Terminating or Cancelling a Business Insurance Contract: Requirements and Consequences

Introduction

Is it Advisable to Cancel a Business Insurance Contract?

We are all familiar with insurance policy contracts concerning an individual. Some examples include life insurance, health insurance, property insurance, and auto insurance. Have you ever wondered how businesses protect themselves from unanticipated events and losses? This is where the concept of business insurance comes in.

Read on to understand what it means and its different types. We will then see how a business contract is canceled or terminated. Lastly, we will examine the requirements and consequences of canceling a business insurance contract. 

What is a Business Insurance Contract?

A business insurance contract is a type of legal contract. It protects a business from any losses or damages from unforeseen events in the ordinary course of business. 

The business insurance provider is called the insurer, while the company benefiting from the policy is referred to as the insured.

The core function of a business insurance contract is to protect business establishments from unforeseen incidents, including natural calamities, theft, lawsuits, and the death of employees. 

What are the Different Types of Business Insurance Contracts?

A business owner chooses a insurance policy based on various factors, such as the size of the business, its location, the number of employees, and the industry it operates. A list of the commonly availed business insurance policies is summarised below:

General Liability Insurance 

It is one of the most common insurance policies and can be availed by any company. It provides insurance coverage against liabilities arising out of damage caused to a third party or property. It includes bodily injury, damage to property, and expenses concerning lawsuits. 

Professional Liability Insurance

It provides protection from defects that arise from the performance of a service. It is also known as errors and omissions insurance and is highly effective in covering financial loss caused by negligence, malpractice, or failure to perform a service contract satisfactorily. 

Worker’s Compensation Insurance 

It helps business owners cover losses related to injuries and illnesses and, in some cases, the event of the death of an employee. In most countries, it is compulsory to provide such employee-centric insurance policies.

Commercial Property Insurance

It is a highly beneficial insurance, especially for small business owners who primarily use a large portion of their capital to pay for repairs and replace damaged company assets. Commercial property insurance covers losses and damage to company property, equipment, tools, and assets. 

Business Owner’s Policy

It is one of the best insurance policies a small business owner can buy. It is a combination of different types of insurance coverages. It typically includes general liability, commercial property, and business income coverage. 

Advantages of a Business Insurance Policy 

Protection Against Losses

It imparts stability to a business by protecting it against any losses due to disasters or unforeseen circumstances such as vandalism, theft, and natural calamities. It also safeguards physical assets such as electronic equipment, tools, and furniture. 

Increased Business Credibility 

Companies having an insurance policy generally enjoy a better reputation amongst their competitors. In turn, this helps to boost credibility amongst consumers. 

Improved Employee Safety 

It is a big boon for any employee if their employment contract provides group policies covering their health and safety. From the employer’s perspective, this provides them a competitive edge over their peers. 

Terminating or Cancelling a Business Insurance Contract

Like many other commercial contracts, a business insurance contract also has a cancelation clause. It can be used by either the policyholder or the insurance provider to terminate or cancel a business insurance contract. It can also be canceled by the insurance agent. 

Termination or Cancellation of Business Insurance Contracts by the Insurer

The insurance company can, in certain circumstances, terminate the insurance contract of a business. In such cases, the company must give the insured entity a written notice of its decision to terminate the contract. Such notice should include the reason for termination and must be in accordance with the law. 

An insurer is generally limited by statute in its ability to cancel a policy. If the insurer fails to provide notice within the statutory period, then the insured may be able to revive the contract by resuming the insurance premium payments.  

Reasons for Terminating a Business Insurance Contract 

• Provision of wrongful or false information to the insurance company. 
• Breach of insurance company policies and guidelines.
• Cause of action for insurance claim arising out of wilful actions of a policyholder. 

Termination or Cancellation of Business Insurance Contracts by the Policyholder

The details pertaining to the termination of a business insurance contract and its consequences will be dealt with separately in a different section. First, let us look at the reasons why a policyholder might terminate an insurance contract:

• The business has undergone a substantial change rendering the insurance policy obsolete.
• Other companies are providing better benefits at cheaper insurance premium rates.      
• Increased financial losses lead to the inability to pay the insurance premium.
• Dissatisfaction with the service of the insurance provider. 
• Relocation of business to a new territory.

Cooling-Off Period

An insured entity may change its mind after purchasing an insurance policy and might want to cancel the contract term prematurely. Most countries include a cooling-off period in the insurance contract. This period is generally 14-30 days long and commences from when the policy begins or on receipt of the policy documents, whichever is later.

You will generally receive a full refund of the premiums paid if you terminate the policy during the cooling-off period. Although, in some cases, you may be required to pay a small administration fee. 

Consequences of Terminating or Cancelling a Business Insurance Contract

It is advisable to consider all the risks associated with the premature termination of insurance contracts before taking such a drastic step. 

Hiked Premiums

It is unlikely that an insured entity will get a refund on the insurance premium paid even if the contract is canceled before its expiry. In addition to this, the insured runs an additional risk of having to pay higher premiums when applying for new coverage. 

You cannot pause an insurance plan. If you cancel one today, you are required to purchase a new policy. It leads to a coverage gap which insurance agencies often use to leverage a higher premium rate. 

Loss of Business Licenses and Permits

Certain businesses require permits and licenses to function. Examples include the construction and liquor industries. Insurance policies, especially those related to workers’ compensation, are often mandatory and serve as a prerequisite for obtaining a business license. Thus, the cancellation of one can lead to the cancellation of the other. 

Increased Exposure to Risks

Businesses are ripe with danger and unforeseen circumstances. Not having an insurance policy exposes your business to risks and the costs associated with fixing the damage incurred. 

Loss of Coverage for Past Incidents 

A professional insurance liability contract is a claims-made policy. This means that the policy will cover events causing damage or loss only when the policy is active. In effect, any untoward event will not be covered after the cancellation of the insurance contract.

Thus, it would be in the business owner’s best interest to consider adjusting the coverage and lowering premiums rather than outrightly canceling the whole contract. For this, you can set up a meeting with your insurance agent. Alternatively, you can check out our website, LegaMart, and drop any queries related to terminating or canceling a business insurance contract on our community page. Our global lawyers will reach out to you at the earliest.  

Procedure for Terminating or Cancelling a Business Insurance Contract

If, after careful consideration of the risks and consequences associated with the termination of an insurance contract, the insured entity decides to move forward with the cancellation, then it is required to follow the procedure listed below:

1. Check the policy to see if any specific process is prescribed by the policy document. 

2. The second step would be an intimation of the intention to terminate the contract. This can be done through a written notice or by discontinuing the premium payment. 

3. In case the insured decides to discontinue payments, it must be mindful of the fact that this may lead to a decreased credit score and difficulty in obtaining insurance the next time. 

4. After discontinuing the payments, the insurer will be required to send a written notice within the statutory period intimating the policyholder about its intention to revoke the commercial contract. 

Conclusion 

Business insurance contracts are an effective means to mitigate risks. Thus, the decision to terminate such an essential commercial contract must be taken only after careful thought and consideration.

Whether you have to choose the right insurance policy or understand your options while contemplating its termination, it’s a good idea to have a professional understand your needs. Visit LegaMart Directory and handpick a lawyer tailored to your needs today.