Calif. Insurers Must Disclose Cancellation Fees

October 4, 2010

Insurers in California will now be required to disclose cancellation penalties —prior to or concurrent with an application for insurance — thanks to legislation recently signed by Gov. Arnold Schwarzenegger.

Previously, the law stated that an insured was entitled to return of his or her premium if the policy is canceled, rejected, surrendered or rescinded. But the new law, AB 2404, which takes effect Jan. 1, 2012, would require that any insurance policy that includes a provision to refund a premium other than on a pro rata basis, including the assessment and cancellation fees, disclose that fact in writing, including the actual or maximum fees or penalties applied, according to the bill text. The law also requires disclosure to be mailed to the insured within five business days.

The change was designed to prevent an insurer from trying to impose a “short-rate cancellation penalty” that is disproportionate to administrative costs the insurer incurred as a result of the cancellation, according to Steve Young, general counsel for Insurance Brokers and Agents of the West.

In addition, the bill authorizes the Insurance Commissioner to postpone a market conduct exam for up to three years if certain conditions are met. Market conduct exams of insurers are required at least once every five years.

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