Last month many Americans completed their federal tax filings and some looked forward to getting IRS refunds in a timely manner. Similarly with insurance, policyholders whose policies terminate before their paid coverage periods expire also expect refunds of “unearned premiums.” Insurers must comply with wide ranging requirements for the return of unearned premium to insureds. On March 27, the Oklahoma Department of Insurance issued a bulletin to remind insurers of the existing requirement regarding the obligation to make timely refunds of unearned premiums for cancelled P&C policies, and warned that delay in the refunding of unearned premiums will not be tolerated. The bulletin set forth the relevant insurance law, Insurance Code Title 36 Section 1435.13a(B), which states in part that every insurer shall return unearned premiums as soon as practicable but in no event more than 45 days after the effective date of the termination.
In general, the states have a wide array of varying requirements regarding refunds of unearned premiums. For example, the timing of the return of refund can depend upon the reason for cancellation. Under Alaska law, for various lines of business, the refund must be returned or credited within 45 days after notice of cancellation if the reason for cancellation is for certain reasons, such as nonpayment of premium and conviction of the insured for specified crimes. But under different circumstances, the insurer must provide the refund before the effective date of the cancellation.
Refund requirements also vary by the timing requirements themselves and by line of business. In North Carolina, the insurer has to refund the excess of paid premium only upon demand by the insured. This refund requirement only applies to policies under the standard fire insurance policy. It is true that if the excess premium is not tendered by the time a notice of cancellation goes to the insured, the notice itself must state that the excess will be refunded on demand. In contrast, though, Minnesota law goes further by stating that a cancellation is not effective unless the unearned premium is returned to the insured with the notice of cancellation or is received by the insured by the effective date of the cancellation. This requirement applies to automobile and homeowners policies. However, in Wyoming, the law is even stricter: an insurer must refund any unearned premium to the policyholder prior to cancellation, and this requirement applies to all lines of business.
Note that in Kansas, House Bill 2107 recently amended the refund requirement for an insurer that makes an adverse underwriting decision for personal lines of business. Currently, under Insurance Code Section 40-2,112, in the event of an adverse underwriting decision, each unearned premium refund must accompany the notice to the insured in most cases. However, as of July 1, 2013, this requirement is changed to allow the insurer more time to get out the refund: the refund may be included with the notice but, if it is not included, then the insurer has 10 days from the date of the notice to return it, and the notice to the insured must state that information.
Some state laws specify that the refund must be calculated a certain way in addition to the timing requirements. In Louisiana, Insurance Code Sections 22:1266 and 22:887 specify that the unearned premium must be returned to the insured on a pro rata basis as soon as practicable following cancellation. In South Dakota, unearned premiums must be returned on at least a pro rata basis within 20 days after effective date of cancellation; but then the law goes on to say that, if specified in the policy, unearned premiums may be determined using short rate or premium may be considered fully earned at policy inception for short term or seasonal policies. (Insurance Regulations Sections 20:06:29:01 and 20:06:29:03.)
Due to the varied nature of the laws regarding unearned premium refunds, there should be an awareness of state law and policy language prior to making a cancellation of a property and casualty policy.