Auto Insurance Cancellation: How Much Notice Do You Need?

Auto insurance is a necessity for drivers, but there are times when you may need to cancel your policy. This could be due to switching providers, moving to a different state, or even selling your car. While you can cancel your auto insurance at any time, it's important to be aware of the potential consequences and the correct procedure to avoid fines and penalties. Understanding the notice period required by your insurer is crucial to ensure a smooth cancellation process.

Cancellation fees

You can usually avoid a cancellation fee by waiting until your policy is about to expire or has ended. If you cancel your policy without notifying your insurer, you may be subject to extra fees or a failure to cancel your policy.

State laws can determine whether a cancellation fee is allowable. If so, the insurer sets the fee, which is often taken out of any refund due.

Refund policies

If you paid your premium in advance and cancel your policy before the end of the term, your insurance company might refund the remaining balance. Most auto insurers will prorate your refund based on the number of days your current policy was in effect.

The insurance industry is highly regulated, and each state has insurance statutes that govern how companies must handle refunds. For example, in Nebraska, an auto insurer must contact you within 15 business days of cancellation to inform you about any eligible refunds. In many states, like Texas, if you finance your premium through a premium finance company, the insurance company may return the unused premium to the finance company, not you.

Unless otherwise stated in a statute, auto insurance companies usually do not have the obligation to refund your money within a given time period. To avoid refund headaches, it is best to notify your auto insurer of your plans to cancel when it is almost time to renew. Check with your carrier before canceling to learn more about its insurance cancellation policy.

Some insurers will refund your entire unused premium. Others may keep a portion of the prepaid amount as a penalty before returning the remainder to you. This is called a "short-rate refund". Alternatively, some insurers charge a flat cancellation fee in addition to the pro-rata amount.

If you cancel an auto policy before its expiration date, some insurers will calculate the amount of your premium to be refunded on a "short-rate" basis. This means that the insurer will retain a greater portion of the premium than on a "pro-rata" basis, which is equivalent to what proportionally represents the expired part of the premium or "earned premium". This additional cost, on average, is approximately 10% of the unexpired portion of the premium. However, this difference may be greater if the policy is canceled towards the earlier portion of the policy period.

If you prepaid for a full policy term and you cancel your insurance before it’s over, you may receive a refund for the months you didn’t use.

Reasons for cancellation

Auto insurance companies are bound by state laws to give a certain number of days' notice before cancelling a policy. This can range from 10 to 75 days, depending on the state and the reason for cancellation.

Non-payment of premium

If you don't pay your premiums, your insurance company can cancel your policy. This is the most common acceptable reason for cancellation.

Misrepresentation on the insurance application

Failing to accurately report necessary information on your auto insurance application, such as your vehicle's "garaging" address or who drives your car regularly, is often referred to as a "material misrepresentation" and may result in cancellation.

Suspension or revocation of your driver's license or vehicle registration

If your driver's license or vehicle registration is revoked or suspended within the policy period, or often within 36 months before the notice of cancellation, your policy could be cancelled.

Fraudulent claim

If you file a claim, or someone else makes a claim against your policy, and you are found to have provided false or incomplete information, your insurance company may cancel your coverage.

Medical condition affecting your ability to drive safely

Health conditions like epilepsy or heart attacks may require a certificate from a physician confirming your ability to drive safely. Failure to provide this could result in policy cancellation.

Conviction of DUI, DWI, or OUI

If you or a regular driver on your policy is convicted of driving under the influence, your risk to insurance companies increases, and your rates may go up. In some cases, your current insurer may choose to cancel your policy instead.

Unsafe vehicle

If your car has mechanical problems that endanger public safety, or if it fails a state-required inspection, your policy may be cancelled.

Business use of your vehicle

A personal car insurance policy typically does not cover business use of your vehicle. If you use your car for work, you likely need a commercial auto policy.

Ridesharing or carrying passengers for hire

If you use your personal vehicle for ridesharing or carrying passengers for hire and don't inform your insurer, your policy may be cancelled or a claim may be denied.

Non-renewal

Auto insurance companies may also choose not to renew a policy after it expires for reasons similar to those for cancellation, such as non-payment and misrepresentation on the application.

Notice period

The notice period for cancelling your car insurance policy depends on the insurer and the state you live in. Most insurers require advance notice of cancellation, with some companies needing up to 30 days' notice before your final coverage date. Some states require insurance companies to give at least 10 days' notice before a non-renewal, but cancellation notice requirements can range from 20 to 75 days, depending on the state.

It's important to check the laws in your state and the requirements of your insurance company before cancelling your policy. Failing to provide sufficient notice can result in a history of missed payments and higher insurance rates in the future.

To cancel your car insurance policy, you typically need to contact your insurer and ask about their cancellation requirements. Once you know their rules for cancelling, you can set a termination date and submit any necessary documents. Some companies may require a signed document or a formal letter requesting cancellation.

It's also worth noting that some insurance companies charge a fee for cancelling your plan early, which could be a flat rate or a percentage of your remaining premium. This is something you should clarify with your insurer before initiating the cancellation process.

Coverage lapse

A car insurance lapse is a period of time when you own a car but do not have car insurance coverage. A lapse in coverage can occur for several reasons, such as missing a payment, forgetting to renew your policy, being dropped from your insurance company, or no longer needing insurance.

Consequences of a Coverage Lapse

A lapse in car insurance coverage, even for a short period, can result in various consequences:

• Increased insurance rates: A lapse in coverage will likely result in higher insurance rates. A coverage lapse of 30 days or less can lead to an average rate increase of 8%, while a lapse of more than 30 days can result in an average increase of 35%.
• Difficulty in obtaining new insurance: A coverage lapse may make it challenging to obtain a new insurance policy. Some providers may consider you a higher risk, leading to higher rates or even denial of coverage.
• Legal penalties: Driving without insurance is illegal and can result in fines, suspension of your license, impoundment of your vehicle, and even jail time, depending on the state.
• Financial liability: If you are in an accident while uninsured, you may be held financially responsible for any property damage or injuries caused.
• Loss of discounts: A gap between your old policy and a new one may result in losing loyalty discounts and other benefits.

Preventing a Coverage Lapse

To prevent a coverage lapse, it is essential to maintain continuous car insurance coverage. Here are some tips to avoid a lapse:

• Pay premiums on time: Ensure that you make timely payments to avoid cancellation due to non-payment.
• Renew your policy: Stay on top of policy renewal dates to prevent accidental lapses.
• Maintain a clean driving record: A good driving record can help mitigate the impact of a coverage lapse on your insurance rates.
• Shop around: If your current insurer is unwilling to reinstate your policy, consider switching to another insurance company that can provide continuous coverage.
• Consider suspension: If you no longer need insurance temporarily, explore the option of suspending your coverage instead of cancelling it. Some insurers allow this for military personnel or individuals studying or moving abroad.

Frequently asked questions