When P/C Insurance Carriers Can Cancel: The ‘Underwriting Period’ by State

Every state extends insurance carriers the right to cancel a newly-written policy during the first days of the policy period. This is commonly known as the new policy “underwriting period.”

An underwriting period allows the insurance carrier time to inspect the property and its operations to assure that what was presented in the applications is, in fact, representative of the risk they are insuring. Also, underwriting data not available prior to the coverage effective date may become available during this period.

(Note: The underwriting period applies to newly written policies only, not renewals. Here is a chart providing underwriting period information for each state and the District of Columbia.)

Although every state extends a new policy underwriting period, the applicability, limitations, notification requirements and allowed length of the underwriting review vary greatly.

Forty-four states and the District of Columbia extend a specified underwriting period to all property and casualty (P&C) lines of coverage and policies. The remaining six states limit the underwriting period’s applicability to only certain types of coverage or policies:

• Four states limit the applicability of the underwriting period to only auto policies;
• One state extends applicability of the underwriting period to both homeowners and auto policies; and
• One state makes the underwriting period applicable to only auto, homeowners and medical malpractice policies.

In states where applicability of the underwriting period is limited to certain lines, the mid-term cancellation statutes are very permissive compared to states that allow the underwriting period to apply to all P&C coverages. To illustrate the point, in states where the underwriting period extends to all P&C lines, a mid-term cancellation beyond the specified underwriting period is allowed only if certain conditions are met (such as a material change in risk or material misrepresentation).

Conversely, in states where applicability of the underwriting period is limited to the auto and/or homeowners lines, mid-term cancellations are allowed without major limitations placed on the insurance carrier. Generally, carriers in these states only have to provide a valid underwriting reason to cancel a policy mid-term. There is no list of acceptable reasons, just the requirement that the insurer’s desire to cancel the policy relates to the carrier’s underwriting guidelines and acceptability of the insured.

A 60-day underwriting period is by far the most common among the states. Thirty-eight states allow a 60 day new policy underwriting period. The shortest allowed is 30 days (Washington D.C.) and the longest is 120 days (South Carolina).

Several states apply multiple underwriting periods based on the line of business. Examples include:

• Arkansas: Auto – 60 days; 90 days for property (related to arson questionnaire);
• Colorado: Auto and Medical Malpractice– 60 days; Homeowners – 30 days;
• Indiana: All lines (except Homeowners and Auto) – 90 days; Homeowners and auto – 60 days;
• Minnesota: All lines (except Homeowners) – 90 days; Homeowners – 60 days;
• South Carolina: All lines (except Auto) – 120 days; Auto – 90 days;
• Texas: All lines (except Homeowners/Farmowners and coverage on governmental operations) – 90 days; Homeowners/Farmowners and coverage on governmental operations – 90 days; and
• Virginia: Homeowners – 90 days; Auto – 60 days.

Essentially there are two “levels” of limitations regarding the reasons a policy can be cancelled during the underwriting period. Policies can be cancelled for:

• Any valid reason; or
• Any valid underwriting reason.

This level includes statutes that contain no limitations on the reasons an insurer can cancel (for “any” reason) up to wording that states the insurance carrier cannot violate another statute (such as an unfair trade practice statute). In fact, a majority of the states that fall into this level allow cancellation during the underwriting period for “any reason.” The involvement of state departments of insurance (DOI) is the driving factor behind grouping such a broad spectrum of allowances into one category.

To be acceptable, the reason used to cancel a policy must be relevant to the unacceptability of the risk. DOIs are known to overturn unreasonable cancellations.

While this does not reach the level of “any valid underwriting reason,” any attempt to cancel during the underwriting period, regardless of how “open” the statute is, should realistically relate to the exposures presented by the risk. While “The building is an ugly color” is likely not an acceptable reason when this statutory wording applies, “Failure to allow timely loss control inspection” is acceptable.

“Any valid underwriting reason” is easier to explain and possibly apply. When this is the rule, the reason used must specifically relate to the underwriting acceptability of the risk.

Essentially, the underwriter can use any reason that would have kept him or her from writing the risk initially. For example, if the true extent of the loss history is discovered after coverage is in effect (because the underwriter depended on the agent who took the word of the insured), and knowledge upfront would have resulted in a different underwriting decision – that is a “valid underwriting decision.”

Only 10 states require this “level” of reasoning during the underwriting period.

Each state prescribes its own notification requirement – how far in advance of the cancellation the insured must be notified of the coming cancellation. Often the notification requirements for cancellations occurring during the underwriting period are shorter than for mid-term cancellation, renewal, or non-renewal requirements.

Depending on the state, the notice period can be as short as 10 days or as long as 60 days. Ten days is the most common (17 states); and only one state requires 60 days notice.

Here is a chart providing underwriting period information for each state and the District of Columbia.