In most non – life insurance, the contracts last for only a year, but subject to annual renewal, if the insured and insurer so agree to renew. However, in the case of life insurance contracts they last for many years, the insurer is obliged to continue to provide cover for the entire period. So it is not necessary for such a policy to be renewed on a periodic basis.
When a policy is renewed for another year, a legally separate contract is created. Offer, acceptance and all other requirements for the formation of insurance contracts must again be present. This means, the insured must disclose any material facts which have developed or altered since the previous year.
Even within the first year or on renewal, within the period of renewal and even if the premium had been paid, the parties to the contract of insurance may cancel the policy within the provisions contained in the policy.
There is no compulsion on the insured and insurer to renew annual policies for a further period. However, in the case of life assurance business, the contract is for a specified period of years or until the happening of a certain event even though the premium is paid annually or half – yearly or monthly.
The insurer must accept the renewal premium from the assured. If the assured did not renew i.e pay the premium, the policy will lapse or become “paid–up” or the Premium will be paid out of the surrender value until it is exhausted.
Certain documents are used in the process of insurance policy renewal. Renewal Notice
It is not compulsory for the insurer to a issue renewal notice but insurers usually issue renewal notices approximately two weeks or one month before the expiry date of the current insurance.
A renewal notice is a reminder to the insured that his existing insurance cover is about to expire. The renewal note will show the insured’s name, the policy number, type of insurance, the sum insured, the renewal premium and the renewal date. In long–term insurance i.e life assurance, reminders are also sent to the policy holders but they are not renewal notices. They simply remind the policyholders that they must soon pay another premium installment.
There is often a perforated remittance slip attached showing the policy number, the insured’s name and type of premium and a request that the insured should detach this and forward it with his remittance.
Also, there is usually a notice on the renewal note to the effect that any changes in the risk since inception or since last renewal must be intimated to the insurers.
Legal Status of the Renewal Notice
There is no legal requirement for the insurer to issue renewal notices. Moreover, the exact legal status of the notice when issued will depend on the wording of the notice.
If the notice is worded as a simple reminder of the existing cover and its expiry date, it has no legal function. It just reminds the insured who wishes to renew to make a new offer to the insurer. On the other hand, if the notice invites the insured to renew his contract, then it is subject to acceptance by the insured for renewal. Whichever wording is used, the effect is the same as any offer. It can be withdrawn before it is accepted by the insured.
Days of Grace
As stated, renewal notices are sent out two weeks or one month before the expiry date of the policy. If the insured intends to renew his insurance cover but fails to do so before it expires, the insurer may continue to provide protection for a period of so – called days of grace, which is usually restricted to a maximum of 15 days.
If the insured pays the premium within this 15–day period the cover continues in full and if a loss has occurred between the renewal date and the date of payment, the insured will be able to recover. However, if the insured intimates by word or action, either before the renewal date or within the days of grace, that he does not intend to renew, the policy will lapse on the renewal date.
There are some policies to which days of grace do not apply. These policies include, short period policies which renewals are not usually issued, they are marine insurance and motor insurance. In marine and motor insurance, it is expected that the premium must be paid on or before the expiry date to obtain full cover.
There is a special position in motor insurance policies. No days of grace are allowed under motor third party insurance; since the back dating of cover is prohibited by the Road Traffic Acts but insurer do provide a 15 day motor insurance certificate on the back of the renewal notice. This is essentially 15 days free Road Traffic Act cover which operates if the motorist has not insured elsewhere, irrespective of renewal.
Days of grace are available on the own damage part of comprehensive motor policies. Therefore, if the insured pays his renewal premium within 15 days of expiry he obtains a backdated own damage cover plus free third – party insurance with the same overall effect as if the days of grace had applied to both parts of his insurance.
In annual contracts, the terms on which the insurers are prepared to renew may be different from those previously applying. This may be because experience may mean that the premium / rate will be increased compared with the previous year. Or that the scope of cover needs alteration or the policy excess needs to be increased.
Even when a valid offer and acceptance have been made and premium paid, the parties to a contract of insurance may still be able to cancel the policy.
There are circumstances in which the insurer may decide to cancel the policy:
There is a condition in contracts that gives the insurer the right to cancel, following due notice given to the insured and the return of part of the premium. Insurers do sometimes take advantage of this clause if the claims experience has been particularly bad. However, existing claims must have been met before cancellation can be effected.
Apart from the above, insurers can only cancel contracts if it can be proved that they are illegal, void or voidable.
Illegal contracts include contracts with enemy aliens, non–existent in Law. The premiums paid should be refunded by insurers.
Void contracts entered into fraudulently and fraudulent misrepresentation are void or non–existent. In this case the policy holder is not entitled to any return of the premium.
Voidable contracts: An insurer can avoid liability if he chooses, if the insured breaches the principle of utmost good faith or the warranty allows the insurer to cancel the contract and the return of premium. Cancellation by the insured may be made at any time. Return premium may not necessarily be made by the insurer. In non–life insurance, a return of premium depends on the attitude of the insurer and the reasons for cancellation. For example, part of the motor insurance premium may be refunded if the insured sells his car before the expiry of his motor insurance cover.
Most non–life insurance contracts last for only a year and when the year is over the contract expires and insurance cover cases. Often, both the insurer and the insured renew the annual policy for a further period of one year on existing terms and conditions or on a new basis.
Insurers usually send the insured a renewal notice which is just to remind the insured that the policy will soon expire.
In insurance contracts provision for renewal is contained in the policy documents as part of the policy conditions. Insurers usually invite their policyholders to renew their policies before they expire. The invitation is known as a renewal notice. Renewal notices contain details of the existing insurance and a pay–in–slip requesting the insured to use it for payment of the renewal premium due.
A 15–day period of grace is often given to the insured after the expiry of the contract to renew. If the insured pays the premium within the days of grace the policy continues but if not the policy is regarded as having lapsed. Some policies have no days of grace and in the case of motor insurance, special position applies. There is no days of grace for third party insurance cover but days of grace applies to the own damage/loss section of a comprehensive motor insurance policy.
The parties to the contract of insurance may decide to cancel the contract. Insurers have provision in their policy documents for cancellation. This provision must be complied with before cancellation can be effective. Also, there are circumstances in which insurers may cancel their policies.
On the other hand, an insured may decide to cancel his policy at any time. In some cases there will be a return premium and in others no return premium is made.
PRINCIPLES AND PRACTICE OF INSURANCE
- PRINCIPLES OF INSURABLE INTEREST
- PRINCIPLES OF INDEMNITY-INSURANCE
- PRINCIPLES OF CONTRIBUTION- INSURANCE
- MAKING A CLAIM – INSURANCE
- INTRODUCTION TO INSURANCE
- INSURANCE RENEWAL AND CANCELLATION
- INSURANCE DOCUMENTATION
- INSURANCE RISK MANAGEMENT
- GENERAL PRINCIPLES OF INSURANCE
- CLASSES OF LIFE INSURANCE
- CLASSES OF GENERAL INSURANCE BUSINESS