Author: VU Faculty

An insured received her commercial property renewal and paid it in full. She then received a cancellation notice. According to the insurer, they failed to bill the insured three years ago for a policy and wanted the premium for that term. She refused to pay it so they are cancelling the current policy for nonpayment. Can they do this? 

"I have a client that received her commercial property renewal and paid it in full. She then received a cancellation notice. We called the company and found that they never billed the insured 3 years ago and never issued a cancellation notice so they wanted the premium for that term or they were going to cancel this term. Does a company have a certain amount of time that they can collect this premium?"

We ran this by the VU faculty and got the responses below. As indicated, you would probably want to run this by your insurance department to see what your laws permit with regard to cancelling a policy. Generally speaking, the right of cancellation under one contract does not extend to an entirely separate contract.


Policy cancellation procedures are regulated by law and administrative rulings by the various state commissioners of Insurance. Be very, very careful.


This may be dependent on your state law, but in most jurisdictions, the answer is NO.


I checked your cancellation statute and regulations and they do not set forth any rules for cancellation aside from proper notice. Was everyone asleep at the switch? How did this happen? I think if it happens the insured did not receive a renewal, there was insurance in force due to lack of a cancellation notice. This would probably come down to a question of a statute of limitations on the collection of a debt. At best, this is poor practice on everyone’s part, including the insured. I would try to negotiate a settlement with the insurer.

Cancellation based on nonpayment is a condition of the insurance contract. You cannot cancel a particular contract based on nonpayment under a different contract.


In a 1993 class action suit (D.J.'s Upholstery v. Western National Mutual Ins. Co.), the Minnesota Court of Appeals ruled that a number of employers could not have their premiums retroactively increased to compensate for a clerical error on the part of the carrier that resulted in the employers being undercharged. The court noted that the insurer's use of erroneous experience modification factors was a unilateral mistake and it had to bear the resulting monetary loss. In the court's opinion, the mods were an integral part of each insurance policy and nothing in the policies permitted the insurer to unilaterally modify the factors and increase the premiums.

Your situation seems very similar to the case above in that the failure to bill under the prior contract was a unilateral mistake on the part of the insurer. If the insurer has a valid, legal basis for recovering that past-due premium, then they should exercise that right. They cannot make up for their past mistake by cancelling the CURRENT policy unless they can cite a valid reason for cancellation. Nonpayment under a prior contract is not a valid basis for cancelling the current, unrelated contract, particularly when the insured didn't fail to pay, but rather the insurer failed to bill.

You can't rescind a contract based on an alleged conditional violation of a totally separate contract. The insurer will have to come up with another valid reason to cancel or seek recovery of the unpaid prior policy another way.