Author: Bill Wilson
An insured makes a payment by personal check on a policy that is scheduled to cancel for nonpayment. The check is received before the cancellation date and the company issues a reinstatement notice. Three weeks later, the insured and agent receive another cancellation notice stating that the policy is cancelled retroactively to the previous cancellation date because the check was returned "NSF" by the bank for "insufficient funds." Is this correct? For the answer and an important message about the value of your state association, keep reading....
Here is a question from a NY agent our "Ask an Expert" service recently received:
"I have a question concerning nonpayment cancellations of personal lines policies. An insured makes a payment by personal check on a policy that is scheduled to cancel for nonpayment of premium. The check is properly received before the cancellation date and the company issues a reinstatement notice.
"Twenty-five (25) days later, the insured and agent receive another cancellation notice stating that the policy is cancelled retroactive to the previous nonpayment date as the check was returned by the bank "NSF." The original cancellation, as well as reinstatement, make no reference to reinstatement contingent on a check not being NSF. There was never any letter to the insured or agent about an NSF check. Is the retroactive cancellation, which now leaves the insured in a terrible lurch, LEGAL?
"Some companies include specific wording on their cancellation and reinstatements that say the original date will stand with an NSF check and I have no issue with them. However, in absence of NSF disclosure, is a company operating outside of insurance regulations?"
This is an issue that should be addressed by your state's insurance laws, regulations or insurance department directive. For questions involving statutory or regulatory issues, you're almost always better off checking with your state IIABA association and/or your insurance department.
The position of most states I've seen on this subject is that submission of an "insufficient funds" (NSF) check is equivalent to no payment at all. Since the check was invalid, it's effectively a nonpayment. If the company has provided prior notice and a cancellation date for nonpayment, then the cancellation will probably be upheld. To confirm this, we checked with Tim Dodge in our NY state association. Tim responds:
"The NY Insurance Dept., in a 1994 opinion (see below) said that paying a premium with a bad check is the same as not making a premium payment, and therefore an insurance company could legally cancel a policy back to its original cancellation date. New York law does not require insurers to insert language in cancellation notices to the effect that reinstatement depends on receipt of a valid check. The laws and regulations require other specific wording (e.g., a warning that auto liability insurance is required), but they don't require the wording to which you refer. I've copied the opinion below for your reference."
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New York
SELECTED OPINIONS OF THE GENERAL COUNSEL INSURANCE DEPARTMENT
OGC Opinion No. 94-75 Cancellation for non-payment of premium
August 30, 1994
You recently requested clarification of an opinion issued by the Office of General Counsel and published in Counsel's Corner in The Bulletin of December 1993.
The opinion concerned cancellation of insurance policies for non-payment of premium when the insurer subsequently receives the premium payment. That opinion stated that a premium is considered remitted as of the date it is postmarked.
You raised the question of whether the premium is remitted if it is postmarked prior to the cancellation date but the check is subsequently dishonored. If the check is dishonored, the premium has not been remitted, regardless of the date it is postmarked.
Issuance of a reinstatement notice in such a situation, where the check is dishonored subsequent to issuance of the notice, is moot. Mailing the reinstatement notice does not rescind the cancellation notice if the check is dishonored. A dishonored check is not a premium payment.
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Again, while the VU will try to answer questions that are state-specific, unless one of our faculty members is familiar with the laws and regulations of a particular state, your best bet is to first run your question by your state association.