Flat Cancellation
What Does Flat Cancellation Mean?
Flat cancellation occurs when a policyholder cancels an insurance policy on its effective date, which is the date the policy is intended to begin or the renewal date.
In such cases, the policyholder usually has not paid any new premiums, eliminating the need for a refund. Additionally, since the policy is not yet in force, there are no costs associated with canceling it early, nor are there any premiums owed.
Insuranceopedia Explains Flat Cancellation
Flat cancellation is treated differently from short-rate or pro-rata cancellations and is the simplest way to terminate an insurance policy. Unlike short-rate or pro-rata cancellations, flat cancellations are straightforward because no money has changed hands, eliminating the need to recalculate insurance costs.
In the case of short-rate or pro-rata cancellations, premiums have already been paid in advance, requiring adjustments for the unearned premium. However, with flat cancellations, the insurance carrier and the policyholder simply part ways at the end of the contract without any further action required.
For example, consider a term insurance policy with a duration of ten years. Once the ten-year term expires, the agreement is up for renewal, and new premiums would need to be collected. If no renewal is processed and no funds are paid, the contract simply ends on the termination date without any additional action from either party.
There are situations in which a flat cancellation may be necessary from the customer’s perspective. One such instance is when the insured asset is sold, making the insurance policy unnecessary. Alternatively, if a policyholder decides to take out a policy with a different company at the time of renewal, a flat cancellation would be appropriate. For example, someone might sell a car around the insurance renewal date and request a flat cancellation of the policy, along with a refund of any premiums already paid.
On the other hand, an insurance company can also initiate a flat cancellation. One reason for this might be if they suspect that a policyholder was not truthful on their insurance application. In such cases, the insurer may reverse their offer of coverage based on new information. In a flat cancellation, the insurance company informs the customer that no coverage will be provided and refunds the premium.
Policyholders transitioning between insurers should ensure they are covered at all times, as gaps in coverage will not be honored by either insurer. For instance, if a home burns down after a flat cancellation of an insurance policy, the insurance company has no liability and is not obligated to provide coverage.
