The Short Rate Penalty Eliminates Policy Hopping
A workers comp insurance policy may be cancelled before the end of the policy period, but not without penalty. Most policies require a short rate penalty when a policyholder requests cancellation.
The amount of the penalty is determined by a table of factors and will be steep in the early days of the policy, gradually tapering off the closer the policy gets to the expiration date.
For example, if you have a one-year policy and you cancel after six months, the short rate penalty allows the company to maintain more than one-half of the annual premium. Policies are required to clearly describe any cancellation penalties.
The penalty keeps employers from jumping from policy to policy especially after a spate of accidents or one large serious accident. The penalty also lessens the risk for insurance carriers if they have to cover accidents with less premium due to the employer switching insurance companies.
Employers often request another insurance carrier after a disputed premium audit. Unfortunately, the premium audit cycle begins just after renewal. The insured may be locked into another year to avoid the short rate penalty.
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