The Short Rate Penalty Can Be Significant
A short rate penalty is applied by insurers when a Workers’ Compensation insurance policy is cancelled by the insured before the expiration date of the policy. In the early days of the policy this penalty is steep. It will gradually taper off the closer the policy gets to the expiration date.
The workers compensation insurance industry created the short rate penalty to prevent an insured from having a large accident or a spate of accidents and then moving to another policy without any type of financial penalty. The insured hopping from one policy to another is monetarily discouraged heavily. This offsets the insurance carriers from having to assume uncompensated risk.
NCCI, WCIRB and the other rating bureaus have a chart that covers how carriers are to charge for short rate penalties. Cancelling a policy within the first two months will cause a large premium penalty. Likewise, canceling in the last two months of a policy incurs a comparably smaller penalty.
An insurance carrier may rarely allow an insured to cancel out of a policy without facing this penalty. Moving to a new carrier on policy renewal will avoid any type of short rate penalty.
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