Lapse in Insurance (according to III.org):
“The termination of an insurance policy because a renewal premium is not paid by the end of the grace period.”
The term “Lapse in Coverage” might send a shiver down the spine of many small business owners and well it should. Most small business owners fight tooth and nail, scraping together dollars, explaining away their late payments, and in some cases signing waivers of subrogation and statements of no loss just to avoid a lapse in insurance.
A lapse in insurance coverage can happen for several different reasons. Examples include:
- Unintentionally (or intentionally) not paying your bill (a.k.a. Cancel for non-payment).
- Your business may not meet the inspection requirements of new insurance carrier.
- You may not get your renewal paperwork back to the carrier by the due date.
- You may be saddled with a huge audit bill and not be afforded coverage until your audit adjusted premiums are paid off.
There are also cases where a small business may purposefully cancel coverage for a set amount of time in order to save cash flow during periods of inactivity. A good example is an exterior contractor closing up shop for the winter.
And for all intents and purposes canceling your insurance or not paying your bill or being too busy to get your paperwork in to the insurance carrier in time might be completely legitimate and honest and to some extent the right thing to do.
What I want to make you aware of today are the repercussions of an insurance lapse because no matter what your reasons for incurring a lapse in insurance there are penalties that you are most likely not aware of.
3 Reasons an Insurance Lapse is Bad for Business:
A lapse of more 30 days can lead to the loss of a “Continuous Coverage” discount given by most carriers.
- Most insurance carriers both personal and commercial lines give a discount for maintaining constant coverage. This includes when switching from one carrier to another. Continuous coverage shows stability within a business which is something insurance carriers reward.
A lapse in coverage can result in the loss of long-tail Products / Completed Operations Coverage.
- If you are with an insurance carrier for say five years, the Products / Completed Operations portion of your liability policy covers you for work done throughout those five years. So if you are sued for something you did four years ago even if it’s not an ongoing project your liability carrier will respond. If you have a lapse you lose that long-tail coverage.
A lapse will cause your business to lose goodwill with insurance underwriters.
- This is especially painful for small business owners who must deal with commercial insurance underwriters. In most instances, commercial insurance is written on a case by case basis. Insurance agents, such as myself, must sell (in a matter of speaking) the underwriter on why that particular business is a good fit that particular insurance carrier. If your small business has a lapse or a couple lapses over a period of time the number of underwriters who want to write the policy will be less. Which means your premiums will most likely be higher.
Obviously all three of these scenarios assume that you have insurance, then have a lapse, and then get insurance back.
The repercussions of having an insurance lapse and not getting new coverage is that you don’t have any insurance. Which means no defense costs, no general liability, no property coverage, no nothing. We won’t get into that nightmare today.
What I’m trying to get at here is that a lapse in your insurance is BAD. Far too often I see insurance consumers, especially small businesses, have a relatively cavalier attitude towards their insurance. Insurance is not an expense, it is a necessity to the small business. Without insurance your business is exposed to an infinite number of catastrophic loses and that is bad for business.
Insurance Lapse Photo via Shutterstock
Great points Ryan. Unfortunately, I deal with this more often than I would like. I don’t think people understand all of the negative ramifications that lapses cause.
You speak the truth! I would probably be out of business right now if I had let my insurance go – I own a gas station and insurance has saved our bacon more then once, so I am a big believer.
I really agree, I think that insurance is key for the safety of a business. You don’t want to take any risks, so insurance is key. It really should be looked like an investment. Great work on the article.
I couldn’t agree with you more Insurance should be seen as an investment product… At least given the same effort by consumers.
Overall a good article. However you have a grammar/usage problem
And for all intensive purposes
The proper form is: intents and purposes.
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Hello, interesting article. The part where you said a contractor does not renew his expired commercial insurance is indeed a nightmare and of great interest to me. Could you post more on that and what a customer’s recourse would be, aside from court that is. Thanks in advance.
What I’d like to know where this new business comes in and buys your business I don’t own it but now we have a lapse in Insurance why should we have to pay the difference in a month which is $600 can someone help me with this
“Insurance is not an expense”. Oh really? Insurance companies pretend to care about the business owner. Yet force them to be insured even when the business is not running in off seasons. I’ve had B insurance for 25 years. Never needed to use it. A couple months over 25 years I’ve had it lapse. So to them I’m scum and have been punished for years.
I liked that you pointed out that you should get liability insurance for your business. That is a good thing to know when you want to protect yourself and your employees. That does seem like a good thing to be aware of when you starting a new business.
Do I have to pay for a lapse Insurance if i’m No
Longer in business? 5/15/2018 – 5/15/2019 and they already cancelled my Policy for non-payment.