The Insurance Report - December 2004

PREMIUM FINANCING
By Roland L. Enz - President, California Plus Insurance Service, Inc.

Happy Holidays! We sincerely wish you and your families a happy holiday season and a prosperous New Year. And along with the holidays comes the winter weather. Rain and snow arrived early this year and the Central Valley is socked in with fog. Defensive driving is the operative word, so take your time and remain under control - it will pay you dividends.

The majority of all insurance policies that you purchase for your truck coverages will be financed through a third party premium finance company. Ninety percent of all policies are done in this manner. Some of you may have direct bill policies that are directly invoiced to you (which you pay directly to the insurance company) and some of you may still pay the old fashioned way with cash up front. Our discussion here this month is directed to those of you out there that have financed insurance policies.

Premium financing is a specialized industry and those finance companies that will accept trucking policies have to know the trucking business. The main issue in financing truck policies is understanding the relationship between the insurance policy and the insured’s operating authority. It does not make any difference between the DMV (state authority) or the Federal Highway Administration.

Generally, the liability policy supports your operating authority. In the case of interstate authority, your cargo policy may also be required to support your authority. It is a requirement, by those government agencies that regulate you, that in the event of a policy expiration or cancellation, that they are given a thirty-day notice of cancellation or termination. Time is not on the side of the insurance company. It is imperative that your monthly payment is made, on time, to the premium finance company. If payment is not received by the predetermined date given by the finance company, the finance company has to notify the insurance company to start the cancellation procedure. If the finance company gives you a grace period and the insurance company is required to give either the DMV or the Federal Highway Administration thirty days notice, it soon uses up any up front downpayment or deposit that you started the policy with. It takes 45 to 60 days to cancel a policy for non-payment. One important point to understand in the cancellation process is that in the event that you get a cancellation notice from the finance company, indicating a cancellation date, the policy is not canceled until you receive notification from the insurance company. That date will correspond with the cancellation date required by either the DMV or Federal Highway Administration.

The majority of all financed policies require a downpayment of 20 to 25 percent, with monthly payments over an eight or nine month period. There are exceptions, but this is the general rule. The finance company makes its money by charging interest. This is a loan and it is treated as such. The finance company is not related to the insurance company; they, in fact, have paid your insurance premium for you. When you receive your insurance quote or when you receive the payment invoice, the interest rate should be indicated or can be quickly calculated, taking the downpayment and the total of the monthly payments from the quoted premium. You may have to pay brokerage fees and/or taxes as well. Your agent should outline or explain all of these to you.

Questions and misunderstanding always come up in the event of adding or deleting coverages (adding additional equipment or deleting equipment). In the event that you add equipment to a policy that is financed, that change develops additional premium, and if there are sufficient monthly payments remaining, you can add that premium to the existing finance contract. The finance company will require another downpayment, based upon the remaining payments. The remaining balance will be divided over those remaining payments.

In the event of a canceled policy, financed through a premium finance company, whether by non-payment or request, the following transpires. Any excess premium, since the finance company originally paid the insurance company, will go directly to the premium finance company to pay off the loan. If there is a shortage, you will be required to make up the difference. If there is a credit balance, that balance will be returned to you. Time is against you, since it takes so much time for the cancellation process. Through this process, the interest clock is ticking with the finance company.

They will continue to charge interest until the loan is paid off. In addition to the cancellation process, it may take the insurance company several months (or in some cases four or five months) for the excess premium to be returned. This is unfortunate. If this happens, the insurance industry should be taken to task by the Department of Insurance. Any excess premium should not take any longer than 45 days to be returned.

If you elect to cancel a policy that supports your authority, you should understand the following: the insurance company making the filing, supporting your authority, is required to give that authority 30 days notice. THEY CANNOT CANCEL YOUR POLICY UNTIL THAT 30 DAY NOTICE IS RECEIVED BY THE GOVERNING AUTHORITY. If you are going out of business, you can put your authority into suspension (on ice). It is easy with the DMV, but if you have interstate authority, it will take a notarized document, and only when they receive it will they cancel your authority. Coordinate this with your agent and the insurance company should accommodate your request. In the event of a financed policy, payment is still due. As I indicated, return premium will go back to the finance company to pay off the loan balance (if any).

I get the following comment often: “I’ll never see any return premium." Relax. If you pay your premium and if you follow all of the rules, any unearned premium WILL be paid back to you. Good luck in the New Year. I wish you all the best and much success. If you have any comments, questions or wish to discuss any insurance-related topics, I can be reached through California Plus Insurance Service in Modesto, CA by calling toll free 1-800-699-7101.