The Insurance Review - August 2010
PREMIUM FINANCING
By Roland L. Enz - President, California Plus Insurance
Ninety Percent of all truck insurance coverage’s are financed. The financing is usually done through an independent financial institutional, usually specializing in insurance premium, and unaffiliated with the insurance company. Since financing is done through a third party, certain particular nuances do exist. There are several rules developed by the insurance industry, financial institutions, and, more importantly, by both the state and federal governments, which affect the mechanics of financing insurance premium. So let’s look at the nuts and bolts of premium financing.
If you have purchased your insurance and utilized a third-party finance company, the finance contract is very much like the one you get when purchasing hard goods, such as your equipment. The return premium, in the event of cancellation, is the collateral of the loan. If there is a deficiency, you will be required to pay the difference.
In the financing of the insurance policy, the premium is paid to the insurance company by the agent sending the insurance company the down payment and the balance forwarded by the finance company. At the inception of the policy, the insurance company has been paid in full and it is the responsibility of the finance company to collect the unpaid balance to make themselves whole and, of course, to make a profit. If the policy runs its course and there are no cancellations from either intentional or unintentional actions against the policy holder, all three parties to the transaction – the agent, insurance company and the finance company – have been paid.
All trucking companies, either for hire or private carriers, are required to have Certificates of Insurance on file with either or both the DMV (MCP) and/or the FMCSA (MC). These certificates are called “filings” and you do not run without them. These filings support your operating authority. If the policy is cancelled, either by the insurance company, finance company (for non-payment) or the insured, the insurance company is required, by law, to give the governing authority a thirty day notice of cancellation. In this notice of cancellation, time has to be considered for both the required thirty day notice as well as administrative and (snail) mail time.
At the time of cancellation, any unused money that the insurance company is holding will be returned to the finance company, if the premiums were financed. If the finance company has been paid off, any remaining return premium will go to the insured. If you look hard at this, you will soon see that the finance company is holding the short end of the financial stick and can be out money if, at the time of cancellation, there is not enough return premium to pay the balance of the finance contract off. Because of this fact, most finance companies require a twenty five percent down payment. This, in theory, will protect the finance company from getting upside down in the contract.
But, as you can see, the minimum cancellation time on a truck policy, with a filing, is going to be at least 50 days. This is the reason that there is no leeway when it comes to due dates on collecting the monthly payment. Premium finance companies are strict in following “slow pay” and “no pay” accounts because they just have too much at stake to let you get behind.
There are only two ways that a policy, that supports a filing, can be cancelled without the thirty day notice requirement (this is even the case when you want to voluntarily cancel your policy). The first way to cancel your policy without the thirty day notice requirement is to cancel or put your authority into suspension and provide the insurance company with a copy of that document (or documents). If you have authority with both the DMV and the FMCSA, both documents will be required. The DMV is not a problem, but the Feds are another can of worms – they require a notarized affidavit, and that will probably take up 30 days. The second way is to re-write your insurance coverage’s with a new company. That new company will then provide the previous insurance carrier with a “Hold Harmless” letter. With that letter, the previous insurance carrier should cancel the policy to that date.
There are two basic return premium concepts that the insurance companies adhere to. In the event that you voluntarily terminate or cancel your policy, the insurance company will use a “Short Rate Formula” to determine the return premium. This “Short Rate Formula” basically penalizes you ten percent on the return premium. If the policy is cancelled for non-payment, the return premium is then based on a “Pro-Rate Formula”. Any and all unused premium is returned to either the finance company or to you, the insured. These return premium concepts basically cover the liability part of the policy and if you have MC authority that requires a cargo filing.
If your coverage’s are written in a package that includes physical damage, the requirement that a lender or Loss Payee requires does not come into play. But, if your physical damage is written separately, your lender will require a ten day notice of cancellation. If you are voluntarily canceling your insurance policy, and if that insurance policy includes physical damage and cargo coverages, you should discuss with your agent the possibility of deleting the physical damage and cargo (if it does not support the filing). This will save you some money as the process runs. But, unfortunately, any cancellation will end up costing you money – whether voluntary or for non-payment.
If there are any deficiencies in the premium finance contract (if the return premium does not cover the balance of the financed loan), the finance company will come after you for the difference. If you have any insurance questions or comments, I can be contacted through California Plus Insurance Service in Modesto, CA at 1-800-699-7101.