If you fail to pay your premiums on a short-term insurance policy, you cannot expect the insurer to cover you if you claim. However, the insurer must be fair in how it deals with you and cannot terminate your cover immediately after a single missed payment, Deanne Wood, the Ombudsman for Short-term Insurance, says.
Most people pay their premiums monthly by debit order. If you pay this way, you will miss a payment if the debit order is rejected because there are insufficient funds in your account.
You are also at risk of missing a premium if you change bank accounts and your debit orders are not transferred to the new account before they fall due.
The ombudsman says the following principles apply to monthly premiums:
• Premiums are paid in advance – in other words, you pay to be covered for the month ahead;
• It is your responsibility to ensure that there is enough money in your bank account to cover the debit for the insurance premium;
• If no premium is paid for a specific month, there is no cover for that month, and if further premiums are missed, the insurer may cancel your policy;
• The insurer does not have to notify you if a premium has not been paid; and
• Most policies contain an exclusion against cover if you place a stop payment (a request made by you to your bank to cancel a payment that is still to be processed) on a premium. A stop payment is regarded as a cancellation of the policy by the consumer, the ombudsman says. In such circumstances, the insurer will not continue to debit the premium in the months that follow.
The Policyholder Protection Rules, which were introduced in 2004 and to which all insurance companies must adhere, contain a safeguard that ensures you have a grace period in the event of a missed premium.
The rules state: “An insurer shall ensure that a policy contains a provision for a period of grace for the payment of premiums of not less than 15 days after the relevant due date … In the case of a monthly policy, such provision must apply with effect from the second month of the currency of the policy.” This means that all monthly premium payments, except for your first (which, if you miss, may result in the cancellation of your policy), are subject to the grace-period rule. Insurers are obliged to include a clause in their policies informing you of the grace period they will apply.
For example, if your premium is debited from your bank account on the first day of the month and the grace period is 15 days, you have until the 16th of that month to pay the premium, failing which you will not be covered for that month. This means that if you do not pay a premium on the 1st of the month and suffer a loss on the 10th, for example, you are covered, as long as you pay the premium by the 16th.
If you have been paying by debit order and miss a payment because, for example, you have insufficient funds in your account, your insurer may try to re-debit your account to obtain the premium. However, the ombudsman says the purpose of the grace period is to allow you to accumulate the necessary funds in your account, so the insurer may again try to debit your account once the grace period has expired. If the grace period is 15 days, it may do so on the 15th day or thereafter.
If the policy wording does not stipulate that your payments must be by debit order, the insurer cannot refuse an offer by you to pay the missed premium directly into its bank account during the grace period.
Points to bear in mind
There are several things to bear in mind about premium payments, the ombudsman says.
• When you are sold a policy, you will be asked on which date you want the premium to be debited from your bank account. You must choose the date carefully, to ensure it is a day on which sufficient funds will always be available in your account.
• If you miss a monthly premium, some insurers will double-debit your account the following month. These insurers are, in fact, giving you a grace period of one month, not just 15 days.
• Some insurers charge an administration fee if a premium is not paid. The fact that an administration fee will be charged should be made clear in the wording of your policy.
• Outside the grace period, premiums that have not been paid cannot be paid retrospectively.
• Your insurer is entitled to amend the policy terms and conditions at any point, provided you are given 30 days’ notice of the changes.
• You will be notified of premium increases, which typically occur annually. You must ensure that there are sufficient funds in your bank account to meet the higher premium.
• If your insurer cancels your policy because you didn’t pay the premiums, you have to disclose this when taking out a policy with another insurer.