Workers' Compensation Mid-Term Cancellation

What is the proper procedure for computing the return premium when a workers’ compensation policy is cancelled by the insured so that they can purchase the coverage from another carrier? The NCCI rule refers to this as “canceled by the insured,” except when retiring from business. The NCCI rule for the proper procedure is written to discourage, although punish might be a better word, the insured from cancelling mid-term.

The rule is contained in Appendix B Cancellation Tables of the NCCI Basic Manual. The short rate percentage is applied to the payroll and the premium that would have been developed for the entire policy period and NOT just the premium developed for the period of time the policy was in effect. For example, if a policy is cancelled by the insured after six months and the earned premium for the six month period is $50,000, Applying the NCCI rule would produce an annual premium of $100,000. The short rate percentage for an annual policy cancelled at six months is 60% so therefore the company would then retain 60% of the annualized premium of $100,000 (or $60,000). If the insured had paid the full annual estimated premium of $100,000 in advance, then they would get a return premium of $10,000 and not the $20,000 ($50,000 earned time 40%) they might have expected by using the traditional short rate cancellation method.

An insured and agent should determine the amount of return premium that will be received both if they cancel a workers compensation policy and switch to a new carrier mid-term. Here are the supporting documents:

Rule 3
Short Rate Table
App B for Short Rate Table