What is the Significance of an Insurance Grace Period?
Have you ever thought about what happens if you don’t pay your insurance bill on time?
It’s a scenario that may seem unlikely, considering the importance of insurance and the protection it offers to your business, but it does happen. You forget to make a payment, the bill gets lost, or the bank makes an error, and the insurers never get their money.
So what happens next? Do you lose your coverage?
This is where the insurance grace period comes in. An insurance grace period is the amount of time after your premium is due, during which you can still make the payment without your coverage lapsing.
The grace period is defined in the contract of your policy and provides you with the opportunity to maintain coverage even if you miss a payment. Understandably, the insurance company wants the grace period to be as short as possible in order to prevent potential situations in which they would have to pay damages without having received the premium payment.
Why Insurance Grace Periods Are Important
Insurance grace periods will protect you from losing your coverage in the event that you are late with your payment. As long as the insurance grace period is in effect, the policy will also be fully in effect.
However, if you fail to pay your premium within the grace period, your insurance coverage will be canceled. Now, you may wonder: Is it really such a big deal to go without insurance for a few days? You can just let your coverage lapse and get a new policy, right?
Well, the situation is a bit more nuanced. Some of the most important policies for a growing business, such as directors & officers, errors & omissions, cyber liability, and EPLI, are “claims-made” policies. What this means is that you will be covered if both the event and the claim arise while the policy is active and are reported during that time period. The start date in the first year is called the “retroactive date.”
What this means that the longer you have the policy, the longer the retroactive period of coverage.
Let’s say a wrongful act from year one of coverage resurfaces a few years down the line. As long as coverage has been unbroken, it will still be covered. If you allow your coverage to lapse and then get a new policy, you’d reset the retroactive date and lose your long-tail coverage. Given that many claims can simmer for years before flaring up, it’s wise to maintain continuous coverage whenever possible.
How Long Does a Grace Period Typically Last?
Every policy has different grace period stipulations. Depending on what’s in your contract, it can vary anywhere from 24 hours up to 30 days. Many policies will also offer two timeframes for a grace period; a shorter period that doesn’t entail a late fee and an extended period that will require you to pay one.
What happens when you make the payment during your grace period?
If you miss your original due date but are able to make the payment before your grace period ends, you’ll be able to preserve your coverage but there may be a stipulated late fee.
It should also be noted that the grace period serves as a safety net and there are usually consequences that follow if you are readily missing due dates. This means that if you’re making a habit of missing original payment deadlines and paying during the grace period, you can be almost certain that your insurer will eventually increase your premium.
Why You Shouldn’t Rely On Your Grace Period
Even if your policy has a long, feeless grace period, you shouldn’t rely on it. The point of grace periods isn’t to allow regular late payments; it’s a benefit that is put in place to give you a bit of leeway if you make a mistake.
Abusing it can result in not only an increase in your insurance rates but even in the cancelation of coverage if the trend persists. And if your insurance policy does get canceled, whatever the reason, it can be harder for you to get insured in the future.
If you develop a history of frequent cancellations resulting from the fact that you didn’t pay your premiums on time, insurers may refuse to provide coverage for you. In the event that you do find an insurer willing to work with you, there’s a good chance that you will end up having to pay high premiums for subpar coverage.
Does every policy have a grace period?
No. Individual states manage grace periods and many don’t require insurance companies to offer grace periods. However, insurance providers may include them regardless as a benefit that could entice businesses to choose them over a competitor that might not offer one.
Overall, the best way to avoid the unpleasant situation that results from an unpaid premium is to pay your yearly premium in full. In some cases, you can even get discounts if you do this. Another effective way to make sure your coverage never lapses would be to set up automated premium payments.
Grace periods are a useful tool that can prevent genuine mistakes from spiraling into painful and costly lapses in coverage. When you are buying business insurance, it’s good to be aware of the finer details of your policy and the limitations of your coverage.
For these reasons, it’s essential to work with an expert broker who will be forthright and help you choose the best policy terms. If you need more help or information about protecting your business, you can reach out to our team of expert brokers to learn more.