Insurance contracts, at their core, are papers that prove a promise by an insurance company to pay benefits under an insurance policy and the payment of money by an insured for that protection. The money paid by the insured is called a premium. The premium is made up of money paid by the insured to the insurance company to cover the insured risk and the administrative costs. Without the payment of a premium, no contract of insurance exists between the insurance company and the insured.
Most automobile insurance policies cover six-month periods. The insurance company will set a date by which the premium is due. Depending upon the agreement between the insurance company and the insured, the policy could go into effect before a premium is paid or the full premium must be prepaid before the insured is covered. Some insurance companies will even allow monthly payments of premiums. It is important to know which scenario applies. If no premium is paid, no contract of insurance exists. If a first installment of a premium was paid, but the second was not, an insurance company can cancel the automobile insurance policy for nonpayment of the premium.
The general rule is that an insured’s failure to pay premiums by the due date results in a lapse of coverage. If an insurance company cancels a policy for nonpayment of premiums, it can recover the premiums earned to the date of cancellation. Insurance protection will continue until the date of cancellation despite the fact that premiums had not been paid to that date.
The time to pay a premium can be extended by the insurance company or by a statute. The insurance company can provide the extension, called a grace period, in the policy, in a separate writing, or even in an oral statement. The grace period will keep the policy in full effect after the missed premium’s due date, if the insured makes the premium payment before the end of the grace period. An insurance broker or agent does not have authority to extend the time for an insured to pay a premium. However, a broker’s agreement to extend the payment time might be enforceable against an insurance company depending upon the principles of agency and the facts of the case.