How to Cancel a Workers’ Comp Policy: The Do’s and Don’ts

Most states require employers to carry workers’ comp insurance. However, what happens when you don’t need it anymore? What should you know about how to cancel a workers’ comp policy? The short answer is that it typically requires a signature on a loss policy release form (LPR). It’s important to understand, though, that any lapse in coverage is a bad idea and should be avoided if at all possible.

Thinking about a workers’ comp cancellation? If so, this guide is for you. At Kickstand Insurance, our sole goal is to help you make informed decisions that protect your business and your employees.

Can you cancel Workers’ Compensation Insurance?

In a word, yes, you can cancel any type of insurance, including a workers’ compensation policy. However, being able to do something does not necessarily mean that you should. If you decide to move forward, it’s best to understand the right way to go about it. 

In most cases, you will need to submit a written request to your insurance company to cancel your workers’ compensation policy. Some employers will have a specific form, such as a policy cancellation request form. You’ll likely also need to provide the date and the reason for the cancellation. 

If you’re changing carriers before the expiration or renewal date on your current policy, you will need to submit a loss policy release (LPR) form. Note that if you’re simply not renewing your policy and letting it lapse, this is not necessary.

What is the difference between Cancelation vs. Lapse?

Most workers’ compensation policies are written annually. That means they must be renewed each year. If you choose to terminate your workers’ compensation insurance before that date, it’s considered a cancellation. 

If you simply don’t renew the policy (and don’t purchase insurance from a new insurance company), it’s considered a lapse. 

Both should be avoided, and each will leave a black mark on your company’s reputation and history.

Why would a business need a Workers’ Comp Cancellation?

Why would any business owner consider canceling a workers’ compensation insurance policy, particularly if they operate in a state where carrying this coverage is mandatory? 

We’ve seen a few different reasons over the years. Some of the most common include the following:

1. The insurance was purchased for a specific project and that project has ended.
2. The business has merged with another company and that company’s policy will now be in force.
3. The business is shutting down its operations.
4. The business has experienced a significant downturn and is trying to save costs. This is usually accompanied by a shift in employment, such as laying off employees and hiring independent contractors who provide their own workers’ comp insurance.

If you are mandated by law to have workers’ comp insurance, it is never a good idea to cancel it. That could mean facing major fines and even criminal charges. 

Are any of these reasons valid? Some of them are legitimate ways to achieve a workers’ comp policy cancellation. 

However, many of them will lead to serious issues both now and down the road. Let’s look at a few of the potential problems that might stem from these choices.

Contract-related Workers’ Comp Policy Cancellation

One of the most common reasons to seek a workers’ comp policy cancellation is if the policy was purchased for a particular project and has since concluded. 

It makes sense, at least superficially. If you no longer need the employees who were conducting the project, then you no longer have a reason for that insurance policy, right? 

The problem here is that letting a workers’ comp policy go is a strike against you. This is particularly true if you let it lapse, but even an outright cancellation without a lapse could leave a black mark on your business’s record. 

It’s a better option to see if the carrier is willing to lower the projections until your next lucrative project. If you plan to continue with another project, it’s always better to keep your policy in place and simply reduce the project payroll. 

Is lowering the Projections possible?

Is it possible to lower your policy’s project payroll instead of seeking a workers’ comp cancellation? Yes and no. 

The insurance companies would prefer to keep the policy as is to avoid needless work that will just need to be redone when your next project begins. But if the only other option is cancellation, the insurance company may be willing to do this as a last resort. 

Kickstand tip

The most important thing is to avoid letting the policy lapse. Always work with your insurance company to find an equitable solution to protect your reputation and ensure that you comply with state laws.

Weathering Slow Periods

All businesses experience ups and downs. If you’re currently weathering a slow period and have either let people go or ended a project because of it, it might be natural to request a reduction in projections from your insurance company. However, it might be better to stay the course.

Why should you continue paying for more workers’ compensation coverage than you need? Wouldn’t it be better to reduce your projections and save that money, particularly if there’s a financial downturn souring things for your company?

The problem is that if the slowdown is temporary and activity jumps back up again a month later, you’ll need to re-up your insurance projections. If you don't, your policy audit will reflect the true payroll and you’ll end up paying a much larger bill.

If you pay less in payroll than you originally predicted, at audit, the insurance company will give you back the extra money.

What are the ramifications of a Lapse in Coverage?

If you do choose to let your workers’ compensation policy lapse, understand that you will face a wide range of hurdles. While some insurance companies do not mind insuring a business that’s allowed a policy to lapse, they are few and far between. 

In short, a workers’ compensation policy lapse puts a black mark on your history, and you may find yourself locked out with many insurers, including the more affordable options. You may have little option but to work with an insurance company of last resort. 

Additionally, you will need to do an audit when the policy cancels, which adds another layer of difficulty.

Here’s another complication that stems from both cancellations and lapses: it means more hassle for you down the road. 

Let’s say you find a new project and want to put a bid on it. The other party will want to know that you have workers’ comp insurance before choosing your bid. That means you’ll be burning the candle at both ends by trying to bid on jobs AND find a new workers’ comp insurance policy at the same time. 

If you can’t find a policy before the bidding period ends, you’ll find that most potential clients decline your bid simply because of your lack of insurance.

Should you switch to Workers’ Comp Insurance Payments Plans instead of canceling?

A pay-as-you-go plan allows you to only pay for the actual payroll each month instead of the estimated payroll. 

Switching from the typical workers’ comp insurance payment plans to a pay-as-you-go option can be a viable alternative to canceling your policy. By opting for a pay-as-you-go plan, you can effectively manage your costs while maintaining continuous coverage. 

It's important to note that most carriers do not offer this flexibility, but it is worth exploring with your provider to see if this alternative is available. Making the switch to a pay-as-you-go plan could provide the financial relief you need without the need to terminate your policy.

Beware of the Short Rate Cancellation Penalty

If you choose to cancel your policy before the expiration date, you’ll face a range of challenges that we’ve already discussed. However, there may also be a financial penalty called the short-rate cancellation penalty.

Essentially this is a fee that the insurance company charges equal to a percentage of the total premium for the year, which is higher than the per day amount. It varies from policy to policy and company to company. 

However, you can almost bet that you’ll be on the hook for additional money if you do choose to cancel early.

What about a Workers’ Comp Flat Cancellation?

One of the only ways out of a workers’ comp policy without incurring additional fees or other challenges is through what’s called a flat cancellation. A workers’ comp flat cancellation is exactly what it sounds like. Both sides simply walk away from the deal.

Sounds great, doesn’t it? The problem is that it must be enacted right away. This isn’t something you can do midway through your policy. A workers’ comp flat cancellation can only occur when an insurance policy is canceled on its effective date before the insurance company has taken on any liability. 

If you’re able to do this, you will incur no premium charges or penalties. There’s also no need to recalculate insurance costs or worry about unearned premium money. 

Kickstand Tip

‍Yes, you can cancel your workers’ comp policy early. However, it’s rarely a good idea. In most cases, you’ll be on the hook for additional fees and penalties. You may also find that your business’s reputation is marred, making it harder to find insurance again later, and complicating the process of bidding projects.

The better option is to simply keep your insurance in place and work with a partner who can help you find the most affordable coverage possible. That includes things like verifying that your workers are classified properly, helping you implement an employee safety training program, and more.

Workers’ compensation insurance is not perfect, but it’s a requirement for most businesses, and trying to save a few bucks by canceling early will ultimately cost you more.

Start an Instant Quote with Kickstand Insurance

As you consider your workers' comp insurance options, it's essential to explore alternatives that align with your needs. If you're interested in exploring a pay-as-you-go plan or other flexible payment options, Kickstand Insurance offers a simple and convenient way to obtain an instant quote. 

By starting an instant quote with Kickstand Insurance, you can easily assess the available options and find the best fit for your business. Take the first step towards securing the right workers' comp insurance for your company today.