In the event that a general liability insurance policy has significantly understated its revenue and hence its premium base, an audit conducted by the insurer will typically reveal the discrepancy. When such inconsistencies are found, the insurer generally requires that the additional premium, based on the actual and correct revenue figures, be paid. This is because premiums for general liability policies are often calculated based on the revenue generated by the insured business. The understatement of revenue would mean that the insured has been paying less than their fair share of the premium appropriate for their risk level.
The ability to instead terminate the coverage without paying the additional premium involves several considerations and can vary based on the policy terms, state law, and circumstances surrounding the policy underwriting. Most policies include a provision that allows the insurer to collect additional premiums due as a result of an audit adjustment. Therefore, even if the insured decides to cancel the policy, they may still be liable for the amount covering the period when the policy was inaccurately priced. This remains true unless the policyholder can demonstrate an early termination clause that permits cancellation without additional cost, an unlikely scenario given customary policy language.
Additionally, opting to end coverage doesn’t typically absolve the insured of obligations incurred under the policy’s terms while it was in effect, which includes paying any underestimated premium amounts. Failure to pay the revised premium could potentially lead to additional penalties, legal action, and difficulty obtaining future insurance coverage. It is advisable that the insured consults the specific terms of their policy and possibly seek legal or professional advice to explore all available options and implications.
