All D&O policies contain language defining the circumstances, timing, and other requirements to effect a cancellation of the policy, either by the insured or insurer. The following is a sample cancellation clause.

D. Cancellation and Nonrenewal

1.The named Company may cancel this policy at any time prior to the Expiration date of the Policy Period by mailing prior written notice to the Insurer or by surrender of this policy to the Insurer or its authorized agent. If the named Company shall cancel this policy, the Insurer shall retain the customary short rate proportion of the premium.

2.This Policy may be cancelled by or on behalf of the Insurer solely for reason of non-payment of premium, by delivering to the Company, or by mailing to the Company, at the address shown in Item 1 of the Declarations, written notice of cancellation at least 10 days before the effective date of cancellation. The mailing of such notice as aforesaid shall be sufficient proof of notice and the effective date of cancellation stated in such notice shall become the Expiration date of the Policy Period. If the Insurer shall cancel this policy, the Insurer shall retain the pro rata portion of the premium hereon. Payment or tender of any unearned premium by the Insurer shall not be a condition precedent to the effectiveness of cancellation, but such payment shall be made as soon as practicable.

3.This policy may be nonrenewed by the Insurer by delivering to the Company, or by mailing to the Company, at the address shown in Item 1 of the Declarations, written notice of nonrenewal at least thirty days prior to the Expiration date of the Policy Period. The mailing of such notice shall be sufficient proof of notice.

Crum & Forster, MP426.1 (04/04)

Cancellation by the Insured

As with most other types of insurance, the D&O policy usually may be cancelled at any time by the insured. However, when the insured cancels the policy, the insurer typically retains what is commonly referred to as a short-rate proportion of the premium, sometimes also referred to as a short-rate penalty. Such provisions impose a penalty based on the unearned premium remaining on the policy at the time the policy is cancelled. Although language may reference “customary” short-rate provisions as in part (1) of the example, many D&O policies are issued without defining the specific proportion or penalty. In such cases, insurers will typically retain 10 percent of the unearned premium as the penalty to offset their fixed expenses incurred in issuing the policy. However, short-rate terms can vary, as illustrated in the following sample short-rate-cancellation table.

Nonstandard Short Rate Cancellation Table

Some policy forms contain minimum-premium provisions. These are usually expressed as a percentage of the annual premium (or a fixed amount) that is fully earned if and when an insured cancels the policy. When the precise terms of the cancellation penalty are unknown, the insured should seek written clarification from the insurer.

Cancellation by the Insurer

If the insurer cancels coverage, the cancellation provision generally provides for the pro rata return of unearned premium to the insured, although some insurers may use a specific formula for calculating the return premium that is applied, regardless of which party initiates the cancellation.

All policies require the insurer to give advance notice to the insured if it intends to cancel the policy. Some policies allow for cancellation by the insurer at any time, subject only to notifying the insured of the intent to cancel. Except for the insured's nonpayment of premium, which generally requires only a ten-day prior notice, the typical notice requirement is thirty days. As a practical matter, however, thirty or even sixty days' notification may not provide ample time to remarket a complicated or distressed risk. Sometimes a ninety-day notice can be negotiated, and for particularly difficult risks, an even longer period may be desirable.

Restrictive Cancellation Provisions

A few policies provide for cancellation only under certain limited situations, such as when mutually consented to by insured and insurer or when majority ownership of the insured corporation changes, as illustrated by the following example.