Renewability and General Provisions Applied
Renewability decides how long a health or disability policy can be counted on, and the general provisions decide what a claim is worth when the facts are messy. A producer who can only recite them cannot answer the client’s real questions: can the insurer drop me when I get sick, what happens to my benefit if I gave the wrong age, and why did my payment shrink when I bought a second policy. The sections below contrast the four renewability classes, apply Michigan’s renewal rules, work the arithmetic of three common provisions, and run one claim from injury to the last day a suit may be filed. Names and figures in the examples are invented.
The Four Renewability Classes
A health or disability policy has a term, such as a month or a year. Renewability says what the insurer may do when the term ends and what it may do to the policy while the term runs. The classes are ordered from the most protection for the insured to the least.
| Class | Can the insurer refuse to renew? | Can the insurer change the premium? | Typical use |
|---|---|---|---|
| Noncancelable | No, as long as the insured pays premiums on time, to the stated age. | No. The premium and the terms are fixed to the stated age. | Individual disability income |
| Guaranteed renewable | No, to the stated age or for life. | Yes, but only for an entire class of policyholders, never one person. | Individual disability income, medical |
| Conditionally renewable | Only on a condition the policy states, and not because of the insured’s claims or health. | Yes, for a class. | Some individual policies |
| Optionally renewable (insurer option) | Yes, on any renewal date, for any reason the law permits. | Yes. | Short-term and limited policies |
Noncancelable and guaranteed renewable policies share one feature: the insurer cannot decline to renew because the insured has become sick or has filed claims. They differ in price. A noncancelable policy fixes the premium. A guaranteed renewable policy lets the insurer raise rates on the whole class, so the premium can climb after the policy is sold. A conditionally renewable policy lets the insurer refuse to renew only on a stated ground, such as the insured reaching a particular age or leaving a covered occupation. It may not single out a policyholder because of claims. An optionally renewable policy gives the insurer the choice at every renewal date, which is why it is the weakest guarantee.
What a Rate Increase Looks Like
Suppose two otherwise identical policies cost $100 a month. The noncancelable policy stays at $100. The guaranteed renewable insurer files a 12 percent increase for the class in each of three successive years.
| Year | Noncancelable | Guaranteed renewable, 12 percent a year |
|---|---|---|
| 1 | $100.00 | $112.00 |
| 2 | $100.00 | $125.44 |
| 3 | $100.00 | $140.49 |
The insured pays 40.49 percent more in year 3 and cannot be singled out for it, but can be priced out of keeping the policy. That is the trade a lower starting premium buys, and it is what a producer should explain before the sale.
What Michigan Requires
Michigan separates two kinds of policy, and the renewal rule depends on which one the client holds. A “health insurance policy” is an expense-incurred hospital, medical or surgical policy, certificate or contract, and the term does not include a policy that covers only excepted benefits (MCL 500.608(b)). A disability income policy is not expense-incurred coverage and so is not one. Section 2213b applies to a health insurance policy:
- The insurer must renew the policy or continue it in force at the option of the individual or, for a group plan, at the option of the plan sponsor (MCL 500.2213b(1)). In effect that is guaranteed renewability by law, which leaves little room in Michigan for an insurer-option or conditionally renewable expense-incurred policy beyond the exceptions below.
- The insurer need not renew for fraud, intentional misrepresentation of material fact, nonpayment, noncompliance with minimum contribution or participation requirements, ending that type of coverage in the market, or the individual or group moving outside the service area (MCL 500.2213b(4)).
- At renewal of an individual policy, the insurer may modify it if the change is consistent with state and federal law and takes effect on a uniform basis among all individuals with coverage under the policy (MCL 500.2213b(2)). That is the class-wide change that guaranteed renewability allows.
- To discontinue a particular plan or product, the insurer must give notice to the Director and to each covered individual or group at least 90 days before, and offer each the option to buy any other plan or product it currently offers in that market without excluding or limiting coverage for a preexisting condition or imposing a waiting period (MCL 500.2213b(5)(a), (b)). It must act uniformly without regard to health status (MCL 500.2213b(5)(c)).
- To leave a market entirely, 180 days’ notice is required, and the insurer may not issue plans in that market for 5 years after the last plan is not renewed (MCL 500.2213b(6), (7)).
- A short-term or one-time limited duration policy of not more than 6 months, issued for 185 days or less, is outside these rules (MCL 500.2213b(8), (9)).
A disability income policy or an accident-only policy is not a “health insurance policy,” so the four-class contrast does its full work there. The Michigan disability provisions let an insurer include an optional cancellation clause: the insurer may cancel by written notice stating a date not less than 5 days later, and the insurer may retain the pro rata premium for the expired time or $25, whichever is greater (MCL 500.3448). Suppose an insurer cancels a $600 annual policy effective on day 20. The pro rata premium is $600 x 20 / 365, or $32.88, which is more than $25, so the insurer keeps $32.88 and refunds $567.12. On a $240 annual policy cancelled effective on day 10, the pro rata amount is $6.58, so the insurer keeps $25 and refunds $215. Cancellation does not affect a claim that began before it took effect.
An insurer that uses a cancellation clause has made the policy cancellable, which is weaker than any of the four classes above. Michigan’s advertising rule also requires an invitation-to-contract advertisement to disclose the provisions on renewability, cancellability, termination and changes in benefits or premiums because of age or for other reasons, in a way that does not minimize them (R 500.658).
Misstatement of Age
If the insured’s age has been misstated on the application, the policy may provide that all amounts payable are what the premium paid would have purchased at the correct age (MCL 500.3434). The insurer adjusts the benefit instead of voiding the policy, and it uses the adjustment whenever the misstatement is discovered, including after the policy’s period for challenging the application. Michigan’s time limit provision expressly leaves the misstatement-of-age adjustment in force (MCL 500.3408(1)(a)(i)).
Take a disability income policy bought with a stated age of 40. The premium is $120 a month. Suppose the insurer’s rate is $6.00 of premium per $100 of monthly benefit at age 40 and $8.00 at age 46, and the insured was really 46.
| Age used | Rate per $100 of monthly benefit | Monthly benefit $120 buys | |
|---|---|---|---|
| As applied for | 40 | $6.00 | $2,000 |
| Corrected | 46 | $8.00 | $1,500 |
The $120 premium buys $120 / $8.00 x $100, or $1,500 a month at the correct age. The insured has paid for $2,000 of benefit and will receive $1,500, so the claim is reduced by $500 a month. The policy is not void, and the insurer does not need to prove fraud. Had the true age been younger, the same arithmetic would increase the benefit.
Other Insurance Provisions
Several provisions answer the same question: what happens when an insured has more than one policy. The answer depends on whether the other coverage is with the same insurer, and whether it pays expenses or pays a fixed indemnity.
Other insurance with the same insurer. An individual disability policy may limit the total indemnity the insurer will pay across all of its policies for the insured. If the aggregate exceeds a stated maximum, the excess insurance is void and the premiums paid for the excess are returned. Alternatively, the policy may limit coverage to the one policy the insured, beneficiary or estate elects, with premiums for the others returned (MCL 500.3436).
Insurance with other insurers: expense incurred. An individual disability policy may provide that if the insurer was not given written notice before the loss that the insured has other valid coverage, its liability for the expense-incurred coverage is a proportion of the loss. The statute states the proportion as the amount the policy would have paid plus the like amounts under other valid coverage of which the insurer had notice, over the total like amounts under all valid coverages, and the insurer also returns the part of the premium above the pro rata portion for the amount so determined (MCL 500.3438(1)).
An example with no notice shows the mechanics. A loss of $10,000 occurs. This policy would otherwise pay $8,000, and a second policy the insurer never heard of would also pay $8,000. The proportion is $8,000 / ($8,000 + $8,000), or one half, applied to the loss, so this insurer pays $5,000. If the insurer had received written notice of the second policy before the loss, this provision would not reduce its payment.
Workers’ compensation and other compulsory benefit statutes are treated as other valid coverage of which the insurer had notice, so a client cannot argue the insurer was never told (MCL 500.3438(3)). Third-party liability coverage is not counted.
Insurance with other insurers: other benefits. The parallel provision for an individual policy’s fixed indemnity coverage applies the same ratio to the benefit itself (MCL 500.3440(1)). Suppose this policy pays $2,000 a month and an unreported policy from another insurer also pays $2,000. With no notice, the proportion is $2,000 / ($2,000 + $2,000), or one half, applied to $2,000. This insurer pays $1,000 a month and returns the excess premium.
Relation of Earnings to Insurance
Disability benefits are meant to replace income. If the monthly loss-of-time benefits promised for the same loss under all valid coverage exceed the insured’s monthly earnings at the time the disability began, or average monthly earnings for the 2 years before, whichever is greater, the insurer pays only the proportionate share and returns the part of the premiums for those 2 years that exceeds the pro rata amount for the benefits actually paid (MCL 500.3444). Total monthly benefits under all coverage may not be reduced below the lesser of $200 or the sum of the monthly benefits. The clause may be used only in a policy the insured can keep in force by timely premium payment until at least age 50, or for at least 5 years from issue if issued after age 44.
Take an insured whose earnings when disability began were $3,600 a month and whose average over the prior 2 years was $4,000. The greater is $4,000. She holds two valid loss-of-time policies, $3,000 a month with one insurer and $2,000 with another, for a total of $5,000.
| Step | Calculation | Result |
|---|---|---|
| Greater of current and average earnings | greater of $3,600 and $4,000 | $4,000 |
| Total monthly benefits promised | $3,000 + $2,000 | $5,000 |
| Proportion each insurer pays | $4,000 / $5,000 | 0.80 |
| First insurer pays | 0.80 x $3,000 | $2,400 |
| Second insurer pays | 0.80 x $2,000 | $1,600 |
| Total paid | $2,400 + $1,600 | $4,000 |
She receives exactly the earnings figure, and each insurer returns the premium for the part of the benefit it did not pay. The $200 floor does not matter here because the reduced total is far above it. The reason the producer cares is on the sales side: selling a second policy to a client whose combined benefits exceed earnings buys coverage that will not pay.
A Claim Timeline Against a Policy
Dates and deadlines in a claim come from several provisions at once. Take a disability income policy with a 60-day elimination period, monthly benefits and a monthly benefit period that ends on the first day of each month after the elimination period. The insured, Owen Brandt, is injured and becomes disabled on March 3.
| Date | Event | Provision |
|---|---|---|
| March 3 | Disability begins. The 60-day elimination period starts counting with this day. | Policy |
| March 10 | Owen gives written notice of claim. The deadline would have been March 23, 20 days after the loss began, or as soon after as is reasonably possible. Notice to any authorized agent with enough information to identify the insured counts as notice to the insurer. | MCL 500.3412(1) |
| March 25 | The insurer has until this date, 15 days after notice, to furnish claim forms. If it does not, Owen satisfies the proof requirement by submitting, within the time fixed for proof, written proof of the occurrence, character and extent of the loss. | MCL 500.3413 |
| May 2 | The elimination period has run, and benefits become payable. | Policy |
| June 1 | The first benefit month ends. Proof of loss for continuing periodic benefits is due 90 days after the period for which the insurer is liable ends. | MCL 500.3414 |
| August 30 | Proof for the first benefit month is due. Late proof is excused if it was not reasonably possible to file on time and it is filed as soon as reasonably possible, and, unless the claimant is legally incapacitated, within 1 year after it was due. | MCL 500.3414 |
| Monthly | Accrued periodic benefits are paid at least monthly once due proof is in. | MCL 500.3416 |
| Proof plus 60 days | Suppose Owen files proof on June 15. The earliest date to sue is August 14. | MCL 500.3422 |
| August 30, three years later | The last date to sue is 3 years after the time proof was required, not after the date it was filed. | MCL 500.3422 |
Two points trip up students. The first is that the 3 years run from the time proof was required, not from the denial, and so waiting for a denial does not extend it. The second is that Michigan’s claim deadlines are statutory protections. Where a policy provision conflicts with chapter 34, the chapter governs the rights of the insurer, the insured and the beneficiary (MCL 500.3468(2)).
The Time Limit on Certain Defenses
Now suppose the insurer wants to deny Owen’s claim because he understated his smoking on the application. The insurer’s right depends on when his disability began. The policy was issued on July 10 of Year 1, and for a Michigan policy of this kind, which is not a health insurance policy, the time limit may not exceed 2 years (MCL 500.3408(2)).
| Disability begins | Insurer may deny for a non-fraudulent misstatement? |
|---|---|
| June 2, Year 3 | Yes, within the period. The statement must still have materially affected the acceptance of the risk or the hazard assumed (MCL 500.2218). |
| July 11, Year 3 | No. After the period, only a fraudulent misstatement may be used. |
The form may print “3 years”, but the 2-year limit governs a Michigan policy of this kind (MCL 500.3408(2)).
The same section also says a claim for a loss beginning after the period will not be reduced or denied because a disease or condition not excluded by name or specific description existed before coverage began (MCL 500.3408(1)(b)). A named exclusion rider is the way an insurer keeps a preexisting condition out of coverage after the period.
Lesson summary
- The four renewability classes run from noncancelable, with a fixed premium, to guaranteed renewable, with class-wide rate increases, to conditionally renewable and optionally renewable, where the insurer keeps some or all of the right to decline renewal.
- A Michigan health insurance policy, which is an expense-incurred policy, must be renewed or continued at the individual’s or plan sponsor’s option, subject to listed exceptions (MCL 500.2213b(1), (4)).
- Discontinuing a plan requires 90 days’ notice and an offer of other coverage without a preexisting condition limit or waiting period; leaving a market requires 180 days’ notice (MCL 500.2213b(5), (6)).
- Disability income and accident-only policies are outside that rule, and an optional cancellation clause lets the insurer cancel on 5 days’ notice while keeping the greater of the pro rata premium or $25 (MCL 500.3448).
- Misstatement of age adjusts the benefit to what the premium would have bought at the correct age, and the policy stays in force (MCL 500.3434).
- A policy may proportionately reduce a claim when the insured did not tell the insurer about other valid coverage, and may reduce loss-of-time benefits so total benefits do not exceed the greater of current or prior 2-year average earnings (MCL 500.3438; MCL 500.3440; MCL 500.3444).
- Claim deadlines build on one another: 20 days for notice, 15 days for forms, 90 days for proof, then no suit before 60 days after proof and none after 3 years from when proof was required (MCL 500.3412 to 500.3422).
- For a Michigan non-health disability policy, the time limit on certain defenses may not exceed 2 years, whatever the form prints (MCL 500.3408(2)).