Understanding When Your Coverage Ends

Roy is a retiree who owns two cars – one that he drives during the winter, the other for the warmer months. He keeps license plates on only one car at a time. When the time comes to take one off the road and put the other one on, he visits his local motor vehicle bureau’s office, fills out a form and transfers the license plates. Last spring, he phoned his car insurance agent on a Tuesday and informed the service representative that he would be switching the plates that Friday. He asked her to remove coverage from the old vehicle and add coverage to the new one, with the changes to take effect on Friday. The service rep ordered the policy change as he requested.

On Friday morning as Roy drove to the motor vehicle bureau, he changed lanes without checking his blind spot. His car struck a vehicle in the right lane, damaging it and his car. He notified his insurance agent at once, the agent notified his insurance company, and the company promptly told him that he had no coverage. Roy, already not in the best of moods, demanded an explanation.

Why did Roy not have the insurance coverage he expected? The answer lies in the instructions he gave his insurance agent. The standard practice in the insurance industry is for coverage to both begin and cease at 12:01 AM on the effective date. For example, an auto insurance policy that takes effect on January 1, 2009 will state on its information page that coverage will begin at 12:01 AM on January 1, 2009 and end at the same time on January 1, 2010. Further, when an insurance company sends a formal notice to a customer that it is canceling his policy, the notice always states that the policy will cancel at 12:01 AM on the specified date. The purpose of this is to set clearly defined moments when coverage begins and ends. By setting the time at 12:01, there can be no doubt as to the date when that moment occurs.

When Roy asked his agent to remove coverage from the first car on Friday, his insurance on that vehicle ended at 12:01 AM Friday. Unfortunately, he was still using it; his accident occurred several hours later. Unbeknownst to him, he was driving an uninsured vehicle at his own request.

This problem is not limited to auto insurance. Suppose John and Mary Smith are selling a house and buying another one. Closings on both sales are scheduled for June 15. If John and Mary cancel the homeowner’s insurance policy covering the first house effective June 15, they are without coverage on it after 12:01 AM, even though they have not yet closed on the sale. If a window were to break in the early morning hours and allow rain to enter the house and damage carpeting, John and Mary have no insurance to pay for the new carpeting their buyers will expect.

Anyone selling a house or a car or taking a car off the road should ask the insurance company to remove coverage the day after the sale. He needs coverage on the property while he has ownership, even if it is only for a fraction of the day. If he has any doubts about the right time to remove coverage, he should discuss it with his insurance agent. While he may end up paying for insurance that he doesn’t need for a few hours after he sells the property, it is a small price to pay for avoiding an uninsured loss.

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