STATE OF CALIFORNIA CHUCK QUACKENBUSH, Insurance Commissioner
DEPARTMENT OF INSURANCE
CHIEF, CONSUMER SERVICES DIVISION
45 FREMONT STREET, 23 FLOOR
SAN FRANCISCO, CA 94105
To : Private Passenger Automobile Insurers and Managing General Agents
Re: California Insurance Code 481.5 Unearned Premium
The California Department of Insurance has a duty to protect the insurance consumers of this state and to
enforce the provisions of the California Insurance Code. We are fortunate in this state to have an increasingly
competitive marketplace, particularly for personal automobile coverage. Generally speaking, the personal
automobile market place functions very efficiently and fairly for the consumer, although occasional issues do
arise. One current issue involves the return of premium to the insured in the case of a declination, reduction, or
cancellation of coverage.
For over a year now, the Department has utilized a database system that allows it to track violations and justified
complaints. During that time over 500 violations of California Insurance Code Section 481.5 (which addresses
refunds of unearned premiums and commissions) have been registered against brokers, insurers, and managing
general agents (MGA’S). A number of the violations have been charged in situations involving premium-
financed non-standard auto coverage. The most common scenarios involve brokers either issuing premium
refunds late or failing to refund unearned commissions at all. In some instances, due to confusing cancellation
statements provided by the insurer/MGA, brokers wait for monthly finance company statements before refunding
the net commissions. When finance company loans are in a credit status, the finance company does not bill the
broker for the unearned commissions and the unearned commissions are never returned to the insured/borrower.
Because of this ongoing problem, the Department recognizes the need to clarify the responsibilities of the insurer
or managing general agent that are incumbent in Section 481.5. To date, the determination of violations has
generally focused on the brokers’ and agents’ violations that have occurred. Beginning on April 1, 2000, the
Department will also begin strict enforcement of the insurers’ obligation under this statute, with the focus on
those complaints involving premium financing. The Department will continue to enforce California Insurance
Code 481.5 against insurers using direct bill financing that fail to refund gross unearned premiums within 25
There are several significant elements of this law that must be adhered to involving the unearned premium, the
specific recipient of the unearned premium, and the time frame for the return of premium.
First, it is clear that unearned premium that is to be returned is the whole or gross unearned premium, which is
the return premium plus the corresponding commission. If the unearned commission is withheld, the
insurer/MGA has not met its legal obligation under this law.
Secondly, Section 481.5(a) states “the unearned premium shall be tendered to the insured or to the person
entitled thereto or to the insurance agent of record as the insurer’s agent…” Again, the insurer/MGA will be in
violation of 481.5 if gross unearned premiums are not refunded to either the insured, the person entitled thereto
(typically the finance company) or the insurer’s agent. Return of net premium to the broker does not
automatically satisfy the Code requirements.
Finally, the premium must be returned “within 25 days after the cessation…” of the policy. The money must be
returned to the appropriate party within 25 days. If the premium is refunded to a broker, that does not meet the
requirements of this law unless the broker, in turn, refunds the gross unearned premium to the insured or the
person entitled thereto (the finance company) within that same 25 day period and the insurer can document the
entire transaction. (The insurer’s agent has 15 days from receipt of the unearned premium to return the premium
to the insured or person entitled to the premium.) Based on the circumstances involved in the complaint, the
insurer/MGA will receive a justified complaint letter and/or a violation notice when the appropriate party,
premium amount or time frames involved are not met.
In situations whereby the insurer/MGA are notified of the cancellation after the effective date of cancellation
(e.g. by a finance company who is late in issuing cancellation notices or by an insured requesting a back dated
cancellation) the Department will evaluate each situation on a case by case basis. The 25-day clock will start on
the date the insurer/MGA is made aware of the cancellation, however, the Department does reserve the right to
evaluate each case to determine if there are other extenuating circumstances affecting when the 25-day period
should begin. A full 25 days offers sufficient time to allow for reinstatement of the policy and the processing of
cancellations. The issuing of unearned premiums (premiums plus commisssion) must be post marked prior to
the 25th day following the receipt of the notification of cancellation.
The Commissioner believes a clear understanding of Section 481.5 will allow the industry to establish specific
and appropriate procedures for refunding gross unearned premiums and will benefit California insurance
consumers. An established industry standard will also provide a level playing field for competing insurers and
MGA’s, as well as encourage the market to phase out retailers unwilling to abide by the refund requirements.
Recently we invited a number of managing general agents, representatives of producer associations and finance
company representatives to the Department to participate in an open discussion of Section 481.5. The meetings
were very productive and we appreciate the input we received.
We thank you in advance for your attention to these issues. Any questions can be forwarded to Edward Call,
CPCU, Associate Insurance Rate Analyst, Rating and Underwriting Services Bureau, at (213) 346-6656.
Chief, Consumer Services Division
481. (a) Unless the insurance contract otherwise provides, a person
insured is entitled to a return of premium if the policy is
canceled, rejected, surrendered, or rescinded, as follows:
(1) To the whole premium, if the insurer has not been exposed to
any risk of loss.
(2) Where the insurance is made for a definite period of time and
the insured surrenders his policy, to such proportion of the premium
as corresponds with the unexpired time, after deducting from the
whole premium any claim for loss or damage under the policy which has
previously accrued. The provisions of Section 482 apply only to the
(b) No contract for individual motor vehicle liability or
homeowners' multiple-peril insurance may contain a provision which
mandates that the premium for such policy shall be fully earned upon
the happening of any contingency except the expiration of the policy
itself. This subdivision shall not apply to policy fees or
(c) This section shall not apply to policies of ocean marine
insurance. For purposes of this section, "ocean marine insurance"
means insurance of vessels or crafts, their cargos, marine builders'
risks, marine protection and indemnity, or other risks commonly
insured under marine insurance governed by the provisions of Chapter
1 (commencing with Section 1880) of Part 1 of Division 2, and as
distinguished from inland marine insurance policies.
481.1. (a) In the event any conditional receipt, binder, or other
evidence of temporary or implied insurance, except ocean marine
insurance as defined in Section 481 and those classes of insurance as
defined in Sections 101, 104, and 106, is canceled, rejected, or
surrendered by the insurer, the coverage thereby extended shall
terminate 10 days after written notice to the named insured is
deposited, properly addressed with postage prepaid, with the United
States Postal Service.
(b) Any conditional receipt, binder, or other evidence of
temporary or implied insurance described in subdivision (a) shall
remain in force for a period of at least 30 days from the date of its
issuance unless sooner canceled, rejected, or surrendered pursuant
to the provisions of subdivision (a).
481.5. (a) Whenever an insurer endorses, rejects, declines,
cancels, or surrenders a policy of insurance as defined in
subdivision (a) of Section 660 or Section 675, or a policy of
insurance as defined in subdivision (a) of Section 660 or Section 675
is canceled pursuant to Section 673, the unearned premium shall be
tendered to the insured or to the person entitled thereto or to the
insurance agent of record as the insurer's agent for transmittal
within 25 days after the cessation or amendment of coverage due to
endorsement, cancellation, rejection, surrender, or rescission. If
this unearned premium is tendered to the insurer's agent, the agent
shall tender this premium to the insured or to the person entitled to
the premium within 15 days after the agent receives the premium.
Any unearned premium not tendered within the time specified above
shall bear interest at the rate of 10 percent per annum from and
after the date on which the unearned premium is to be tendered. An
agent or broker shall only be liable for the payment of interest
after 15 days from the date the agent or broker has received the
funds for the amount of the unearned premium from the insurer, or
from the date the agent or broker has received notification from the
insurer that a credit or payment for the amount of the unearned
premium has been applied to an agent's or broker's account. That
interest imposition shall not apply to any insurer in conservatorship
or liquidation and shall constitute the sole penalty paid to the
insured for a failure to refund an unearned premium. For the
purposes of this section, the tender of any unearned premium to the
insured shall be deemed complete upon the deposit of the unearned
premium in the United States mail, prepaid, addressed to the named
insured at the last known address.
(b) Whenever a policy is canceled pursuant to Section 673, other
than a policy as defined in subdivision (a) of Section 660 or Section
675, the unearned premium shall be tendered to the person entitled
thereto or to the insurance agent of record as the insurer's agent
for transmittal within 120 days after the cessation of coverage due
to cancellation. Any unearned premium not tendered within the time
specified above shall bear interest at the rate of 10 percent per
annum from and after that 120 days. That interest imposition shall
not apply to any insurer in conservatorship or liquidation and shall
constitute the sole penalty paid to the insured for a failure to
refund an unearned premium.
(c) For purposes of subdivisions (a) and (b), where the unearned
premium is not assigned as security to a premium finance agency
pursuant to a premium finance agreement and where the amount of
unearned premium is less than twenty-five dollars ($25), tender of
unearned premium shall include applying the amount of unearned
premium either to the renewal premium at the next renewal date or to
other premiums due, provided written notice of either application is
given to the insured within 30 days after the endorsement, rejection,
declination, cancellation, or surrender of a policy of insurance.
At the time of endorsement or surrender of a policy of insurance or,
within 15 days after the mailing of the written notice required by
this subdivision, the insured may request in writing that the
unearned premium be tendered as provided in subdivisions (a) and (b).
Whenever the amount of unearned premium is less than five dollars
($5), tender shall be effective and the written notice required by
this subdivision shall not be required provided the unearned premium
is applied either to the renewal premium at the next renewal date or
to other premiums due.