Are car insurance companies allowed to charge a cancellation fee?
It’s on a state by state basis. They are ALL allowed to charge a “short rate cancellation penalty”. Many states ALSO allow a cancellation fee, in ADDITION to the short rate cancellation penalty. That’s because, it costs money to issue a policy. The cost of issuance is built into the policy premium for a full year. If you cancel the policy before the year is up, the insurance company STILL needs to get compensated somehow, for the cost to write your policy. So, there’s a short rate penalty, and sometimes a cancellation fee. Any cancellation fee should have been disclosed on the application you signed, but the short rate penalty is NOT.
