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REMOVAL OF SUBSTANDARD RATING

Frequently a person who is classified as a substandard risk and insured on that basis by one company subsequently applies for insurance with another company�or even the same company�and is found to be a standard risk in all respects. Under these circumstances the person�s natural reaction is to request the removal of the substandard rating. The question is whether the company should remove the rating.

Theoretically the rating should not be removed unless the impairment on which it was based was known to be temporary or was due to occupation or residence. At the time the policy was originally issued, the insured was placed in a special classification of risks whose members were presumably impaired to approximately the same degree. It was known by the company that some of the members of the group would die within a short period, while others would survive far beyond their normal expectancy. It was likewise known that the health of some of the members would deteriorate with the passage of time, while some members would grow more robust. By the time the insured under consideration is in normal health, the health of many others in the original group has undoubtedly worsened. Many of them cannot now get insurance on any terms, while others are insurable only at a greater extra premium than that charged. If the company reduces the premiums for those whose health has improved, it should be permitted to increase the premiums of those whose health has deteriorated. Since the premiums of those in the latter category cannot be adjusted upward, the premiums of those in the former category should not be reduced.

As a practical matter, however, the company is virtually forced to remove the substandard rating of a person who can demonstrate current insurability at standard rates. If it does not do so, the policyowner will almost surely surrender the extra-rate insurance and replace it with insurance at standard rates in another company. Knowing this, most companies calculate their initial substandard premiums on the assumption that the extra premium will have to be removed for people who subsequently qualify for standard insurance. Thus the common practice is to remove the extra premium upon proof that the insured is no longer substandard.

Where an extra premium has been imposed on account of occupation, residence, or a temporary risk, it is proper to discontinue the extra premium upon termination of the condition that created the extra hazard without prior adjustment in the substandard premium. It is necessary to exercise care in these cases, however, particularly when the source of the rating was occupation or residence. There is always a possibility that the insured may subsequently return to the hazardous occupation or residence, or that his or her health has already been affected adversely. Hence it is customary in such cases to require that a specified period of time, such as one or 2 years, must elapse after cessation of the extra hazard before the rating will be removed. Occasionally, a medical examination is also required. At the end of the period, the adjustment is usually made retroactively to the change of occupation or residence.

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