Which statement correctly distinguishes 'lapse' from 'cancellation'?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A lapse is the termination of a policy because the insured failed to pay the premium when due, typically after the grace period has expired. Cancellation is the termination of coverage before the policy's natural expiration, initiated by the insurer or, where permitted, by the insured, for the reasons stated in the policy's cancellation provision. Grace periods and reinstatement rights operate around lapses, while cancellation rules address the early termination of a policy that was in force. The two terms describe different events with different causes and different procedural rules.
Why the other options are wrong
- B) The terms describe different events. Lapse results from the insured's nonpayment of premium, while cancellation is early termination by the action of a party. Accordingly, this plausible-sounding answer is one that examiners expect candidates to eliminate.
- C) Cancellation is an early termination of coverage before the policy's natural expiry date. The natural expiry of the policy is simply the end of the policy period, not a cancellation.
- D) Lapse results from the insured's failure to pay premiums when due. It is not a termination chosen by the insurer for its own reasons. The correct answer follows from the controlling authority, which this option does not follow.
Memory hook
Lapse = you stopped paying. Cancellation = someone stopped the policy early. Money vs. action.