I found out I could save $75 on my car insurance by switching to another insurance company. I told my previous company that I no longer needed my insurance, and asked it to refund my money for the 10 months still left on my policy. To my great shock, the insurer penalised me $100 on my refund. Now, I end up LOSING money instead of saving! Is the insurance company allowed to do this? -- No Saving Grace

Dear Grace:

In this case, unfortunately, a penny saved is NOT a penny earned! Yes, your insurer is legally entitled to charge you a penalty if you cancel your policy before its expiration date, to compensate for administrative costs.

This penalty is called "short-rating," but, in your eyes, it's more like getting "shortchanged." The amount of the penalty will vary from company to company and depending on how many months are left on your policy when you cancel it. The more months remaining, the higher the penalty, as you found out. If, for example, your policy had been in force for just one month out of 12, you would be charged considerably more than one-twelfth of the full annual premium.

Often, consumers agree to be insured by one company, but continue to shop around. If they find comparable insurance at a cheaper price, they think that, because they haven't paid any money to the first company yet or received the policy, they aren't obligated to that insurer. Wrong!

That may not seem fair, but let's look at it from another point of view. As soon as an insurance company agrees to cover you -- even if it's only by verbal commitment and even if you haven't paid a cent yet in return -- that company is obligated to do so, to hold up its end of the bargain. So once you and the company have agreed that you will be insured, both parties must honour that commitment. If, on the other hand, you were to cancel BEFORE an agreed start date, you would not incur a penalty.

So let's say you decide to wait until renewal time to cancel your coverage, to avoid paying a penalty. Don't think that simply ignoring the bill will do the trick. Once a renewal notice has been delivered to you, it means the insurer has already committed to fulfil its obligation, so the onus is on you to inform the insurer -- in writing -- that you don't want to renew your coverage. If you're not sure about the procedure, ask your insurance provider.

The bottom line: before you instruct an insurer to cancel your policy, and before you agree to coverage elsewhere, ask how much the penalty is. Although you have the right to terminate your insurance policy at any time, for any reason, don't get "short-changed" in the process.

Note: Remember, policies vary, so when in doubt, consult your insurance representative.