Premium Credit has invited Independent Insurance policyholders to cancel their policies and avoid paying further instalments on their premiums.

However, lawyers have warned that cancelling may mean policyholders lose the right to claim money back from Premium Credit.

Premium Credit wrote to Independent Monthly Instalment Plan policyholders late last week.

The letter said liquidators Pricewaterhousecoopers (PWC) would be cancelling policies, regardless of whether they had a cancellation clause. PWC recently announced its intention to cancel all policies by July 31.

Policyholders with a cancellation clause would be eligible for a pro rata refund from the Policyholders' Protection Board (PPB).

The letter continues: “Regardless of the basis for cancellation of your policy, provided that you agree to assign your right to a premium refund in respect of the remainder of the policy year, you will not be required to make further direct debit payments.”

However, Class Law partner Stephen Alexander said section 75

of the Consumer Credit Act would allow policyholders to claim the unpaid portion of their premium back from Premium Credit.

He said cancellation in the manner requested by Premium Credit would nullify that right.

Instead, he has advised policyholders to take part in a test case to claim money back from Premium Credit.

“Had they known the extent of the company's position, policyholders would never have entered the contract,” Alexander said.

Several other groups, including brokers and other premium finance companies, are taking legal advice on the situation.

The PPB is expected to make a decision on premium finance issues by the end of the week.