Attorney General Martha Coakley's staff alleges that Arbella Mutual didn't follow state laws with some policy cancellations

Arbella Mutual Insurance Co. has agreed to pay $56,000 and change language in its homeowner insurance policies to resolve an investigation into the way Arbella cancelled some of its customers' policies.

Arbella also agreed to reimburse a small number of former customers whose policies were canceled by making up any difference in cost between their cancelled Arbella policies and their new policies.

The settlement between the Quincy-based insurer and Attorney General Martha Coakley was filed in Suffolk Superior Court and disclosed by Coakley on Monday.

Coakley's staff accused Arbella of failing to adhere to guidelines spelled out in state law when the company cancelled a group of customers who had been with Arbella for longer than 60 days. The attorney general's office also said Arbella cancelled many customers' policies without properly explaining why the cancellations took place - another violation of state law.

If the settlement gets court approval, Arbella will pay $56,000 to the attorney general's local consumer aid fund.

It's unclear how much money Arbella would need to pay to reimburse customers who were canceled for improper reasons. Arbella will need to send notices to those customers and await responses explaining what they believe they are owed. Arbella would only need to reimburse the former customers for any excess payments made during the rest of the terms of the policies they would have had with Arbella if they had not been cancelled.

The attorney general's office began its investigation into Arbella following a similar investigation into OneBeacon, a Canton-based insurer, that was settled in December 2006, Coakley spokeswoman Amie Breton said in an e-mail.

Although Coakley's complaint claims that problems with Arbella's cancellations date back as far as 2003, Coakley's staff just provided the number of problematic cancellations found in the past year. The staff found 10 instances of improper cancellations of polices and 71 cancellation and non-renewal notices that failed to provide specific information required by state law, Breton said.

As part of the settlement, Arbella has agreed to change the way its policy forms are written to make it clear that Arbella will provide specific reasons for cancellations and non-renewals.

In the settlement agreement, Arbella specifically denied Coakley's allegations.

``These represent a small number of violations that were technical in nature,'' Jim DiNatale, an Arbella spokesman, said in a prepared statement.

``It is Arbella's practice to work closely with its agents to avoid policy cancellation whenever possible,'' DiNatale said. ``In many cases where written notification did not provide a specific reason for non-renewal or cancellation, this had been communicated verbally with the agent. Having said that, Arbella is committed to working with the Attorney General's office to ensure that our paperwork for these important policies is as thorough and precise as it can and should be.''

Jon Chesto of The Patriot Ledger (Quincy, Mass.) may be reached at jchesto@ledger.com.