What does it mean when a policy is cancelled on an ab initio basis?

When a policy is cancelled on an ab initio basis, it means that the policy is treated as if it never existed from the very beginning. This legal principle effectively nullifies the contract and rescinds any obligations under it, as if the agreement had never been made. In this scenario, neither party has any rights or responsibilities arising from the contract, which may happen if the policy was based on fraudulent information or if critical information was withheld.

The other options describe different outcomes related to policy cancellation but do not accurately capture the meaning of "ab initio." For instance, ceasing coverage after a specified time suggests a continuation of the contract until that point, while settling a claim before cessation implies that the policy was still valid at the time of the claim. Similarly, a proportionate refund of premiums indicates that the contract was in effect to some degree, allowing for a refund based on the unexpired portion of coverage. These actions contrast with the principle of treating the contract as though it never existed, which is a defining characteristic of cancellation on an ab initio basis.