Refund processing depends on the policy of the insurer. There is no law forbidding the issuance of a check for the overpayment. For instance, Radian issues refund checks directly to the loan servicer, per its policy. It sounds as though your friend's loan servicer prefers to apply the overpayment to the loan balance, but I can find no law requiring this. I would ask them to cite the specific law that applies, and push for an actual refund if they can't do this.