What Does “Minimum Earned Premium” Mean?
Jeff Henderson November 01, 2016
There are many reasons a business may want to cancel their policy prior to the expiration date, but no matter the reason, a policy holder can cancel the policy at any time.
Most insurance policies
The insurance company will typically pro-rate the amount of money owed based on the number of days the policy was active. Earned premium is the amount of premium that the insurance company has earned on your policy as of any given date.
For example, on January 1, you may purchase an annual insurance policy that costs $1,000. On July 1 (exactly 6 months later), the earned premium is $500.
So what does “minimum earned premium” mean?
Some policies are subject to a minimum earned premium percentage upon cancellation.
Common minimum earned premiums are 25%, 50%, and 100% of the total premium. If your policy is subject to this, the early cancellation may not result in a straight pro-rate of the earned premium.
For example, a 50% minimum earned premium means you are responsible for paying half of the total premium regardless of when the policy actually cancels—even if coverage was only in place for a week.
What do minimum earned premiums apply to?
Please be aware that most state taxes and filing fees cannot be pro-rated or refunded after the policy is issued. Some policies are subject to a 100% minimum earned premium. This means you can cancel the policy early, but will be on the hook for paying the full premium anyway. In this case, there is no benefit or reason to cancel the policy prior to the expiration date.
This is commonly seen on builder’s risk and liability policies for construction projects.
Why is there a minimum at all?
The insurance companies have minimum earned premiums to discourage policyholders from buying an annual policy when they only need coverage for a short-term project or event. There is also a lot of administrative work that goes on behind the scenes to get a policy issued.
The minimum earned premium is a way for the insurance carrier to ensure they can recoup their administrative costs should a policyholder cancel early. If applicable, the minimum earned premium will be shown on the quote prior to purchasing your policy.
Understanding the minimum earned premium will help prevent any surprises when it comes time to cancel your policy. If you are unsure, just ask your agent—that’s what we are here for.