When the insured initiates the cancellation of a policy, the unearned premium will be refunded on a

Executive Liability

All D&O policies contain language defining the circumstances, timing, and other requirements to effect a cancellation of the policy, either by the insured or insurer. The following is a sample cancellation clause.

D.   Cancellation and Nonrenewal

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Residential Insurance: Homeowners and Renters 22 If the premium revision results from an error made by the company or its agents, or from incomplete information provided by you, the insurance company is required to notify you of the error within sixty days and the higher premium shall be charged from the effective date of coverage. If you do not accept the increase in the premium, you may ask the company to cancel the policy. The earned premium must be calculated on a pro rata basis on the original quotation. If the premium revision results from an error made by the company or its agents and you are not notified of the error within sixty days, the policy shall remain in force as written at the original premium. After the sixty day period has expired, the insurance company may flat cancel the contract for misinformation and/or misstatement or other matters sufficiently serious to justify a flat cancellation. Refunds In general, whenever the policyholder initiates a cancellation, the premium is calculated on a short rate basis whereby the company retains part of the unearned premium to cover administrative expenses. However, some companies may calculate the premium on a pro rata basis. You will need to review your policy contract to find out the cancellation provisions of the company. The insurer is required to issue payment for the amount of refund due within 25 business days of receiving notice of the cancellation. In addition, if you have acquired the services of a broker and signed an agreement, the broker may be entitled to retain the broker fee. You may be entitled to a full refund of the broker fee if the broker acted incompetently or dishonestly. Unresolved disputes over non- refunded broker fees can be forwarded to the CDI for review.

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Chapter 59A

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Pro-rata and Short-rate are two different ways of determining the refund amount that an insured party will receive if their insurance policy is cancelled before the expiry date.  A policy will state in the Terms and Conditions section which approach applies and in which situation.

Pro-rata cancellation

With pro-rata cancellation, the refund amount is calculated based on the remaining length of the policy. This means the insured only ends up paying for the number of days the insurance contract is actually in effect. Pro-rata cancellation applies when the insurer initiates the cancellation and, in some cases, to an insured initiated cancellation.

Short-rate cancellation

Short-rate cancellation calculation is similar to pro-rata but it includes a penalty as a disincentive for early cancellation. In other words, the insured receives less of a refund with this calculation. From the insurer’s perspective, a short-rate cancellation covers their administration costs. It also better balances the money they collect with their chances of paying for a loss.

Policies have different methods for determining the penalty amount. Some policies charge a percentage of the unearned premium amount.  This means the total refund would be the unearned premium amount less, for example, 10%. The result is that the penalty amount will be higher if the policy is cancelled when the policy is new than if the policy is cancelled shortly before the policy expiry date.

Other policies provide a short rate table that lists out the penalty amount that will be charged and when it applies. For example, they may charge a different percentage or factor depending on the number of days that the policy has been in force. Whichever way it is calculated, typically the longer the policy is in effect, the smaller the short-rate cancellation penalty.

Although an insurance policy can be cancelled at any time, it is important to appreciate the implications for doing so.  Like any legally binding agreement, the documents should be reviewed thoroughly, and the cancellation provisions fully understood before entering the commitment.

Learn about more insurance terms in the Insurance Glossary

b) Short rate basis. When a policy is cancelled at the insured's request, the amount of returned unearned premium will be calculated on the short rate table that the insurer has filed with the insurance department. This allows the insurer to retain some of its cost of issuing the policy and providing service.