Minimum earned premium: what a NEMT policy keeps when you cancel early, and pro rata against short rate

What does an insurer keep when you cancel early?

Premium is earned a day at a time. IRMI says an insurer typically earns it at an even rate through the policy term, and the part paid but not yet earned sits in an unearned premium reserve. When a policy ends early, the question is how much of that unearned share comes back to you. A premium finance agreement changes who gets the refund first, and the guide to replacing cancelled coverage covers the insurer’s side.

• Pro rata. You get back the full proportion of premium for the unexpired term, with no penalty.
• Short rate. Only the insured can trigger it, and the insurer keeps a larger share than the days used. IRMI describes a table printed in the policy, or the pro rata factor increased by a set percentage, such as 10 percent.
• Minimum earned premium. A floor the insurer keeps whatever the date of cancellation. New York’s Banking Law 576 uses the term for financed policies and sets it at 10 percent of the gross premium or $60, using whichever is larger.

What does a minimum earned premium cost in dollars?

This is an example, not a quote. Take a $48,000 annual premium that you cancel, on a policy that states a minimum earned premium of 25 percent, which is $12,000.

The minimum changes the refund only while the days used are worth less than the floor. Past the point where pro rata earned premium reaches $12,000, which is day 92 in this example, it makes no difference.

What does state law say an insurer may keep?

It depends on the state, and the rules differ.

• California. Insurance Code section 481 returns premium in proportion to the unused time unless the contract says otherwise. It bars individual motor vehicle liability and homeowners policies from making the premium fully earned on any contingency except expiration. Any policy that refunds on a basis other than pro rata, including through cancellation fees, must say so in writing, with the fees or maximum penalties stated, before or with the application and again before each renewal.
• Florida. Section 627.7283 computes unearned premium on motor vehicle policies pro rata. If you cancel, the insurer may keep up to 10 percent of the unearned premium and has 30 days to send the rest. If the insurer cancels, it refunds 100 percent within 15 days. A late refund carries 8 percent interest.
• Texas. Chapter 558 requires an insurer to refund the appropriate portion of unearned premium promptly when a policy ends early, and it sets a deadline of the 15th business day only for personal auto and residential property policies. How to compute the refund is left to the insurance commissioner’s guidelines.
• New York. Banking Law 576 applies to policies financed through a premium finance agency, as described next.

Who gets the refund on a financed policy?

The lender does. If you financed the premium, the insurer returns the unearned premium to the finance company first, and only a surplus over your balance reaches you. The premium finance agreement entry has the state deadlines and the lender’s cancellation notice.

What does switching insurers mid-term cost?

Money, in three ways. You pay the new policy’s premium or deposit now, the refund from the old one arrives later, and a floor or short-rate penalty can shrink it. Do not cancel the old policy first. MTM’s Pennsylvania agreement ends immediately if insurance is not maintained at all times, so line up the new policy, or at least a written binder, and set the cancellation date to match its start. Cancelling at expiration avoids the early-cancellation question, since IRMI describes short rate as a penalty for cancelling before the normal expiration date.

Before you cancel, ask your agent in writing for the refund in dollars, the method (pro rata or short rate), and any minimum earned premium, using your policy’s cancellation condition and endorsement list. Cancellations the insurer starts are covered in replacing cancelled NEMT insurance.