Short-rate cancellation

Short-rate cancellation is a refund method in which the insurer keeps more than the premium for the time you were covered. When you cancel before the policy's expiration date, a short-rate refund deducts a penalty from the unused premium to cover the insurer's upfront costs of issuing the policy, such as commissions and underwriting.

The penalty comes from the insurer's short-rate table or formula and is commonly described as about 10% of the unearned premium. Example: you pay $1,200 for a 12-month policy and cancel after three months. A pro rata cancellation would refund $900. With a 10% short-rate penalty on the unused portion, you would get $810 (hypothetical figures). Some policies use a minimum earned premium or a flat cancellation fee instead.

Short-rate refunds generally apply only when you cancel. When the insurer cancels the policy, refunds are normally pro rata. Whether short-rate is allowed on personal auto policies, and how large the penalty can be, depends on the policy and state rules, and many auto insurers refund pro rata either way. Before cancelling mid-term, ask how your refund will be calculated; if the penalty is significant, consider switching at policy renewal instead. Never cancel the old policy until the new one is in force. See how to cancel car insurance the right way.