What is minimum earned premium?
Minimum earned premium is the part of your premium the insurance company keeps no matter when you cancel — usually a percentage of the annual price, fixed when the policy starts. If your normal refund would dip into it, the minimum wins. It applies to business policies such as property, liability and professional coverage, not personal insurance.
- It is a floor, not a fee: the insurer keeps the larger of what it earned for the time used and the minimum.
- A quarter of the annual premium is a common minimum; specialty policies for hard-to-place risks often keep all of it.
- It is printed on the quote and the policy — ask about it before you agree to buy, not when you want out.
What does minimum earned premium actually mean?
It is the least the insurance company will keep for writing your policy, even if you cancel the next week. Insurers call it minimum earned premium, and it is usually a percentage of the annual premium.
Premium is normally "earned" a day at a time as the policy runs; the unearned part is what comes back if you cancel. Minimum earned premium sets a floor under that schedule, and it applies even when the policy is cancelled or your business shrinks. (Source: Arlington/Roe)
Why have it? Most of an insurer's cost — reviewing, inspecting, pricing — lands before the policy starts, and the minimum covers that cost and the risk it took on if you leave early. (Source: Premco Financial)
How much would I get back if I cancelled early?
The insurer works out what it earned for the time you used, compares that with the minimum, and keeps whichever is larger. On a $12,000 policy with a 25% minimum, the floor is $3,000.
Two refund methods matter. Getting back the full unused share with no penalty is pro-rata cancellationPro-Rata Cancellation Ending a policy early and getting back the full unused portion of your premium, with no penalty. Insurers call this pro-rata cancellation. more →. Getting back the unused share minus a penalty is short-rate cancellationShort-Rate Cancellation Cancelling a policy early and getting back the unused premium minus a penalty. Insurers call this short-rate cancellation. more →, which applies when you are the one cancelling; the penalty comes from a table in the policy or a set cut such as 10%. (Source: IRMI) Here is a $12,000 annual policy with a 25% minimum, using a 10% cut:
| Cancelled after 1 month | Cancelled after 3 months | |
|---|---|---|
| Unused share (pro-rata refund) | $11,000 | $9,000 |
| Short-rate refund (unused share minus 10%) | $9,900 | $8,100 |
| The most the 25% minimum lets you get back | $9,000 | $9,000 |
| What you get back when you cancel | $9,000 — the minimum governs | $8,100 — the short-rate penalty governs |
Illustration only, with round numbers. It is not a statement of what any policy pays; your own policy wording governs.
After three months, the time used ($3,000) already equals the minimum, so the short-rate penalty is what costs you. After one month, the insurer has earned only $1,000, so the $3,000 floor takes over and you get back $9,000 instead of $9,900.
What percentage is normal, and why do some policies keep it all?
A quarter of the annual premium is common, and higher shares are not unusual. Specialty policies for hard-to-place risks often keep the whole premium from day one, because the insurer did its work before the policy started.
Minimums are usually stated as 25%, 50% or 100% of the premium. (Source: Arlington/Roe) Property coverage commonly carries 25% to 50%, and policies for professional mistakes often carry 100%. (Source: Insureon)
The highest minimums cluster in the market of insurers your state permits but doesn't license, used for risks standard insurers decline — insurers call it the excess and surplus lines marketExcess and Surplus Lines (E&S) Coverage from insurers your state permits but does not license, used for risks standard insurers decline. Insurers call this the excess and surplus lines market. more →, and how it differs from the standard market matters here. One agency's real example shows liability, liquor and property policies from that market each at a 25% minimum, with policy fees fully earned — fees it calls standard in that market. (Source: Fusco & Orsini Insurance Services)
Why all of it? A specialty insurer does heavy review and pricing before it agrees, and its taxes and fees are paid at the start and aren't recoverable.
Where do I find it, and when should I ask?
Look on the quote, on the policy's summary page, and in any add-on titled minimum earned or fully earned premium. Ask before you agree to buy.
The summary page at the front of the policy — insurers call it the declarations pageDeclarations Page The summary page at the front of your policy showing who is covered, for how long, which coverages, the limits, and the price. Insurers call it the declarations page. more → — often states the minimum, and some policies add it through a written add-on — an endorsementEndorsement A written change attached to your policy that adds, removes, or alters coverage partway through the term. Insurers call it an endorsement.. Watch for the words "minimum earned premium" or "fully earned at inception." (Source: Insureon)
Before you agree to buy, ask your agent four questions, and get the answers in writing:
- What is the minimum earned percentage, and does it apply if the insurer cancels?
- Are the taxes and policy fees refundable?
- Is the whole premium earned the day coverage starts?
- If there is a year-end audit of payroll or sales, does the minimum apply there too?
What does it mean if I'm shopping in the middle of the year?
Do the math before you switch. A cheaper policy only saves money if the savings beat what you give up by leaving the old one early.
Take the example above and leave after one month.
| What happens | Amount |
|---|---|
| The insurer keeps its 25% minimum of the $12,000 premium, which is (25% × $12,000) | $3,000 |
| The coverage you actually used in one month is ($12,000 ÷ 12) | $1,000 |
| A new policy must save you more than the $3,000 kept minus the $1,000 used, which is ($3,000 − $1,000) | $2,000 |
Illustration only, with round numbers. It is not a statement of what any policy pays; your own policy wording governs.
If the premium was financed, cancelling may not end the loan: the refund may not cover the remaining balance, and you repay the difference. (Source: Premco Financial) The steps for doing it cleanly are in how to cancel a business insurance policy; if you are leaving because you sold, see what happens to your insurance when you sell.
Renewal is when you can move without the penalty, so line a good mid-year quote up to start when your current policy ends.
Frequently asked questions about minimum earned premium
No. Minimum premium is the lowest price an insurer will charge to write a policy at all. Minimum earned premium is how much of the price it keeps if the policy ends early or your numbers come in lower than expected.
Sometimes, and only before you agree to buy. On accounts insurers compete for, your agent can ask for a lower minimum; on hard-to-place risks, the insurer rarely moves. Once the policy starts, the term is fixed.
It can. On a policy priced on estimated payroll or sales, the minimum also sets the least the insurer keeps if your actual numbers at the year-end review come in far below the estimate.
Know what you'd get back before you switch.
Send us your current policy and we'll show you its minimum earned terms, the refund math, and whether moving now or at renewal makes more sense.