Short-Rate Cancellation

Short-rate cancellation occurs when an insured requests to cancel their policy before the expiration date. The insurer calculates the return premium using a short-rate table or formula that retains a percentage penalty, typically 10% of the unearned premium, to compensate for the administrative costs of issuing a policy that did not run its full term. For example, if a $12,000 annual policy is cancelled after three months, the pro-rata unearned premium would be $9,000, but a short-rate calculation might return only $8,100, retaining $900 as a penalty. Short-rate cancellation only applies when the insured initiates the cancellation. If the insurer cancels the policy, the return premium must be calculated on a pro-rata basis. In COI compliance, understanding short-rate cancellation helps explain why vendors may maintain policies they want to cancel or why replacement certificates show overlapping coverage periods rather than clean transitions between carriers.