Early Cancellation of Errors & Omissions Insurance Policies – What to Expect

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It is important to know how much refund you can expect if you cancel your errors & mistakes insurance policy within the first year. The insurance premium returned is the premium that was not used.

Let’s suppose you have a 1-year policy with an annual premium of $2,000 and a $1,500 monthly payment. You might be eligible for a prorata (daily calculation), return premium of $1,000 if you keep the policy for six months. However, this may or not be true depending on which insurance company you choose and what type of policy you have.

Cancellations of Prorata and Short-Rate Rates

Insurance companies use two types of formulas to calculate the amount you will receive in return for the premium they pay: prorata and short-rate. A “short rate cancellation” clause is included in some insurance policies, but not all. This means that companies charge for early cancellation. The charge for early cancellation is usually reduced or eliminated as the policy expires.

Other insurance companies process cancellations prorata, and there is no charge for cancellations that are made early. Divide the total days of the policy term by the number of active days to calculate the amount of unearned premium you receive back. If you have a 365-day E&O insurance policy and the carrier cancels it after 300 days, the carrier will refund you the entire amount for the 65 remaining days.

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We’ve compiled some answers to common questions that our customers have about E&O policies.

Cancellation at short-term: Why can’t I get my full refund if I cancel?

Short-rate cancellation rates are used by insurance companies because they have to establish and maintain your account. Instead of charging you upfront, the carrier will spread the cost over the life of your policy. The insurance carrier retains enough money to pay its administrative costs. However, it will refund you any premium you have paid. These administrative costs are spread over a shorter period of time, so you pay more per day for coverage than if the policy had been in force for the full term.

What is the annual turnover of an insurance company?

The amount of the return premium for short-rate cancellations can vary because many business insurance companies have their own short rate schedules. Some carriers however use a “Short Rate (90% Pro Rata”) calculation method. This means that the carrier charges a flat 10% of the unearned premium. This is the remaining premium in your policy if you cancel. In these cases, you will get back 90% of the unearned premium. Insurance companies may establish a minimum earned premium in some cases. This means that they will charge a percentage of the total premium even if the policy is only for a few months. The minimum earned premium charges generally amount to 25 percent or 30% of the total annual premium.

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What does this all mean? Is it better to cancel my E&O policy before the renewal date?

It depends on whether your carrier uses a short rate calculation method and how far into your term. Insurance companies base their administrative fees on how long the policy has been in force, and not the length of the policy term. It may be a good idea to keep your policy in force until it is almost finished. However, if your policy is less than three months old and you decide to cancel, you may not get any money back. For a cost-benefit analysis, speak to your broker or insurance agent before you cancel.

What if my insurance company cancels your policy?

The policy can be cancelled at a short-rate only if you are the one cancelling it. Your insurance company may cancel your policy for reasons other than non-payment or premium. You’ll be refunded pro-rata, which is the amount of any unused premium.

Make sure to read the cancellation terms of your carrier before you purchase your errors & mistakes insurance policy. You should also know that your policy will be cancelled or canceled by your carrier. This means that you won’t have any coverage and no protection from future claims for professional negligence.

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