Short rate cancellation is a method used by your insurance company to calculate any refund or premium due after you cancel your policy.
An insurance policy is a contract between you and the insurance company. When you cancel your policy mid-term, the insurance company is allowed to cancel the policy on a short rate basis as described in your policy language vs a pro rata basis.
This cancellation method basically means more of the premium is owed at the beginning of the policy term and is not divided out evenly among the days you had coverage.
This method is used to help the company offset some of the cost associated with setting up the policy.
Your refund or premium owed is calculated by your insurance company and not your agent. Any questions regarding the cancellation should be directed to the insurance company.
When calculating your refund any policy fees or installment fees are in addition to the premium owed to the company.
Below is the policy language from the NC auto policy:
If the named insured or a premium finance company cancels this policy, the premium owed or premium refund due will be calculated according to the short rate provisions contained in our manuals.
If we cancel this policy, any premium owed or premium refund will be calculated on a pro-rata basis. However, making or offering to make the refund is not a condition of cancellation
Short rate example of a yearly premium that is $1,200 cancelled 30 days after start of the policy term.
In the above example, cancelling 30 days after beginning the policy the amount owed is $208 plus any policy and installment fees.
One may assume that cancelling after 30 days the premium owed should only be $100 plus fees. This would be the case in a pro rata cancellation basis.
The best way to avoid short rate cancellation is to cancel your policy at it's renewal date and not mid-term. This method of cancellation is flat cancellation and no premium would be owed to the insurance company.
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