Earned Premium

Earned premium is an accounting concept that directly affects apartment owners when policies are cancelled mid-term. Insurance premiums are paid in advance for the full policy period, but they are earned by the insurer proportionally as time passes. On a twelve-month policy with a $24,000 annual premium, the insurer earns $2,000 per month. After six months, $12,000 is earned and $12,000 is unearned. If the policy is cancelled at that point, the disposition of the unearned premium depends on who initiates the cancellation and the cancellation method used.

When the insured cancels the policy, many insurers apply a short-rate cancellation that imposes a penalty—typically 10% of the unearned premium—to cover the insurer's policy issuance costs. When the insurer cancels (for non-payment, material change in risk, or underwriting reasons), a pro-rata cancellation returns the full unearned premium to the policyholder. Apartment owners should understand the cancellation terms in their policy because switching carriers mid-term can result in a meaningful financial penalty under short-rate provisions.

Earned premium also matters when audit-based policies adjust the final premium after the policy period. Workers' compensation and general liability policies for apartment operations may be subject to premium audits that increase or decrease the final premium based on actual payroll, revenue, or unit count. The audit adjustment applies only to the earned premium for the completed policy period, and any additional premium owed is billed after the audit is finalized.