Insureon Blog

What Is a Minimum Earned Premium?

21. August 2013 09:26

When it comes time for many small-business owners to buy business insurance, decoding the jargon can be the most frustrating and difficult part of the process: you have to sift through pages of contracts to figure out not only what kind of coverage your client contracts require you to carry, but also which coverage various policies offer.

This post explains one of the more common terms our customers ask us about: the minimum earned premium. (For an explanation of other terms we get asked about a lot, take a look at our posts on additional insured status, coinsurance, and vicarious liability.)

How Minimum Earned Premiums Affect Your Business

In insurance, the “premium” is the amount you pay the insurance company for coverage. The “earned premium” is the amount of that premium a company has “earned” at any given point in your policy. So for example, if you have a $500 premium on a one-year policy, at the six-month mark, the insurance company’s earned premium is $250.

The “minimum earned premium” is the smallest amount of money an insurance company is willing to accept for writing a business insurance policy. The minimum earned premium becomes an issue mainly when a business owner decides to cancel a policy before its expiration date. Let’s say that, at the six-month point of that $500 policy I mentioned above, you (the policyholder) decide to cancel coverage.

If the insurance company has no minimum earned premium in place, it would refund you the remaining premium – what it hadn’t yet earned – which, in this case, is $250. But if the company had a minimum earned premium of, say, $300, the most it would refund you is $200, regardless of how early into the policy’s term you canceled it.

Why Do Insurance Companies Use Minimum Earned Premiums?

For insurance companies, minimum earned premiums are a way to manage risk and prevent customers from buying an insurance policy with the intention of canceling it after a single event or project. With a minimum earned premium in place, insurance providers have a much more reliable revenue stream and can therefore offer coverage when their customers need it. 

And really, minimum earned premiums are not unique to the insurance industry. Many service providers require a down payment on long-term services or projects or charge a cancellation fee for appointments canceled within a set window. Insurance companies just use a different name.

Here are a few key things to know about how minimum earned premiums might affect you:


Insurance Terms Explained | Tips for All Small Businesses

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