Minimum earned premium

A minimum earned premium (MEP) is the portion of your business insurance premium an insurance company keeps if you cancel your policy early. Even if you only have coverage for a short time, the insurer earns this minimum amount to cover the cost of issuing and managing the policy.

For small business owners, understanding MEP is important because it affects how much money you may get back—or not get back—if you cancel a policy before it expires.

When you buy an annual business insurance policy, you typically pay for a full year of coverage. If you cancel before the policy term ends, insurers usually refund the unused portion of your premium. However, if your policy includes a minimum earned premium, the insurer will keep at least that minimum amount, regardless of how early you cancel, for example:

• Annual premium: $1,200
• Minimum earned premium: 25 percent, which equals $300
• If you cancel early, the insurer keeps at least $300, even if you used less coverage than that.

Minimum earned premiums are usually expressed as a percentage of your total annual premium. Here’s how different percentages can affect your refund:

25-percent MEP

• $1,200 annual premium x 25 percent = $300 minimum earned
• Canceling early means insurer keeps at least $300

50-percent MEP

• $1,200 annual premium x 50 percent = $600 minimum earned
• Canceling early means insurer keeps at least $600

100-percent MEP

• $1,200 annual premium x 100 percent = $1,200 minimum earned
• Canceling early means no refund at all

If you keep your policy for the full term, the minimum earned premium doesn't increase your cost or change what you pay.

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.

Additionally, insurance companies apply minimum earned premiums to help recover upfront costs, such as:

• Underwriting and risk assessment
• Policy setup and administration
• Compliance and regulatory costs

These expenses occur as soon as a policy is issued, even if it’s canceled shortly after.

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 certain time frame. Insurance companies just use a different name.

You can usually find MEP details in your insurance quote, the policy declarations page, and the cancellation or premium section of the policy contract.

Be sure to look for phrases like:

• Minimum earned premium
• MEP
• Fully earned at inception

Here are a few key points business owners should know about minimum earned premiums:

Minimum earned premiums only matter when you cancel coverage. So long as you don’t cancel your insurance policy before its expiration date, minimum earned premiums won’t impact you.

Not all insurance policies come with a minimum earned premium. Some are pro-rated so that refunds after cancellation are calculated by dividing the total cost of the policy by the amount of time remaining when it is canceled.

Some policy fees are never refundable. Regardless of minimum earned premium practices, the taxes and fees you pay on your insurance policy are never refundable.

Some policies have a minimum earned premium of 100 percent. A 100-percent minimum earned premium is the entire yearly cost of your policy. This is more common in errors and omissions policies, which tend to have expensive claims and require larger payouts from insurance providers.

For help understanding your coverage, contact your Insureon agent. Our insurance specialists are licensed in every state and can help you understand what your policy covers and whether it has a minimum earned premium.

Minimum earned premiums aren’t included in every policy, but they’re more common with certain types of coverage:

Insureon helps small business owners compare business insurance quotes with one easy online application. Start an application today to select the right policy limits for your risk exposures.