Pro Rata Cancellation

Pro rata cancellation is a method of calculating the refund when an insurance policy is cancelled before the end of its term. The refund equals the unearned premium calculated proportionally, day-by-day, to the days remaining on the policy. There is no penalty beyond what you have already paid for the coverage you received.

What is pro rata cancellation in insurance?

Pro rata means ‘in proportion.’ In an insurance context, it means the carrier returns exactly the share of premium that corresponds to the unused coverage period. This distinguishes pro rata from short rate cancellation, which imposes a penalty on the refund amount. The dollar difference between the two methods can matter significantly on higher-premium commercial accounts.

How is a pro rata refund calculated?

The math is straightforward. If you paid $1,200 for a 12-month policy and cancel exactly halfway through, six months in, you receive back $600 under pro rata. For example, if you cancel after four months, the remaining eight months of unused premium come back to you, which equals roughly $800 on that same $1,200 policy. Some carriers calculate to the exact day; others round to the nearest month.

When does pro rata cancellation apply in Georgia?

Pro rata is the standard refund method in Georgia for customer-initiated cancellations on personal lines, homeowners, auto, umbrella, and renters policies. It is also what applies when the carrier initiates the cancellation. A carrier cancelling for non-payment must return the unused portion on a pro rata basis under Georgia insurance regulations, protecting policyholders from losing unearned premium on top of an already disruptive cancellation. For context on how Georgia regulation differs by carrier type, see our FAQ on admitted vs. non-admitted carriers.

How does pro rata differ from short rate cancellation?

Short rate cancellation reduces the refund by a penalty, typically around 10 percent of the unearned premium, as a fee for ending the policy early. Short rate is more common in certain commercial lines and was historically used in personal lines as well. Most personal lines carriers writing in Georgia have moved to pro rata as the default, but short rate still appears in some commercial, specialty, and surplus lines policies. As noted in our FAQ on claims-made vs. occurrence policies, the type of policy form often signals which cancellation and refund terms apply.

What is minimum earned premium and how does it affect refunds?

Some specialty policies, including surplus lines, certain commercial lines, and excess liability policies, include a clause stating that a minimum portion of the premium is non-refundable regardless of when cancellation occurs. This is separate from short rate and is disclosed in the policy declarations page or endorsements. For example, a professional liability policy with a 25 percent minimum earned premium provision on a $4,000 annual premium means $1,000 is non-refundable even if you cancel on day two. Before cancelling any policy, confirm whether the calculation is pro rata or short rate, and whether a minimum earned premium applies. A coverage review can walk through your existing policy terms before you make the decision, as described in our FAQ on what a coverage review involves.