Minimum Earned Premium
Also known as: Min Earned, ME
Common in specialty / high-risk markets where carrier issuance costs are high. Tow truck and E&S markets frequently impose 25% minimum earned, meaning even cancellation in the first month forfeits 25% of annual premium.
Real-world scenario
Neon Owl Lounge, a late-night bar and music venue in a coastal city, buys a package of liquor liability and general liability through a surplus lines broker because no admitted carrier would write the risk. The policy carries a $1,000,000 per-occurrence limit, a $2,000,000 aggregate, a $50,000 assault-and-battery sublimit, and a $2,500 deductible. The annual premium is $18,000, and the quote sheet prints a 25% minimum earned premium — meaning the carrier will keep at least $4,500 no matter when the policy ends.
The owner does not pay the full $18,000 up front. Instead he uses premium financing with a $3,600 down payment plus roughly $1,200 monthly installments, and the broker adds a $600 policy fee. Two months in, the lounge loses its lease and the owner cancels. Under a pure pro-rata calculation, the carrier earned only $3,000 (2 of 12 months) and would refund $15,000. But the 25% minimum earned premium floor overrides that math: the carrier keeps $4,500, so the actual return premium is only $13,500.
The $1,500 gap between the $15,000 he expected and the $13,500 he received is the real-world cost of the minimum earned premium clause — the price of locking in coverage on a hard-to-place risk, even for a policy that was live just 60 days.
How it affects your premium
The size of a minimum earned premium (MEP) — and whether one applies at all — is driven mostly by how hard the risk is to place and how much cost the carrier fronts on day one. Key drivers include:
- Admitted vs. non-admitted market: MEP clauses are far more common on non-admitted (surplus lines) policies, where carriers have more freedom to protect their acquisition costs.
- Percentage floor negotiated: Typical MEPs run 25% on standard risks but climb to 50%, 75%, or even 100% (fully earned) on short-term, seasonal, or catastrophe-exposed accounts.
- Short policy terms and catastrophe timing: Wind, wildfire, and coastal property policies often carry high MEPs so an insured cannot buy cheap coverage through storm season and cancel right after.
- Front-loaded underwriting and inspection costs: Engineering reports, loss-control surveys, and reinsurance costs are incurred immediately, so carriers recover them via the earned floor.
- Cancellation method: MEP interacts with short-rate penalties — the refund is the lower of the pro-rata/short-rate amount or what remains above the earned floor.
- Broker and policy fees: Surplus lines taxes, stamping fees, and broker fees are frequently 100% fully earned and are separate from the MEP itself.
- Line of business: Cyber, liquor, vacant building, and special-event policies see higher MEPs than a stable, admitted BOP.
Common misconceptions
Myth: If I cancel my policy early, I always get a straight pro-rata refund for the unused months.
Reality: Only if there is no minimum earned premium. When an MEP applies, the carrier keeps the greater of the earned premium or the MEP floor, so your refund can be smaller than a clean pro-rata number would suggest.
Myth: Minimum earned premium is just an illegal junk fee brokers tack on.
Reality: It is a disclosed contract term, not a hidden fee — it caps how much unearned premium is refundable and lets carriers recover front-loaded underwriting and reinsurance costs on hard-to-place risks.
Myth: A 25% minimum earned premium means I owe 25% extra on top of my quoted price.
Reality: No — the 25% is measured against the premium you already agreed to, and it only matters if you cancel; it defines the minimum the carrier keeps, not an add-on charge.
Frequently asked questions
What is a minimum earned premium in plain English?
Does minimum earned premium apply if the insurance company cancels me instead of me canceling?
How is my refund calculated when there is a minimum earned premium?
Why do surplus lines and specialty policies have such high minimum earned premiums?
Can I negotiate the minimum earned premium down?
Sources cited
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