Short Rate Cancellation

Cedar Ridge Roofing LLC bought a 12-month general liability policy with a $1,000,000 per-occurrence limit, a $2,000,000 aggregate, and a $2,500 deductible. The annual premium was $8,400, which the owner financed through a premium finance agreement with a $1,680 down payment and nine monthly installments of $792. Five months in, Cedar Ridge landed a large commercial contract that required a different carrier, so the owner asked to cancel the existing policy early.

Because the insured requested the cancellation, the carrier applied short rate rather than pro rata. On a straight pro-rata basis the carrier had earned $3,500 for five months of coverage, so the unearned premium would have been $4,900. Under the short-rate table the carrier retained an extra penalty of $490 (roughly 10% of the unearned amount), so the actual return premium dropped to $4,410. Because Cedar Ridge had financed the policy, that $4,410 refund went first to the finance company as loss payee: after it deducted a $175 cancellation fee and applied the balance against the $3,960 still owed on the loan, the roofer received just $275 back instead of the $765 a pro-rata refund would have returned.

Had the carrier cancelled the policy instead — for example after a $1,900 premium-audit shortfall went unpaid — the refund would have been calculated pro rata at the full $4,900, about $490 more than the short-rate result. On a hypothetical $250,000 liability claim with $60,000 in legal defense costs the cancellation math would be irrelevant, but for a clean early cancellation on an $8,400 policy the short-rate penalty cost Cedar Ridge real money.