What is Pro-Rata Cancellation?
Pro-Rata Cancellation refers to a way of adjusting the premium when an insurance policy is canceled before the end of its term. In this method, the insurance company refunds the unused portion of the premium based on the exact period the policy was in effect. The refund or premium adjustment is calculated in proportion to the amount of time the policy was active, without any penalties or additional fees.
For example, if a homeowner’s insurance policy was canceled six months into a 12-month term, the insurer would return half of the paid premium in a pro-rata cancellation. This ensures that the policyholder only pays for the time they were covered and no more.
This type of cancellation is often used in standard insurance contracts, including homeowners, auto, and property insurance. It is considered a fair way to settle cancellations as it does not impose penalties on the insured for early termination of the policy.