Can I avoid the penalties of a short rate cancellation?

First, lets have a quick refresher on the difference between the two types of cancellations: pro rata and short rate (we'll ignore flat cancellations for now).

1. A pro rata cancellation is a full refund of any unearned premiums. This amount is proportional to the amount of time remaining on the policy. For example, if an insured pays a premium of $12,000 for the year, but the policy is cancelled after 6 months on a pro-rata basis, the insurer returns $6000 to the insured—50% of the policy remaining means 50% of the premium is refunded.

2. A short rate cancellation is the same as a pro rata refund minus some administrative costs or minimum retained premium.

Pro rata cancellations are applied when the insurer cancels the policy. This usually happens because of some material change in circumstances and the insurer doesn't feel comfortable staying on the policy (find out How an Insurance Company Decides to Insure You). On the other hand, short rate cancellations are applied when the insured opts to cancel the policy mid-term.

Generally, there is no way to avoid a short rate cancellation and its associated penalties if you are opting to cancel the policy of your own volition. There are, however, some insurance companies, such as the Canadian insurer Intact Insurance, that will let you do a pro rata cancellation even when you opt to cancel.