Updated: 04 July 2023

What Does Cancellation Mean?

Cancellation, in the context of insurance, is the termination of the insurance policy either by the insurer or the insured before the end of the period of coverage. A policyholder has a right to cancel their policy, although they are subject to limitations presented by the laws of his state. An insurer, however, may cancel a policy based on valid grounds, such as non-payment of insurance premiums, misrepresentation, or concealment.

Insuranceopedia Explains Cancellation

There are three common cancellation methods of cancellation: pro-rata, short-rate, and flat rate. Pro-rata cancellation refers to policy termination earlier than its maturity, either at the request of the insured or at the behest of the insurer. In this case, a return premium factor is computed based on the remaining days of coverage less the total number of days in coverage period and multiplied by the premium.

Short-rate cancellation occurs when the insured requests the termination of the policy. In this case, the unearned premium is returned, less a 10% penalty. Finally, flat cancellation takes place when termination occurs on or before the policy start date. In such cases, no penalty or premium is charged.

If an insurance policy contains a cancellation clause, either party may legally cancel the insurance policy before the end of the period after sending a written notice to the other. Depending on the grounds of cancellation, the insured may or may not receive return premiums. If cancellation is based on intentional misrepresentation or concealment, the insured may not be able to receive premium refund.



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