Jessica Sautter is a Content Writer for CarInsuranceCompanies.com with a Bachelor’s Degree from Eastern Michigan University in Elementary Education with a Major in Reading and a Minor in Mathematics.

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Sep 21, 2020

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Here's what you need to know...

  • Insurance companies sell policies in either 6-month or 12-month terms
  • Fixed fees can range from 2 to 10 percent or $50 and they vary by company
  • The best way to avoid paying a penalty is to choose an insurer that is known for pro-rata cancellation policies

Many consumers focus on asking questions about how different types of coverage work and what limits are available.

Failing to learn about administrative policies concerning the car insurance contract can lead to expensive fees and penalties.

Some of these fees and penalties are assessed by insurers for canceling the policy before the term is due to expire.

Read on and learn more about the laws surrounding insurance cancellations, and if you are entitled to a refund.

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Table of Contents

When can the insurer arrange an early cancellation?

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A car insurance provider cannot just up and decide that they want to cancel your insurance in the middle of your term.

Cancellation of a new policy will date back to when the policy’s effective date and is called a rescission.

In most cases, car insurers in any state can cancel a policy early within 60 days of issuance for virtually any reason.

The rules for a cancellation ordered by the insurer become much more strict once the 60 day time period is up. The insurer cannot cancel insurance at any time unless there is fraud or some type of misconduct.

Here some reasons why an insurer can cancel a policy early include:

  • Failure to pay policy premiums by the grace period
  • Evidence of fraud on application
  • A violation of terms of the policy
  • Your license is suspended
  • Your vehicle is mechanically defective
  • You drive the vehicle for hire

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Reasons Policyholders Can Cancel Their Policy Early

Insurance companies sell policies in either 6-month or 12-month terms. While these are the only two standard options, some individuals may need cover for a shorter amount of time.

Your policy does not terminate on its own in the middle of a term.

If you do not want to continue the coverage, you can cancel your policy and terminate the coverage on the current date or any date thereafter.

Here are some of the most common scenarios that lead to early cancellations:

  • The policyholder sells their only car and is not replacing it
  • The named insured no longer is licensed to drive
  • The policyholder is dissatisfied with service received
  • The client has moved out of the country
  • The policyholder buys an exotic car the company does not insure

Pro-rated Cancellation vs. Short Rate Cancellation

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There are two types of cancellation offered by insurers: pro-rated and short-rated.

It is very important to learn about the difference between the two before you decide to shop for coverage prematurely.

If you do not check the terms of your contract, you may find out that the insurer has the right to charge you exorbitant fees just for exercising your right to request termination.

Here are some of the cancellation terms:

– What is a pro-rata cancellation?

When the insurer offers you the ability to cancel your coverage and receive a prorated refund, the insurer will not charge you any fees.

They will issue you a refund for all of the unearned premiums that have been paid.

The company does this by calculating the number of days that you have paid for and the number of days you have yet to use.

What is a short-rate cancellation?

Insurers that offer a short-rate refund are not so nice.

Instead of giving you all of the unearned premiums, the company will penalize you for canceling early and keep a percentage or a fixed fee.

Fees can range from 2 to 10 percent or $50 and they vary by company.

It is important that you learn about the law in your state and that you compare the penalties charged by the popular carriers as you shop around.

How to Avoid the Fees

The best way to avoid paying a penalty is to choose an insurer that is known for pro-rata cancellation policies.

If it is too late to do this, you may want to wait for your renewal to switch so that you aren’t penalized for finding a value.

Once you have a list of the quotes and you have reviewed the coverage, you can begin to research each company’s cancellation policy by reading consumer reports.

After you are satisfied with the price and the policies of one insurer, begin coverage and cancel the old plan.

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