What is the term used for when an insured cancels and a penalty fee is applied?

The term used for when an insured cancels their insurance policy and a penalty fee is applied is referred to as a short-rate penalty. In this context, when an insured cancels a policy before its expiration and the insurer imposes a fee, this fee generally compensates the insurer for the administrative costs incurred and the potential loss of expected premium income.

A short-rate cancellation is different from a pro-rata cancellation, which usually returns the premium on a proportional basis without penalty. Therefore, the short-rate penalty reflects the fact that the insured is not entitled to the full refund of premium, as there are additional costs associated with processing the cancellation before the policy term ends. This term specifically aligns with the contractual obligations and financial principles behind property and casualty insurance policies.