Earned premium is the portion of your insurance premium that the carrier has "earned" by providing coverage during the elapsed portion of your policy period. If you pay an annual premium of $24,000 and six months have passed, the carrier has earned $12,000 and the remaining $12,000 is unearned premium. This distinction matters when you cancel a policy mid-term or when your carrier calculates return premiums.
For roofing contractors, understanding earned premium is important in several situations. If you cancel a policy before it expires, you are entitled to a refund of the unearned premium, minus any short-rate cancellation penalty that may apply. If your carrier cancels your policy mid-term for non-payment or material misrepresentation, they refund the unearned premium on a pro-rata basis. The earned premium calculation also affects your financial reporting if you track insurance costs by project or by month.
Earned premium is calculated differently from the deposit premium that comes due at audit. While your deposit is based on estimates, the audit determines your actual total premium based on real exposures. The earned premium at any point during the policy term is the pro-rata share of whatever the total premium turns out to be. If you switch carriers mid-year, the audit on your prior policy will still occur and may produce an additional premium bill or return premium based on the actual exposures during the portion of the year that policy was in force. Always complete the audit process with your prior carrier even after switching to avoid unpaid premium balances that can affect your future insurability.