What is Earned Premium? A Comprehensive Legal Overview
Definition & Meaning
Earned premium refers to the portion of an insurance premium that corresponds to the time period during which coverage has been provided. In simpler terms, it is the amount of the premium that an insurance company has "earned" by providing coverage up to a certain point in time. For instance, if you have a one-year insurance policy costing $1,200, after three months, the earned premium would be $300, as this is the amount applicable to the coverage that has already expired.
Legal Use & context
Earned premium is primarily used in the insurance industry, particularly in the context of accounting practices. It plays a crucial role in determining an insurance company's financial performance during a specific accounting period. Legal professionals may encounter this term when reviewing insurance contracts, assessing claims, or during audits. Users can manage related forms and documentation through resources like US Legal Forms, which provides templates for various insurance-related agreements.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A business purchases a one-year general liability insurance policy for $2,400. After six months, the earned premium would be $1,200, as half of the policy period has passed.
Example 2: A homeowner has a homeowners insurance policy costing $1,000 for one year. If the policy is canceled after four months, the earned premium would be approximately $333, reflecting the coverage provided during that time. (hypothetical example)