Premium is paid in advance for protection over time. The part for time already passed is earned premium. The part for time still to come is unearned premium, and it is what the insured gets back on a pro rata cancellation.

Example: a $3,650 annual premium is $10 per day ($3,650 ÷ 365). If the policy is canceled pro rata after 73 days, earned premium is 73 × $10 = $730 and unearned premium is $3,650 − $730 = $2,920. The usual mistake is to swap the two.

Ins. Code §481(b): an individual motor vehicle liability policy or a homeowners' multiple-peril policy may not make the premium fully earned on any contingency except expiration of the policy. A clause making the premium fully earned when a claim is paid is not allowed, and disclosure does not cure it. Policy fees and membership fees are outside this rule.

Ins. Code §481.5(e) defines two figures: - Gross unearned premium: the unearned part of the full premium, including any part allocated to an agent as commission. - Net unearned premium: gross unearned premium minus unearned commission. Example: $1,000 unearned, including $150 of unearned commission, gives gross $1,000 and net $850.