Legal Definitions - deposit premium

A deposit premium is an initial payment made by an insured party to an insurance company at the beginning of an insurance policy period. This payment is based on an estimated level of risk or exposure for the upcoming period. It is not the final cost of the insurance; rather, it serves as a provisional payment that will be adjusted later once the actual risk or exposure during the policy period is accurately determined. The final premium might be higher or lower than the deposit premium, leading to either an additional payment owed by the insured or a refund from the insurer.

Here are some examples to illustrate how a deposit premium works:

• Workers' Compensation for a Construction Company:

  Imagine "BuildWell Contractors," a new construction company, needs workers' compensation insurance. The insurance company estimates BuildWell's annual payroll will be $1,500,000 based on their projected projects and employee count. BuildWell pays a deposit premium calculated using this estimated payroll.

  At the end of the policy year, an audit reveals that BuildWell actually had a payroll of $1,800,000 because they secured more large projects than anticipated. The insurer then recalculates the final premium based on this higher actual payroll. BuildWell will owe an additional payment to cover the difference between the initial deposit premium and the higher final premium.

  This example demonstrates how the deposit premium is an initial payment based on an estimate (payroll), which is later adjusted once the actual exposure is known, resulting in an additional payment.

• Commercial General Liability for an Event Planning Business:

  "Celebration Creations," an event planning company, purchases commercial general liability insurance. The insurer bases the premium on an estimated number of events they will host in the year, say 60 events. Celebration Creations pays an upfront deposit premium calculated using this estimated event count.

  However, due to an unexpected economic downturn, Celebration Creations only manages to host 40 events that year. The insurer performs an audit and recalculates the final premium based on the actual 40 events. Since the actual exposure (number of events) was lower than estimated, Celebration Creations would receive a refund for the difference between the deposit premium and the lower final premium.

  This illustrates the deposit premium as an initial payment tied to an estimated activity level, which is later adjusted based on the actual activity, potentially leading to a refund.

• Commercial Auto Insurance for a Food Delivery Service:

  "QuickBites Delivery," a local food delivery service, insures its fleet of vehicles. The insurance company calculates the premium based on an estimated annual mileage for the entire fleet, perhaps 750,000 miles. QuickBites Delivery pays a deposit premium based on this estimated mileage.

  At the end of the policy term, a review of their vehicle logs shows the fleet actually drove 800,000 miles because they expanded their service area and added more routes. The insurer recalculates the final premium based on the higher actual mileage. QuickBites Delivery would then owe an additional amount to the insurer to cover the increased risk associated with the higher mileage.

  This example shows how the deposit premium is an initial payment based on an estimated operational metric (mileage), and how the final adjustment can result in an additional payment if the actual exposure is higher than initially estimated.