Once an agreement has been reached on the cover amount (e.g. $500k) and the price of coverage, Sherlock can calculate the per-second USDC premium that the protocol will pay at any given time.
A protocol will add USDC to its active balance in Sherlock's Protocol Manager contract. Protocols can manage their active balance here. In order to stay current on payment, the protocol must simply keep the balance above a minimum USDC amount (currently 500 USDC) and a minimum amount of seconds of coverage left (set to 12 hours). If a protocol's active balance drops below either of these thresholds, an arbitrager can remove the protocol from coverage for a fee. For the 12-hour minimum, the arbitrager fee increases linearly over time to ensure the arbitrager doesn't receive an egregiously large fee. Once a protocol's coverage ends, Sherlock is no longer responsible for repaying any payouts that occur. But when a protocol's coverage first ends, it will have a 7-day window to submit claims for payouts that may have occurred when the coverage was still active.
If a protocol decides it wants to withdraw USDC from its active balance, it is perfectly free to do so. However, there is a minimum level of USDC that cannot be withdrawn (7 days worth). This is to give Sherlock time to react if a protocol decides to cancel its coverage. A protocol is free to cancel coverage at any time, it will just not be able to withdraw its last 7 days worth of payment. A protocol can also decide to run down the last 7 days of coverage instead of canceling, at which point an arbitrager will eventually remove the protocol when the balance is very low (i.e. 500 USDC or a few hours from being exhausted).
If Sherlock's staking pool TVL sinks below a threshold (defined in the coverage agreement) of the coverage policy amount (i.e. $500k) for any reason, then Sherlock will only charge based on the amount of coverage being offered. This prevents a protocol team from being overcharged in a scenario where Sherlock can no longer pay out the full coverage amount.