Homeowners insurance cancellation, nonrenewal and policy-lapsing are all different forms of discontinuation and each have their own set of consequences. This guide explains exactly why your insurance company may have terminated your coverage, what each means and how they impact a policyholder.
Homeowners Insurance Cancellation
A carrier cannot cancel a homeowners policy more than 60 days after it was purchased unless a policyholder fails to pay their premium, or committed fraud and seriously misrepresented themselves in their application. For example, if a carrier discovers a policyholder lied about their identity and applied for a policy under another individual’s name, they have the right to cancel that policy.
Another reason behind a policy cancellation might be a deterioration of the condition of the home, increasing the risk beyond what an insurer is willing to cover. For example, say a carrier insures a home then a policyholder makes some type of drastic change to the structure. If the changes make the home uninsurable, based on the company's own determination, they will cancel the policy.
A cancellation also might take place if a homeowners insurance company discovers a home is vacant. Most home insurance policies require policyholders to notify their insurer if a home is vacant for 30 days or more at a time. Uninhabited homes are more susceptible to crime and higher claims. For example, consider if a fire somehow starts at an uninhabited home - not only is no one there to potentially combat the fire, but no one is there to call the fire department. It’s likely to burn down and be a total loss. Basically, the risk of greater damage is much more significant when no one is around, along with the cost of paying out the claim. Secondary dwellings where someone might only spend a few weeks out of the year, such as a vacation home, cost more to insure for this reason.
Companies are required by law in most states to give a written notice to the policyholder at least 30 days before a cancellation. Whether you intend to fight your cancellation or not, you should use this time look for a new homeowners insurance policy - you don’t want there to be a gap in coverage.
Those who have their homeowners insurance policy cancelled for any reason frequently have trouble getting coverage in the months that follow. Should you find yourself in a position where companies refuse to insure you, contact your state department of insurance. They can provide you a list of assigned risk (also known as the residual market) carriers who offer insurance to those who cannot get coverage from the traditional, voluntary market.
Nonrenewal of a Home Insurance Policy
A nonrenewal of a homeowners insurance policy is when either an insurance company or a policyholder chooses not to renew a policy at the time of its expiration. Either party might do this for a variety of reasons.
For example, a company might not allow a customer to renew their policy due to a high volume of claims filed within a policy period. This might not seem fair - after all, customers pay premiums so they can file a claim when they have to - but insurance companies can’t afford to pay out too much in claims as a whole. If an individual policyholder is filing a high volume of claims and the company feels it could lose too much money on them over time, a nonrenewal is an amicable solution.
An insurance company also might not renew your policy if you file a small number of large claims due to damage you cause. You don’t have to cause the damage intentionally. For example, say a policyholder really likes candles. You can have as many candles as you want, but if you constantly forget to extinguish them and have caused two seriously damaging fires, a company might not renew your policy.
A policyholder who has caused damaging fires is just one example - many things could lead an insurance company to determine a policyholder is irresponsible and choose not to renew their policy. Liability claims also might lead an insurer to not renew a policy. For example, dog bites are responsible for more than one-third of all homeowners insurance liability claims, which paid out an average of $32,072 in 2014. A company might not renew a policy if that homeowner has a dog that has bitten multiple people and claim filings have been the result.
For the same reasons a company might cancel a policy, they also might choose not to renew one. For example, if a policyholder has a poor history of making payments on time, that might not be grounds to immediately cancel their policy but their insurance company can decide not to renew it.
A nonrenewal might occur purely because a company is no longer offering that product or line of service in the area where a policyholder lives. No matter if the policyholder is in good standing or not, insurance company business strategies might be the reason behind a nonrenewal.
Insurance companies are required to give written notice of a nonrenewal prior to the expiration of the policy. This allows policyholders time to establish a policy with a new insurance company so there is no gap in coverage. The notice must be delivered at least 45 days before the expiration in some states.
What to Do When Your Homeowners Insurance Policy Lapses
Homeowners insurance policies usually lapse because a policyholder failed to make multiple payments. If you miss a payment, companies usually continue to cover a residence for 30 days before the policy lapses and is no longer covered.
There are a few reasons you should never allow your homeowners insurance policy to lapse. The most obvious being that you won’t be adequately protected. Remember that home insurance covers more than just the structure of the home. It also protects your personal belongings, provides liability protection and covers living expenses if your home become uninhabitable.
Beyond exposing yourself to a potentially crippling financial risk, allowing your home insurance policy to lapse might cost you a lot more money in the long run. Most homeowners are required to buy a home insurance policy if they purchased their home through a mortgage lender. Lenders require the coverage because they want to protect their financial interest in the home.
In the event a policy lapses for any reason, a mortgage lender will find an insurer to cover the home on behalf of the policyholder. Policyholders should do everything they can to avoid this circumstance because they will be financially responsible for the cost of the new policy. Lender-placed policies are frequently higher than what policyholders might find otherwise and their level of coverage might not be adequate. For example, a lender-forced policy will appropriately cover the physical dwelling itself but might fall short in terms of personal property coverage because they have no financial stake in a homeowners possessions.
Policyholders who allow their home insurance to lapse also might have a hard time getting a policy with a new carrier. Although, they generally do not experience the difficulty others might, such as those whose policy was cancelled. If you allowed your home insurance policy to lapse, call your agent or company as soon as possible and see if they will allow you to reinstate it.