Home Insurance Cancellation, Nonrenewal and Policy Lapses

When it comes to homeowners insurance, there are three types of discontinuation: cancellation, nonrenewal, and policy lapse. Each has its own set of consequences. This guide explains why your insurance company might have canceled your coverage, what each term means, and how it affects a policyholder

Homeowners insurance cancellation

Canceling your home insurance means that your insurer has decided to stop insuring you or your home immediately (or within a short period after you've been notified), usually for a significant reason — and there are only a few exceptions.

After 60 days from the purchase date, an insurer cannot cancel a homeowners policy unless the policyholder fails to pay their premium or commits fraud and materially misrepresents themselves in their application. For example, if the carrier discovers that a policyholder lied about their identity and applied for a policy in the name of another person, the carrier has the right to cancel the policy.

Another reason an insurer may cancel a policy is if the home's condition deteriorates, posing more risk than the insurer is willing to cover.

• For example, suppose a carrier insures a home and the policyholder makes a significant structural change. If the changes make the home uninsurable in the company's opinion, the policy will be canceled.

If a homeowners insurance company discovers the home is vacant, your insurance may be canceled. Most home insurance policies require policyholders to notify their insurer if their home is vacant for more than 30 days at a time. Unoccupied homes are more vulnerable to crime and have higher insurance claims.

• Consider what happens if a fire starts in an unoccupied house: not only is no one there to potentially fight the fire, but no one is there to call the fire department. It will most likely burn down and be a total loss. Secondary dwellings, such as a vacation home, are more expensive to insure because they are only used for a few weeks out of the year.

Most states require companies to provide a written notice to policyholders at least 30 days before a cancellation. Whether you intend to fight the cancellation or not, this is the time to look for a new homeowners insurance policy — you don't want a gap in coverage.

Homeowners whose insurance policies are canceled for any reason frequently have difficulty obtaining coverage in the months that follow. If you find yourself in a situation where companies refuse to insure you, contact your state's insurance department. They can provide you with a list of assigned risk carriers (also known as residual market carriers) who provide insurance to those who are unable to obtain coverage from traditional insurers.

Nonrenewal of a homeowners insurance policy

A homeowners insurance policy nonrenewal occurs when either the insurance company or the policyholder chooses not to renew the policy when it expires. This can be done by either party for a variety of reasons, and there are fewer restrictions than on a cancellation.

• For example, a company may refuse to renew a customer's policy due to a high volume of claims filed during the policy period. Customers pay premiums so they can file claims when they need to, so this may appear unfair, but insurance companies can't afford to pay out too many claims. A nonrenewal can occur if an individual files a large number of claims and the company risks losing too much money on them over time.

An insurance company may also refuse to renew your policy if you file only a few large claims for damage caused by you, even if the damage was unintentional. Assume you have a strong preference for candles. You can have candles, but if you frequently forget to extinguish them and cause two major fires, your insurance company may refuse to renew your policy.

Liability claims may also cause an insurer to refuse to renew a policy. Dog bites, for example, account for more than one-third of all homeowners insurance liability claims. If a homeowner's dog has bitten multiple people, resulting in claim filings, the company may refuse to renew the policy.

A company may choose not to renew a policy in the same way that it may cancel one. If a policyholder has a history of late payments, their policy may not be canceled immediately, but their insurance company may decide not to renew it.

Nonrenewal may occur simply because a company no longer provides that product or service in the policyholder's area. Insurance company business strategies can be a reason for nonrenewal whether a policyholder is in good standing or not.

Insurance companies are required to provide written notice of nonrenewal prior to the policy's expiration date. This gives policyholders time to establish a policy with a new insurance company, ensuring that there is no coverage gap. The precise time frame varies by state, but 45 days is a common limit.

What to do when your homeowners insurance policy lapses

Homeowners insurance policies frequently lapse when a policyholder fails to make multiple payments. If you miss a payment, most companies will keep you covered for 30 days before your policy expires.

There are several reasons why you should try to keep your homeowners insurance policy active. The most significant disadvantage is that you will not be adequately protected. Remember that home insurance protects more than just the structure of your home; it also protects your personal belongings, protects you from liability, and pays for living expenses if your home becomes uninhabitable.

Allowing your home insurance policy to lapse may cost you much more money in the long run, even if it does not expose you to financial risk. If they purchased their home through a mortgage lender, most homeowners are required to purchase home insurance. Lenders need the coverage to protect their financial interest in the property.

If the policy lapses for any reason, the mortgage lender will find an insurer to cover the home on the policyholder's behalf. Policyholders should take every precaution to avoid this situation, as they will be financially responsible for the cost of the new policy. Lender-placed policies are frequently more expensive than what policyholders would find elsewhere, and their level of coverage may be insufficient. A lender-forced policy, for example, may adequately cover the physical dwelling but fall short on personal property coverage because lenders have no financial stake in a homeowner's possessions.

Policyholders who allow their home insurance to lapse may also have difficulty finding a new carrier — though not as difficult as those whose policies were canceled. If your home insurance policy has expired, contact your agent or company as soon as possible to see if you can reinstate it.