What happens when your home insurance lapses?
A homeowners insurance lapse is a larger financial risk than you may realize. If your policy lapses and your home is damaged, you’ll need to pay for repairs entirely out of pocket. Plus, having a lapse in your insurance history could make coverage both more expensive and harder to get later on. Avoid surprises by learning what happens if your home insurance lapses and how you can be prepared if it happens to you.
What happens if my homeowners insurance policy lapses?
A lapse in home insurance can happen for a number of reasons. Perhaps you simply missed a payment one month. In that case, your insurance company might give you a grace period to pay what you owe and then reinstate your policy. But, not all insurance companies allow for grace periods.
Regardless of the reason, if you experience a lapse in homeowners insurance, it can create both immediate and long-term financial damage. The immediate result of a policy lapse is a loss of coverage, which can quickly snowball into other issues.
You would have to pay for losses out of pocket
A lapse in your coverage means that you are uninsured. It could be days or weeks, but the risk is the same. If something happens during the lapse period, you will not have any financial protection should your home experience damage that would otherwise be covered. You will need to pay for the repairs on your own, which can get expensive quickly.
Here’s what certain types of damage could cost you, according to the Insurance Information Institute’s analysis of average claims:
- Fire and lightning
-
$83,991
- Bodily injury and property damage
-
$31,690
- Water damage and freezing
-
$13,954
- Wind and hail
-
$13,511
- Medical payments and other
-
$13,081
Your premiums may increase
If you catch an insurance lapse quickly — maybe you changed bank accounts and forgot to update your automatic payments — your insurance company may be able to reinstate your policy once you make up the payment. However, this is usually the exception, not the rule. Most of the time, you’ll pay any past-due amount, then start a new policy with a new effective date.
Home insurance prices are largely calculated based on an individual’s risk profile, and a homeowners insurance lapse, however small, could make you seem riskier to your insurance company. The riskier you seem, the more you’ll typically pay in premiums.
Any rate change — particularly an increase — will usually become effective on your new policy start date or your existing policy renewal date.
You may have trouble finding coverage with another carrier
Depending on the circumstances, your insurance company could drop you because of a coverage lapse. Its underwriting guidelines could prevent it from writing you a new policy or reinstating your old one.
When you’re shopping around for a new policy, an insurance application will likely ask if you’ve had a coverage lapse. If you have, you could be denied coverage. Plus, if you experienced a loss during the lapse, you may have to show documentation that the home is repaired in order to secure coverage.
Your mortgage lender will buy home insurance coverage
Most mortgage companies require you to carry home insurance as a condition of your loan. Depending on where you live, you may also be required to carry flood insurance. If your policy lapses, the insurance company is required to let the lender know your policy is no longer active. Typically, the mortgage company will give you a specified window of time to secure a new policy and provide proof of coverage. If you do not acquire a policy, the mortgage company will likely initiate a force-placed insurance policy.
Force-placed insurance is typically not the cheapest homeowners insurance and could be more expensive than your previous policy. The coverage is likely to be more limited, as well, and often does not include personal liability coverage. If a homeowner does not pay the forced-placed insurance premium, they risk having their home placed in foreclosure.
When switching home insurance companies for any reason, be sure to keep your mortgage company in the loop.
I switched to a new home insurer about two years ago to get the same coverage at a better price, and within a few days I got a phone call from my mortgage servicer who thought I was without coverage. I intended to contact them about the new policy, but they called before I got the chance. They almost billed me for forced-placed insurance, which comes with a much steeper price and only covers the mortgage holder, if I didn’t have the new policy in place.
— Kathleen Howley Insurance Reporter, Bankrate
You will not be able to file a claim for damage
Perhaps the largest risk of a homeowners insurance coverage lapse is not being able to file a claim. Without home insurance coverage, you’ll be responsible for repairing or replacing losses you experience out of pocket. Attempting to file a property insurance claim retroactively for a loss that occurred while you had a lapse in coverage is a felony in some states, which could be punishable with jail time and significant financial penalties.
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Reasons for a home insurance lapse
If you do not pay your insurance bill after a certain amount of time, your home insurance can be canceled, creating a lapse in coverage. However, other situations can cause a lapse in home insurance, too.
- You misrepresented yourself on your application: For instance, if you omitted that you own a restricted dog breed or that you do not plan on living in the home full-time, your insurance company has the right to cancel your policy mid-term.
- You are considered high-risk: Your carrier may decide that too many claims or late insurance payments make you too high-risk to insure.
- A negative home report or deferred maintenance: If your roof needs repair or replacement and you have been avoiding it, or the initial home inspection showed that the electrical wiring is defective or outdated but has not been replaced, an insurance company may decide to cancel your coverage.
- Insurance fraud: If at any point a policyholder is found to have caused intentional damage in order to submit a fraudulent claim or takes any action that goes against the insurance policy contract, insurance companies have the right to cancel the policy. This includes falsified information on your policy application.
- Insurance company withdraws from the state: An insurance company may reevaluate its risk model and decide that a certain area isn’t profitable enough due to the risk of future catastrophic losses, like from wildfires in California or hurricanes in Florida and Louisiana. When this happens, providers can choose to stop writing new business contracts for certain types of risk or withdraw from the state. It may also be the case that a company voluntarily withdraws from a particular market. In either scenario, a home insurance policy nonrenewal would occur, and the homeowner would need to secure other coverage before the end of their policy term to avoid a lapse. At least 30 days advance notice is required in most states for nonrenewals and mid-term cancellations.
- Insurance company goes insolvent: If your insurance company is declared insolvent, meaning it cannot pay its debts or rehabilitate itself, a policy lapse could also occur. Your policy will usually be transferred to another insurance company in the process, but this isn’t guaranteed. It’s important to maintain coverage regardless — either through a transfer or by securing a new policy on your own — to avoid a policy lapse from appearing on your insurance history.
Any of these scenarios may cause you to lose home insurance coverage. Finding an alternative quickly before your insurance lapses and you end up without coverage is vital. There may be a short homeowners insurance grace period before coverage is canceled if the premium payment is not received on time, but if you receive a warning letter for nonpayment, act fast to avoid a lapse in coverage.
How to get homeowners insurance after a lapse in coverage
Getting homeowners insurance after a lapse in coverage is crucial if you want to have financial protection against covered perils. Usually, the best course of action is to contact your insurance company immediately to see if your policy qualifies for reinstatement so your lapse can be rescinded. However, this option isn’t always possible, especially if the lapse was for more than a few days, if the property has experienced any unrepaired damage or if your policy has previously been reinstated to avoid a prior lapse.
Here are the steps to take to get homeowners insurance coverage after a lapse:
- Gather quotes. Get several quotes from different carriers to determine which companies will insure you after a lapse. Be open about the lapse so you don’t waste time getting quotes from carriers who will not insure a homeowner with a coverage lapse.
- Compare quotes. After gathering quotes for the same coverage types, policy limits and deductibles (or as close as possible), compare pricing. Once you narrow down your company choices, research customer reviews and third-party ratings to decide which company is best for your needs.
- Apply for coverage. Complete the company’s application, including setting the effective date as soon as possible so you can get coverage in place.
- Confirm payment options. With a lapse on your record, the insurance company may want a down payment or the policy to be billed to your mortgage company. If the carrier invoices the lender, verify coverage is already effective versus when the lender makes the payment.
- Notify your lender. Once coverage is in place, contact your lender and provide the new policy details to prevent or stop force-placed insurance on your home. The mortgage company may require proof of insurance, which you can send or have the carrier submit on your behalf.
Ways to save on homeowners insurance coverage
If you are struggling with the cost of your home insurance, finding ways to save on your premium could bring your budget some relief. Consider the following:
- Bundling: Purchasing auto and home insurance from the same carrier often nets a significant discount.
- Switch carriers: Periodically compare home insurance rates from a handful of carriers. You may find it is cheaper to switch companies. (Remember to inform your mortgage company if you do.)
- Raise your deductible: If you’re comfortable paying a higher deductible in the event of claimable damage, you will likely pay less in premiums. The key is to ensure you’ll always have enough savings to pay your deductible at a moment’s notice. Keep in mind that homeowners in states prone to hurricanes or tornadoes may be subject to a separate deductible for windstorm and/or hail damage.
- Adjust your coverage limits: While your homeowners insurance policy limits are generally dependent on your dwelling coverage amount, some coverage may be adjusted. For example, if your personal property coverage is currently 70 percent of your dwelling coverage amount, you may be able to reduce coverage to 50 percent to save on premium costs. Another area where you can reduce coverage is “other structures” if you don’t have any external structures on your property, such as a swimming pool, gazebo, shed or detached garage. Talk with your insurer about what coverage can be adjusted, what coverage you need and how reducing policy limits could impact your premium.
- Add a security system: Adding cameras, door sensors, deadbolt locks, smoke detectors or a water leak detector could help you save on your home insurance.
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