Here at Team Clark, we always recommend shopping around to get the best homeowners insurance for your needs. But did you know that once you’ve purchased a policy, your insurance company can drop you as a customer?
A homeowners insurance policy is a contract between you and your insurer. Just as I’ve written about what red flags you should look out for and avoid when choosing a company for coverage, there are certain red flags that companies look for from customers that can lead to a cancellation.
So, let’s look at a few reasons why your insurer might cancel your policy.
- The Difference Between Cancellation and Non-Renewal
- 5 Reasons Why Your Home Insurer Will Cancel Your Policy
The Difference Between Cancellation and Non-Renewal
Whether your homeowners insurance policy is cancelled or not renewed, the outcome is the same: both result in losing your coverage. The difference between cancellation and non-renewal is based on when your coverage will end.
A policy cancellation means that your insurer is ending your coverage before your policy’s end date. According to the Insurance Information Institute (III), insurers can’t cancel a policy that’s been active for more than 60 days unless you’ve missed payments, committed fraud, or misrepresented something on your application. You can read examples of these events below.
State laws require companies to give notice before a cancellation takes effect so that you have time to find new coverage. How much time you’re given will depend on your state, how long your policy has been active and the reason why your policy is being canceled. For example, several states require only 10 days of notice for cancellation due to nonpayment of premiums, but up to 30 days of notice for all other cancellation reasons.
Non-renewal means that your insurance company will honor your policy’s total coverage period but will no longer offer you coverage once your current coverage period ends. I’ve written about reasons why your insurer may not renew your homeowners insurance policy here.
5 Reasons Why Home Insurers Will Drop You
There are many reasons why a homeowners insurance contract can be voided. Sometimes, there’s nothing you can do to prevent a cancellation. In Florida, for example, many homeowners have experienced policy cancellations as companies leave their state’s market.
But even in states with stable markets, it’s still important to minimize the risk of being dropped. Here are five common reasons your insurer could drop you:
1. You’re Behind on Payments
Falling behind on payments can lead to being dropped by your insurance company if you’re unable to catch up. Many companies have grace periods (which vary by company and state) to offer short-term flexibility on making payments.
2. You Weren’t Honest on Your Application
Misrepresentation is another reason your insurer may drop you. If, for example, during a home inspection the condition of your home is determined to be different than what you stated on your application, your insurance company may decide to drop you.
3. You File Too Many Claims
Using data from data analytics and risk assessment firm Verisk, the Insurance Information Institute (III) reports that, “In 2020, 6 percent of insured homes had a claim.” Every claim you file will become part of your claims history on property claims databases, such as the Comprehensive Loss Underwriting Exchange (CLUE).
Claims typically stay on your C.L.U.E. report for seven years, and many home insurance companies use C.L.U.E. to decide whether to offer you coverage. But even after you have coverage, filing multiple claims (especially over a short period of time) impacts how risky you are as a customer to home insurance companies.
As money expert Clark Howard warns, “You should think of homeowners insurance as a ‘use it and lose it’ kind of proposition. “It’s not for use except in the case of a catastrophe.”
4. You Use Your Home for Business
Using data from the U.S. Small Business Association (SBA), online legal services company incfile estimates there are around 19 million home-based businesses. If you conduct business from home, it’s important to know that could cause your insurer to drop you. To avoid this, you may need to purchase endorsements for your homeowners insurance policy or a separate business insurance policy to keep your homeowners insurance contract intact.
There are many types of activities that are classified as business, which may not immediately come to mind when thinking of a home-based business. Home sharing (such as renting your property through Airbnb) is a great example.
Home sharing can be a great way to supplement your income if you’re a property owner, but what happens if your property is damaged while someone’s renting it? Clark once took a call from someone with $50,000 of damages from their short-term renters.
The owner’s insurance denied responsibility because renting was not an authorized use of the property and was not covered under the homeowner’s policy. And if someone gets hurt on your property while you’re renting it out, your insurer won’t cover liability without the right policy either.
Check out Insuring a Home-Based Business: What You Need to Know for more on the ins and outs of insuring your home-based business.
5. You’ve Become Too Risky To Insure
I mentioned in #3 that filing claims is one way to be considered riskier, but there are lots of other reasons that your risk level can increase.
If you adopt a dog and the dog’s breed is categorized as aggressive, your insurance company might drop you because of the liability risk. According to the III, “liability claims related to dog bites and other dog-related injuries cost homeowners insurers $882 million in 2021.” Forbes reports that Doberman pinschers, pit bulls and rottweilers are banned most often, but there are several other breeds that your insurer may drop you over.
Or if you don’t bring your property up to a required standard (whether by your state or insurer), insurers might also drop you. And sometimes insurers determine that location-specific risks have increased in your area, so even things out of your control can result in your coverage being dropped.
We can turn to Florida again for examples of these reasons. Between more intense tropical storms and roofing fraud, many homeowners have had their coverage canceled as insurers change their roof requirements for coverage.
Homeowners insurance is a contract —and it’s an important one to keep intact for your property protection and peace of mind. Being aware of potential red flags that insurers look for can help you avoid them or adjust your policy as needed to maintain coverage.
Here at Team Clark, we hope you never have to use your homeowners insurance policy, but if you do we sure want it to be there.