What Happens When Your Homeowners Insurance Lapses?

Unless you are significantly rich and can afford the expenses of rebuilding your home in the event of a fire, you should not allow your homeowner's insurance to lapse. A lapse in homeowner's insurance entails the loss of financial protection in the event of property damage. A lapse occurs when payments are not paid, the policy is not renewed, and when an insurance company declines to renew a homeowner's coverage. Maintaining insurance coverage safeguards both the homeowner and the mortgage lender.

Financial Danger

A lapse in coverage means you will be unable to file claims if a severe loss occurs in your home, such as a fire or burglary. You assume full financial responsibility in the event of such a loss. The financial impact of a minor occurrence, such as a burst pipe, is minimal. If your property is destroyed by fire or a thief steals expensive previously covered items, your financial loss would be significantly greater. Allowing your homeowners' policy to expire exposes you to the possibility of losing a ton of money, depending on the value of your property and insured belongings.

Liability

Additionally, lapsed insurance voids liability coverage for anyone on your property. The insurance covers medical expenses for persons harmed as a result of your negligence and personal property damage caused by your negligence. Liability coverage reimburses you for legal fees if the other party sues you. When your insurance expires, you expose yourself to lawsuits for injuries and property damage caused by you or others on your premises.

Insurance Obligations

The lender for a mortgaged home establishes the homeowner's insurance obligations. When a homeowner's insurance policy expires, the insurance company often sends a letter to the policy's lien holder. The mortgage company has the right to obtain insurance on the property to protect its interest and deduct the cost from the homeowner's escrow. This coerced insurance is often more expensive than coverage purchased independently by the homeowner. You have no say in the policy and will almost certainly receive less coverage than you did with your previous policy.

Difficulty in Obtaining Replacement Insurance

Any potential insurers will learn about the lapse when a homeowner wants to start a new insurance policy. Due to the duration without insurance, the insurer views the homeowner as a higher risk. The lapse may give the homeowner an impression of irresponsibility or financial insecurity. Insurance companies may also believe that the motive for initiating a new policy is to file a claim for already incurred damage. The increased risk typically results in a higher coverage premium or trouble finding an insurer willing to insure the property.