If you have ever had a mortgage, including a reverse mortgage, you know that as a condition of your loan, you must maintain homeowners insurance. This insurance helps protect you should something happen to your home, which serves as collateral for the loan.
Pretty straightforward, right? But homeowners insurance cancellations and non-renewals (we’ll explain the difference shortly) occur more frequently than you might suspect. For example, when the Independent Insurance Agents & Brokers of America, Inc. (IIABA) conducted its first survey seeking information on homeowners insurance non-renewals, it found that over a two-year time period, 2.5 million households lost their homeowners coverage.1 In wildfire-prone California alone from 2015-2018, more than 340,000 rural homeowners were dropped by their insurance companies.2 In 2020, cancellations and non-renewals will likely be on the rise again.
The Difference Between Cancellations and Non-Renewals
Non-payment of premiums is an obvious reason for your insurer to cancel your homeowners policy. Insurance companies are businesses that depend on taking in more money than they pay out.
As for fraud, if your carrier discovers you lied about your identity or applied for a policy under a fictitious name, cancellation will likely occur. Also, if you make a false statement or conceal, omit, or misrepresent significant information about the property on your application, these are grounds for cancellation.
Another reason behind a policy cancellation might be a deterioration of the condition of the home that increases the insurer’s risk. Likewise, if you physically alter the property after your policy is in effect — adding a pool or spa, for example — your coverage could be canceled.
Although only about a quarter of policyholders read their contracts, you should make it a point to pore over the fine print.3 For instance, many insurance policies require policyholders to notify their insurer if their home is vacant for 30 days or more, an absence that could easily occur if you take an RV trip around the country or that once-in-a-lifetime European cruise to celebrate a milestone like retirement or an anniversary. Were a fire to break out in your uninhabited home, however, there would be no one on site to combat the blaze or call the fire department, which could result in a total loss of the collateral. This is why it generally costs more to insure a second home than a primary home.
Although reasons for cancellation fall into a relatively small but well-defined bucket, reasons for non-renewals are fuzzier, some of which may have nothing to do with you. For example, after Hurricane Irene made landfall in 2011, causing approximately $13.5 billion in damage, Allstate decided not to renew the policies of 45,000 North Carolina homeowners unless their coverage was bundled with auto insurance.4 Insuring homes in disaster-prone areas was simply a business the company no longer had an appetite for. Your insurer would inform you well in advance of your renewal date (usually policies are written for a year) and state the reasons that your policy was not being renewed.
While preserving coverage after a natural disaster may be beyond the control of many homeowners, there may be just as many cases, if not more, where homeowners can actively work to reduce their liability risks.
Here are some of those ways:
Filing frequent or excessive claims
What’s excessive? No one really knows. If you have one claim in 30 years, that would hardly seem excessive. But if you file claims for water damage in two successive years, one caused by a plumbing issue and the second by a roof problem, your insurer might consider this pattern excessive. The gray area for consumers is, each insurer is free to create their own underwriting model for defining acceptable risk. It’s their secret sauce they’re not likely to share with consumers or competitors.
One way to avoid filing claims would be to implement a good home maintenance plan, performing routine inspections and paying for small repairs out-of-pocket.
Owning aggressive pets
Dog bites comprise one-third of all homeowner insurance liability claims, according to the Insurance Information Institute. According to the Centers for Disease Control and Prevention, “about 4.5 million people are bitten by dogs each year and about 885,000 require medical attention for these injuries; about half of these are children.”5
Many insurance companies typically maintain an exclusion list for pets they won’t insure. Be sure to know whether your pet is on the list.
If your credit slips for some reason, an insurer may consider you a poor risk, to which it can respond in a couple of ways. Your insurer may simply elect not to renew your policy when it comes up for renewal, or it may raise your premiums to compensate for the higher risk it’s taking on.
Increase in neighborhood crime
An outbreak of crime in your neighborhood could cause your insurer not to renew your policy, even if you haven’t filed a claim for theft. If you’re aware of rising crime in your neighborhood, you might consider installing a security or burglar alarm system not only to defend against potential losses, but also to signal to your insurer you’re taking proactive measures to minimize their risk.
What if your policy is not renewed?
Depending on the state you live in, your insurance company must give you a certain number of days’ notice and explain the reason for its non-renewal before dropping your policy. In California, insurance companies must give homeowners at least 60 days’ notice if they plan to non-renew a policy.
Most importantly, you should let your insurer’s reasons for non-renewal guide your appropriate response. For instance, if your insurer has decided to drop coverage in your service area, you may simply have to go shopping for another carrier.
If, however, the reason for non-renewal is your insurer believes your home is too high-risk, you can contest the decision and make a case that you have since mitigated their risk exposure and yours. By demonstrating that you have reduced exposure to major risks with landscaping, roof modifications, and other updates to your property, you may be able to justify a coverage renewal.
Another negotiating tactic is to propose solutions that directly address the reason for cancellation. For example, if your homeowners insurance has been canceled due to multiple water damage claims, request new coverage that no longer covers water damage.
If negotiations fail, and you’re having trouble finding replacement coverage, call your state’s department of insurance and ask for information for assigned risk carriers in your area. The one downside is that you’ll probably pay higher premiums, but that’s better than being uninsured.
FAIR Plans, or Fair Access to Insurance Requirements Plans, may be one option. More than 30 states offer this coverage, sometimes by different names. For example, the state-run insurer in Florida is Citizens Property Insurance. Again, these plans exist so no homeowner must go without insurance.
Your bottom line
Generally, you can’t have a mortgage, including a reverse mortgage loan, without a homeowners insurance policy. To avoid cancellation of your policy, don’t try to conceal certain aspects about your property that your insurer could view as a red flag, like a pool slide or backyard trampoline. To avoid a non-renewal, keep your home in good condition and conduct routine home inspections, which can prevent future homeowners insurance claims. If you have significant equity in your home, consider tapping some of it to help pay for your home updates and improvements. If you are 62 or older, also weigh the merits of applying for a reverse mortgage loan to help cover the cost of renovation, as long you comply with all the loan terms which includes paying property taxes, homeowners insurance, and maintaining the home.
Finally, keep good records, so you can demonstrate to your insurer that you have made the necessary improvements to keep your home safe and insurable. To find out if a reverse mortgage loan is right for you, click here.