No state has a legal requirement for homeowners insurance. Whether or not to insure the home remains the decision of the homeowners and mortgage lenders.
If you own your home free and clear, whether you carry homeowners insurance is at your discretion. However, considering the relatively small investment a policy requires and the potentially ruinous costs of severe home damage, most homeowners with no mortgage still carry insurance.
Mortgage companies have a vested interest in the home and therefore stipulate that mortgagees must carry a homeowners insurance policy in the loan contract. Without this provision, a homeowner who suffered a serious loss could simply abandon the property, leaving the mortgage company to foot the rebuilding costs.
What Happens If You Have No Homeowners Insurance?
If you have no mortgage, you simply avoid paying the premiums but are on your own should your home be damaged, destroyed, or burglarized. You also have no insurance company behind you in case of a lawsuit connected to your property.
For instance, imagine if a fire razed your home to the ground or a burglar broke a window and disappeared with thousands of dollars in valuables. You would have to replace all those valuables from your own pocket or pay the entire cost of rebuilding your home.
The law allows mortgage companies to purchase forced-placed insurance in cases where their customers allow policies to lapse. Mortgage lenders do this to protect their interests, so forced placed policies are limited to coverage for the structure. They offer no protection to the homeowner for dwelling contents or liability. In addition, the lender passes the premium cost onto the homeowner, and lender-placed insurance often costs 1.5 to 2 times the voluntary market premium for the same home.
What If Your Insurance Company Cancels the Policy?
In certain circumstances, homeowners insurance companies cancel policies. This happens for many reasons, such as discontinuance of service in an area, claims history, and nonpayment of premium. The law requires homeowners insurance companies to provide at least 30-days notice before canceling a policy, giving homeowners time to shop for new coverage. However, some homeowners find it impossible to find similar coverage at their one-time premium. This often occurs when an area suffers from a natural disaster with a strong likelihood of repeating.
What If You Are Rejected for Homeowners Insurance?
Some homeowners find themselves in a bind because they receive multiple rejections for homeowners insurance. The reasons for this can be many, from location to excessive liability risk. If you face continual denials, it’s worth it to find out why.
When underwriting policies, homeowners insurance companies use the Comprehensive Loss Underwriting Exchange (CLUE) report. The report aggregates claim data from all homeowners insurance companies. Underwriters often reject applications because of extensive claims histories revealed in the CLUE report.
To find out if you suffer exclusion because of the CLUE report, contact the company that compiles it, Lexus Nexus. As with a credit report, you can dispute inaccurate information and add a statement of explanation to any recorded claims.
Guaranteed Coverage for High-Risk Properties
Some properties cannot be insured through the regular market. This is because there may be so much risk attached to the location or property that no insurer can afford to take a chance on writing a policy. For example, a flood and hurricane-prone location may be too risky for mainstream insurers.
Fair Access to Insurance Requirements (FAIR) homeowners plans cover properties in this category. FAIR plans are government-run programs for high-risk applicants. They guarantee coverage regardless of the claims history or risk associated with a property. However, it pays to know if a property falls into this category before purchasing it because premiums can be steep.
Though no state mandates homeowners insurance, mortgage lenders require them as part of the loan contract. Mortgage-free homeowners can opt-out of coverage, but most insure their homes because the premiums are tiny compared to the cost of repairing or replacing a house. Homeowners insurance serves a vital function in a sound financial plan, protecting the policyholder’s assets and financial future.