What happens if my home insurance policy lapses?

There are three primary problems which can arise from a lapse in your home insurance policy. First, your home and property are at risk of loss and destruction. Second, your mortgage may be at risk because you are violating a condition of the loan. Finally, getting new coverage may be more difficult, and will almost certainly be more expensive.

Without homeowners insurance, you are responsible for any damages or losses out of pocket. In the event of a total loss, you could be looking at hundreds of thousands of dollars in losses that occur almost in the blink of an eye. And that is without considering that you or your property causes damages or injuries to a neighbor or visitor. In that situation, you could be facing thousands of dollars in medical costs, or even the possibility of being sued. Having valid insurance would protect you in court along with paying for the costs.

It is not unusual for your mortgage agreement to specify that you must keep valid home insurance on the property. Since it is part of a legally binding contract between you and your lender, they have the right to foreclose on the home if you your insurance to lapse. In some states, the insurance company notifies the mortgage company directly of lapses.

The lender also has the option of requiring you to have mortgage insurance which pays off the home in the event of a catastrophe, but does not cover your personal effects or liability concerns. This type of coverage is intended only to protect the lender's interests, and is meant to be used in conjunction with a home policy, not in place of one. Mortgage insurance is typically bundled into the mortgage payments, where homeowners insurance is purchased separately.

Allowing a long-term insurance policy to lapse does not look good financially. If your policy lapses, it may cost more to purchase a replacement policy and some companies may not insure you at all, depending on the reason for the lapse, the length of the lapse, and other details. Basically, insurance companies see allowing a policy to lapse as financial mismanagement, and it can result in much higher premiums to compensate for a perceived higher risk of you defaulting again in the future. One saving grace is that your insurance agent will most likely reach out to you with reminders about renewing your policy.