What Happens to a Mortgage When Homeowners Insurance Is Canceled?

Learn the impact and consequences—and what to do next

Having your homeowners insurance canceled isn't exactly great news, but there is no need to panic, either. Yes, your mortgage lender probably requires you to have homeowners insurance, and if your policy is canceled or not renewed, you could have to scramble a bit to replace it. If you're in that situation, here's what you need to know about your legal rights and the next steps you should take.

KEY TAKEAWAYS

• If you have a mortgage on your home, your lender probably requires you to have homeowners insurance.

• Insurance companies sometimes cancel existing homeowners insurance policies for a variety of reasons.

• Reasons for cancellation can include failure to pay premiums, excessive claims, and issues relating to the condition of the property, among others.

• Homeowners should take immediate action if their policy is canceled and try to obtain new coverage to replace it.

• If the homeowner fails to obtain coverage, the lender may buy it and charge them for it.

  Why Is My Homeowners Insurance Being Canceled?

  There are several reasons that your homeowners insurance company might choose to cancel your policy or not renew it. In many cases, you may be able to resolve the issue relatively easily and get your coverage reinstated. Otherwise you will need to find a new insurance company. The most common reasons include:

  • Failure to pay premiums. If you don't keep up with your insurance premiums, your coverage can lapse after a certain grace period and your insurer may cancel the policy. In some cases if you pay the amount you owe, your insurer will reinstate your coverage. If your insurance premiums are paid through an escrow account, rather than by you directly, contact your mortgage company or loan servicer to find out why it hasn't paid the premiums or if there has been some other mix-up.1

  • Misrepresentation. If you omitted important information or lied on your home insurance application and the insurer finds out, you could have your policy canceled. Similarly, if you are found to have committed claim fraud your insurer is likely to cancel your policy.

  • Condition of the home. In many cases, insurers conduct exterior home inspections before issuing new policies. They also have a right to cancel policies if your home is later found to have major risks or to be in poor condition.2

    Texas Department of Insurance. "Consumer Bill of Rights."

    For example, if you have large tree branches too close to your roof, your insurance company might require you to trim them or else your policy will be canceled. 

  • Bankruptcy. Insurance companies do go out of business, and when this happens, they will stop issuing new policies and possibly cancel existing ones. 

    If your homeowners insurance policy is being canceled, the insurer generally needs to send you a notice explaining the reasons and to do so a certain number of days in advance, which can vary from state to state. That's also the case if the insurer plans not to renew your policy.3

    NAIC. "Property Insurance Declination, Termination and Disclosure Model Act," Page 720-2.

    Important: Rather than canceling your policy while it is still in effect, an insurer can decline to renew it when the time comes. Reasons for nonrenewal can include changes in the condition of your home, your claims history, or a decision on the insurer's part to stop doing business in a region because of the risks posed by extreme weather or natural disasters.4

    Consumer Financial Protection Bureau. "Consumer Advisory: Take Action When Home Insurance Is Cancelled or Costs Surge."

    Mortgage Lenders' Rights and Actions

    Because your home serves as collateral for your mortgage, most mortgage lenders will require you to have adequate homeowners insurance in place in order to protect themselves. If your insurance policy is canceled and you longer have coverage, your mortgage lender will ask you to purchase new coverage.
    
    If you fail to do so, or if you obtain a new policy that doesn't meet the lender's requirements, the lender has a right to buy a policy for you and charge you for the premiums—what's known as a force-placed, or lender-placed, insurance policy. While such a policy will meet the lender's requirements, it is likely to cost you more than if you were to purchase a policy yourself. In fact, according to the Consumer Financial Protection Bureau, it might cost you twice as much.45
    
    Federal law requires that mortgage lenders send borrowers a written notice at least 45 days before charging them for force-placed insurance.6

    If your lender does buy insurance on your behalf, you can request that the lender cancel it if you obtain your own coverage.7

    Consequences for the Homeowner 

    Whether or not a lender requires it, not having homeowners insurance can have severe financial consequences, one of which is the potential for high out-of-pocket costs if there is damage to your property. A homeowners policy may also provide liability coverage in case someone is injured on your property and decides to sue you.

    Having a policy canceled won't directly affect your credit score since your payment activity isn't reported to the credit bureaus. However, your credit score could play a role in how much you have to pay for insurance.4

    What to Do if Your Homeowners Insurance Is Canceled

    There are several steps you can take if your policy is canceled. First, when you receive a notice, read it to see why your insurer chose to cancel or not renew your policy. Contact your mortgage lender as soon as possible to explain the situation.

    You may be able to ask your insurer to reconsider its decision, depending on the reason it gave and whether that is something you can remedy. If your insurer canceled your policy for reasons relating to the condition of your property, for example, you may have to address that problem in any case before any other insurer will take you on.

    If your current insurer won't reconsider, you will need to shop around for a new policy. While you'll want to act quickly to ensure that there are no gaps in coverage, take the time to compare quotes from multiple insurers, as prices and coverage limits may vary widely.

    If you have automobile insurance with a different company from your homeowners policy, it could be worth asking that company for a homeowners quote. Many insurers offer discounts if you "bundle" both policies with them.

    
    The Importance of Communicating With Your Mortgage Lender

    As mentioned, it's important to contact your mortgage lender or loan servicer as soon as possible when your homeowners insurance policy is canceled or is not being renewed. If the problem is that the lender or servicer failed to pay the premiums from your escrow account, it should address that.

    Otherwise, you will want your lender to know that you are shopping for a new policy, so that it doesn't try to buy—and make you pay for—a potentially expensive force-placed policy. 

    Once you do obtain a policy, you will want to provide your lender or servicer with whatever proof of coverage it requires.

    Additional Considerations

    Note that if your home is in an area that is considered high risk for weather-related reasons, and you have a hard time finding new coverage, your state insurance department may be able to assist. Many states have special insurance plans to help homeowners in that situation.8

    How Long Does Canceled Home Insurance Stay on My Record?

    Depending on why it happened, the fact that your home insurance was canceled may not appear in any records other than the internal records of that particular insurer. However, if you filed any claims, your claims record (which might have been the reason for the cancellation) will appear in an insurance industry database known as LexisNexis C.L.U.E. (Comprehensive Loss Underwriting Exchange). Those records can go back as far as seven years.9

    Do I Need to Declare Canceled Insurance to a New Insurance Provider?

    You need to provide truthful information to a new insurance provider, and that includes disclosing that your former policy was canceled if you are asked the question.

    Can I Contest a Home Insurance Cancellation?

    You can try to contest the cancellation with your insurer. If you believe you are being treated unfairly by the insurer, you can also take the matter up with your state insurance department.10

    How Do I Cancel a Home Insurance Policy?

    You can cancel a homeowners insurance policy by notifying your insurer in writing that you wish to do so and indicating when you want the last day of coverage to be.

    Are There Any Home Improvements That Make an Insurer More Likely to Renew My Homeowners Insurance Policy?

    Home improvements that might help include replacing your roof, installing safety or fire alarm systems, and wind mitigation features.

    The Bottom Line

    Having homeowners insurance coverage is important both to meet your mortgage lender's requirements and to protect your home and other financial assets. If you receive a notice of cancellation from your insurer, take action right away to ensure that you continue to have uninterrupted coverage. You should have a variety of options for obtaining a new policy.

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