Dropping Homeowners Coverage Could Prove Costly

If you’re a homeowner who’s considering canceling your insurance coverage due to the high cost, think twice. Your lender will most certainly object, assuming you have a mortgage. But even if you own the house outright, you might not be able to cover the cost to rebuild after a catastrophe.

Owners with mortgages should read their loan documents, which plainly say that you are required to keep insurance in place. And not just any insurance, but enough to cover the cost of a total loss from a covered event – tornadoes, hurricanes, windstorms, hail, fires and the like.

Notice that floods are not covered. For that catastrophe, you need separate coverage. And although it is always a good idea to have a flood policy, most lenders don’t require one.

They do demand regular homeowners insurance, however, and they don’t take kindly to borrowers who cancel their policies. If you do so, most lenders will put another policy in place – usually at a much higher cost – and make you pay for it. It’s called force-placed insurance, and it’s something you want to stay away from.

If you drop coverage, the insurer will notify your lender, and the ball starts rolling.

The rules differ from state to state, but usually, you’ll receive a letter giving you 30 or 45 days to find a new policy. If, after that time, you still don’t have coverage, the lender will put its own policy in place.

Better Off Picking Your Own

Gretchan Francis, managing director of InsureMAC Financial Insurance Services, estimates that 1 percent to 2 percent of homeowners with mortgages have force-placed insurance coverage. And she doesn’t recommend it.

“You are always better off” with a policy you secure on your own, Francis said, calling force-placed coverage “a necessary evil” that is “not borrower-friendly.”

“I don’t like it either,” she said, “but it’s part of the mortgage agreement.”

One reason you’re better off finding coverage is that a forced policy covers only the lender, not you – which means that only the structure is covered, not its contents. If your lender chooses to rebuild your house after a fire, you’ll get the benefit. But the insurer could call it a total loss, pay off the bank and walk away, leaving you with nothing.

Another reason: cost. Because the risk is higher – jettisoning insurance is usually a sign of a borrower in financial difficulty, for example – force-placed coverage is considered commercial insurance, which is more costly. That’s not always the case: In rare instances, Francis said she has seen forced coverage come in at a lower premium than a conventional policy. But even when that happens, the coverage isn’t as good.

Mortgage-Free Owners: Take Heed

If you are mortgage-free, on the other hand, you can cancel your current policy without anyone forcing you to purchase another. You’ll certainly save some cash in the short term by doing so. That’s all well and good – as long as you don’t have an insurable event.

But you will have to worry about a disastrous event wiping you out. And it doesn’t have to be a tornado, mudslide or other major event that takes out everything from the ground up. Even a small kitchen fire can be expensive to put right.

The question is this: Can you withstand the hit to your pocketbook without raiding your nest egg? And do you want to take that chance?

According to the Insurance Information Institute, the typical home insurance claim for property damage is $15,747. Of course, being an average, that means some claims are smaller and others are larger – much larger.

The most common claim is for wind and hail damage, at an average of $13,511 per claim, per the III. And claims in the catchall category of “fire and lightning” are the most costly, averaging $83,991.

Not Just for Disasters

With all this talk of insuring your home and its contents, it’s important not to forget about liability insurance. What if your teenager knocks someone’s teeth out in a playground brawl? What if Fido gets loose and bites a neighborhood child or attacks the plumber?

You’re liable in all of these scenarios.

Dog liability claims are among the highest average cost of any type of claim filed against homeowners, according to a report from the III and State Farm. In 2023, insurers paid out $1.12 billion in dog-related injury claims. Yikes!

The point is, all types of insurance are important. Dropping coverage now could prove very costly later.

Besides, there are ways to save money on insurance without canceling it. Seek discounts by combining your home and auto coverage with the same carrier, for example. Or increase your deductible to an amount you can comfortably handle, should a catastrophe occur.

Your mortgage might limit how high you can raise your deductible: Most lenders won’t allow it to be greater than 10 percent of the property’s appraised value. But even at that, your premium may be a little more palatable.

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.