Another common question that we get regarding home insurance, is handling a lapse in coverage and how/why it affects a homeowner’s insurability. We just had this question last week with a re-fi situation. Each carrier treats a lapse in coverage differently. However, there seems to be three tiers of a lapsed policy as far as how carriers treat them.
First, if you have a lapse in coverage of one day or more, many standard carriers will not make any exception at all. This is even more magnified when a carrier no longer offers policies in that area, or the carrier is trying to reduce their exposure in that area.
The second tier seems to be when a person has had a lapse in coverage of up to 30/45 days. I some carriers will accept a 30-day lapse, and few will allow up to a 45-day lapse. While there are a handful of carriers who will write homes in this second tier, they will generally add a lapse in coverage sur-charge, and some require underwriting approval. The sur-charge varies from carrier to carrier but is usually in the 10% range. Carriers will also usually require the insured to sign a “No Loss Statement” which is a document confirming no losses during this time.
The third classification is for people who have had a lapse in coverage of more than 45 days. This scenario really limits the homeowner’s options to just a couple of carriers-most of whom reflect the exposure in their rates. These carriers also charge the policy with a “No Prior Sur-Charge’, and some have a waiting period before they will issue the policy.
So, why would an insurance company care if the person has prior insurance or not, if the home has had favorable inspections on it? While most clients are honest, trustworthy people, you can imagine that not everyone falls into that category. Insurance is ultimately about managing risk, and when a risk can’t be managed due to fraud, the insurance companies will look to seal up that loophole in their contracts. In these three scenarios, there may be existing damage to the home, this may even be damage that does not show on an inspection. The insured may then turn around and file a claim to get the pre-existing damage taken care of at the insurance company’s expense.
As you can imagine, this puts the insurance carrier in a very bad situation, since they may have charged a client $2,000 for their insurance premium, but they incurred a $30,000 loss. This is not a good business model, and it is a big reason that many carriers hesitate to offer coverage when a lapse in coverage has occurred.
On the flip side, assuming the insured maintains continuous insurance for 12 months without a lapse, the “no -prior surcharge” will fall off at their renewal, and they will most likely have many more carrier options moving forward with potentially more favorable rates.
This is why your agent’s relationship with carriers is more important than the actual carrier. If the agent you work with only has one or two carriers they represent, that will be the only option the homeowner will have. However, if your agent has several carriers that they work with, the homeowner is naturally going to have more options across the board.
