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That's cold: Ways your home insurance company could drop you

If you think that once a home insurance company issues your policy, it's yours until you drop it, think again.

Insurers can cancel or refuse to renew policies if they have a legitimate business reason to do so, according to Jeff Raizner, owner of Doyle Raizner, a Houston-based law firm that specializes in insurance litigation.

For instance, insurers can decide that they no longer want to write insurance policies in a particular state due to the high cost of claims there. Or they'll decide that certain types of buildings are too costly to repair, or that a particular home's claims history makes that property an unacceptable risk.

"I've seen cases where a tornado has damaged a home to the point where it's considered a total loss or a homeowner has filed several expensive claims in a short period of time. These are valid reasons for insurers to cancel policies. The key is that they must have a documented history of multiple losses in order to justify the cancellation," says Raizner.

Ways home insurance could be canceledAnita Taff, co-owner at Taff Claim Services, Inc., a public adjusting firm in Atlanta, has had several clients who received nonrenewal notices. She says insurance companies are allowed to make the decision on what types of risks they want to insure but that any time a policy is not renewed, the homeowner should receive a letter of explanation detailing why that decision was made.

"Oftentimes, it's due to the size of the losses that clients have suffered," says Taff.

Cancellation during a claim

Can an insurer try to cancel a home insurance policy while a claim is in progress? It can happen but rarely does, according to Barry Flax of Goodman-Gable-Gould/Adjusters International, a nationwide public adjusting firm with headquarters in Rockville, Md. He notes that the nonrenewal of a policy at the end of the policy period is much more common than a cancellation in the middle of the term.

"The rules and regulations for a 'nonrenewal' of a policy are usually a bit more lax and less stringent than they are for a cancellation. Most property policies have endorsements within the policy [often at the back] where you will see certain rules and regulations that apply to cancellation [and nonrenewal] in particular states. Usually, within these regulations, there will be definitive language about what an insurer needs to do in order to cancel a policy," says Flax, such as days required for notice.

Finding new coverage

Nonrenewals after a claim can be particularly challenging for homeowners because other insurance companies may be reluctant to issue a new policy for a damaged property. Sometimes homeowners have to turn to their state's Fair Access to Insurance Requirements (FAIR) plan, the insurer of last resort.

If there are no other options in sight, the only available coverage for homeowners in this situation might be forced-placed insurance, a special type of policy that is arranged by mortgage companies to cover the remaining balance of the homeowner's loan.

"It's usually expensive to have your mortgage company help you get insured and the coverage can be very restricted. For example, if you've been in your home for 20 years and you only have 10 years left on your mortgage, the forced-place insurance will only cover the remaining balance of your mortgage, which is about one-third of the value of the home. Any additional costs to repair the home would typically come out of the homeowner's pockets," says Taff.

State laws govern home insurance, including regulations for why and when homeowners insurance policies can be canceled. Raizner suggests checking your state's Department of Insurance website to research the laws where you live.

Fighting back

Consumers who think that their policies may have been illegally terminated can contact their state insurance department, which is also the place to file a complaint. If the department finds that the practice is particularly pervasive, they can file an enforcement action or lawsuit against the insurance company for improper cancellation practices.

"The most important point for consumers to understand is that their policies cannot be canceled in retaliation for filing a claim. It's a fine line to draw because they can cancel for a poor claims history over multiple claims and they can cancel for reasons such as the home being too damaged to insure, but it is illegal to cancel for pure retaliation for filing a claim and consumers need to be aware of that," explains Raizner.

More from Marjorie Musick here

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