Home insurance companies can go out of business for a variety of reasons. Whether an insurance company was bought by a competitor, mismanaged its budget, or faced an unprecedented number of claims that left it bankrupt, going under is always a possibility for an insurer.
And it’s becoming more and more common in states at high risk of severe weather — including California, Texas, Florida, and Louisiana — where billions of dollars in claims have caused several companies to go under. In Florida alone, 11 home insurance companies went bankrupt over the last two years. And more than eight home insurers in Louisiana went broke in 2022.
We break down what happens when your home insurance company goes belly up and the steps you can take to avoid ending up in that position in the first place.
What happens if my home insurance company goes out of business?
For most people, having your home insurance company go out of business is simply a nuisance that requires you to purchase a new home insurance policy with a different provider. But, in some situations, your insurance company going under is a much bigger deal.
If you live in a state like Florida where multiple insurance companies are failing, having your home insurance company go out of business leaves you with limited coverage options.
What happens after your insurance company goes bust depends on why they went out of business.
Home insurance company is bought by another company
Mergers and acquisitions happen all the time in the insurance industry, so it’s common for one company to be purchased by another. For example, Allstate purchased National General insurance back in 2021.
In most cases, customers won’t experience any significant differences in their coverage or customer experience if their home insurance company is purchased by another insurer. If your insurance company gets purchased by another insurance company, you’ll be notified before the merger goes into place and told if there is anything you need to do to maintain your coverage.
Home insurance company insolvency
If your home insurance company can’t afford to pay their claims or other debts, they are considered insolvent. It’s a problem, but it doesn’t necessarily mean the company is going out of business. In fact, an insurance company can use their reinsurance coverage to continue paying claims even if they don’t have the funds.
Also known as stop-loss insurance, reinsurance is essentially insurance coverage for your insurance company. Insurers that are insolvent will likely fall back on their reinsurance coverage to pay out claims.
Insolvency is something a company can fix over time and doesn’t impact its legal status or ability to stay in business. However, an insolvent company can decide that the best solution to its financial problems is to declare bankruptcy. And that’s when things get ugly.
Home insurance company goes bankrupt
An insolvent insurance company may choose to declare bankruptcy, which means it is legally declaring it can’t pay its debts. Bankruptcy is often (but not always) the first step to shutting down a company completely, which means customers will probably need to find a new insurer.
What happens to claims when an insurance company goes out of business?
If your insurance company goes belly up and isn’t able to pay out its claims, state insurance regulators will try to transfer active policies to other insurance companies or, in a worst case scenario, they will pay out claims through the state's central guaranty fund. Similar to the FDIC guarantee that protects bank customers, your state’s guaranty association steps in to pay customer claims if a company goes out of business.
How to protect yourself from an insurance company failure
While you can’t predict the future, there are steps you can take to protect yourself from an insurance company going out of business.
Review the company’s financial strength ratings. Insurance companies are often rated for their financial stability by companies like A.M. Best, Moody’s, and Standard and Poor’s. The higher the score, the better financial shape the company is in and the more likely they are to be able to pay out future claims.
Read customer reviews. If an insurance company has a significant number of customer complaints, especially when it comes to claims, that is a sign you might want to look elsewhere for homeowners insurance.
Assess the risk where you live. Certain factors, like where you live or the size of your insurance company, may affect whether or not your insurance company will go bust. For instance, people living in coastal states need to consider the impact of regular natural disasters on the financial stability of the home insurance companies in the state.
Consider more than price when picking a company. Choosing the cheapest homeowners insurance policy available may seem like a no-brainer, but it isn’t always the right choice. If you have a choice between a more expensive policy from a company with high financial ratings and a cheaper policy from a company with lower ratings, you might be better off choosing the more expensive plan, especially if you live in Florida, California, or another state where natural disasters are creating a volatile insurance market. Our list of the best home insurance companies in 2023 is a great starting off point to find a reputable insurer in your area.