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What homeowners should know about 'use it and lose it'

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Everyone knows the phrase "use it or lose it." Indeed, we've heard it applied to everything from flex spending accounts to credit card miles. Can the same be said, however, about the phrase "use it and lose it?"

While this swap of conjunctions might seem like a simple typo, this is far from the case. The exchange of "or" to "and" references a little known insurance practice that has created huge problems for many homeowners.

Specifically, insurers may elect to impose surcharges, increase premiums or refuse to renew polices if:

  • Homeowners file a single claim after years of on-time payments
  • Homeowners file a claim that results in no payment
  • Homeowners merely inquire about coverage for a loss, but file no claim

The inequity of the Use It and Lose It approach doesn't stop there. Consider also that insurers share information on costumers via national databases. As such, the decision not to renew a homeowner's policy is readily available to all insurers. Affected homeowners could potentially have difficulty finding similar coverage at a reasonable rate elsewhere.

The result of this practice is the creation of a wrongful deterrent effect. In other words, homeowners become reluctant to file claims even though their losses would be covered.

As to the legality of Use It and Lose It, it's complicated. All 50 states approach the regulation of insurers and homeowners' coverage differently. For example, one state might say nothing about it, while another might have a universal ban in place.

Interestingly, a recent academic study by Rutgers Center for Risk and Responsibility shed some light on this legal patchwork. Furthermore, it ranked the 50 states on their approaches to Use It and Lose It.

We'll examine this more in our next post.

Source: The Rutgers Center for Risk and Responsibility, "State-by-state rankings: 'Use It and Lose It," February 2017

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