Home insurance company bankruptcy: What happens next

Reinsurance or your state guaranty association will help pay out claims if your home insurance company goes out of business.

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Rachael BrennanSenior Editor & Licensed Auto Insurance ExpertRachael Brennan is a senior editor and a licensed auto insurance expert at Policygenius. Her work has also been featured in MoneyGeek, Clearsurance, Adweek, Boston Globe, The Ladders, and AutoInsurance.com.

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Jennifer GimbelJennifer GimbelSenior Managing Editor & Home Insurance ExpertJennifer Gimbel is a senior managing editor at Policygenius, where she oversees all of our insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

Updated|4 min read

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March 2024 update: How to get coverage after being dropped

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Home insurance companies 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 common in states at high risk of severe weather — including California, Texas, Florida, and Louisiana — where billions of dollars in claims 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.

Key takeaways

  • Home insurance companies can go out of business because they were purchased by another insurer, went insolvent, or declared bankruptcy.

  • If your home insurance company can’t afford to pay out claims after going out of business, it typically purchases reinsurance or stop-loss insurance to cover the cost.

  • To avoid having a policy with a home insurance company that goes out of business, experts recommend reviewing the company’s financial strength ratings with AM Best and reading customer reviews before purchasing a policy with them.

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.

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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, your insurance company going 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 home insurance company.

An insurer’s financial score can be a helpful tool

Credit rating agencies like AM Best, Moody’s, and Standard and Poor’s review the finances for insurance companies across the country and rate them based on their ability to pay claims and other outstanding debts. Checking an insurance company’s financial strength ratings before purchasing coverage can help you feel secure confident that claims will be paid in the future or provide a warning that an insurance company might be on the edge of insolvency.

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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 AM 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 point to find a reputable insurer in your area.  

Why are insurance companies going out of business?

While there are many reasons an insurance company might go out of business, climate change has been a driving factor over the last few years. States like California, Florida, and Texas are seeing insurance companies go out of business because the increased numbers of hurricanes and wildfires are causing so much damage that insurance companies can’t afford to pay out claims while staying profitable.

When is it time to switch insurance companies?

You are allowed to switch home insurance companies at any time, but there are some signs that may indicate you should switch policies sooner rather than later.

  • Your insurance company sent you notice that they are no longer offering coverage in your area

  • You found out your insurance company is insolvent or declaring bankruptcy

  • Your insurance company’s financial rating has dropped

  • Your rates have gone up

If you choose to switch insurance companies, make sure you don’t cancel your current policy until you have a new policy in place to prevent having a gap in coverage.

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Frequently asked questions

What is it called when an insurance company goes out of business?

An insurance company that doesn’t have the funds to pay their claims is insolvent. If an insurance company becomes insolvent, the state insurance commissioner can step in and try to rehabilitate the company or sell off its assets to pay any claims and cover other outstanding expenses.

Why would an insurance company cancel a homeowners policy?

The most common reason an insurance company might cancel your homeowners policy is due to nonpayment, but there are lots of other reasons a policy might be canceled. For instance, if your insurer decides they no longer want to offer coverage in your state, they won’t renew your coverage when your policy ends.

What happens when insurance runs out?

When your homeowners insurance policy expires, you can either renew it with your current insurance company, get coverage through a new insurer, or cancel your coverage. But if something happens and your insurance company isn’t able or willing to cover you anymore, your only option is to find a new policy with another insurer.

What happens to your mortgage if your home insurance is canceled?

Depending on the situation, you could be fined by your bank for not maintaining a homeowners insurance policy, your mortgage could be recalled (which means you have to pay back the whole balance right away), or the mortgage company could purchase insurance on your behalf and add the cost to your monthly mortgage payments.

Author

Rachael Brennan is a senior editor and a licensed auto insurance expert at Policygenius. Her work has also been featured in MoneyGeek, Clearsurance, Adweek, Boston Globe, The Ladders, and AutoInsurance.com.

Editor

Jennifer Gimbel is a senior managing editor at Policygenius, where she oversees all of our insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

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