How to Deal With Homeowners Insurance When You Sell Your House: Avoid Gaps in Coverage!

Homeowners insurance tends to be an expense that sellers are all too happy to hand off to buyers as fast as possible—but canceling it too early can cost you a significant chunk of money and even the sale of your house.

Jennifer Murtland, a top-selling real estate agent in Cincinnati, Ohio, knows this well. She once represented sellers who had canceled their policy one day before closing, only for a tree to fall on their porch. The damage was so extensive, all parties canceled the contract, she said. The repairs took several months before the house was resold to another buyer.

“It was definitely a financial strain on the sellers,” said Murtland.

“People think, ‘Well, nothing’s happened, and I’ve owned the house for 20 years, so it should be fine.’ And that’s when the water heater breaks or the house catches fire or a tree falls. That’s always how it works.”

We’ll clear the air on some common perceptions about homeowners insurance so that you can better evaluate how to handle your coverage when selling your house.

Homeowners insurance in a nutshell

About 85% of homeowners have home insurance policies, with the most common type being HO-3 (about 78%), according to data from the National Association of Insurance Commissioners (NAIC). This is broad coverage on personal property that insures against a number of perils such as fire, windstorms, explosions, theft, and smoke, except for any that are specifically excluded, such as flooding.

All policies cover a home’s structure, fixtures, and built-in appliances; most policies also cover your belongings and personal liability from injuries or damage, the NAIC says.

Policyholders often need additional coverages, such as for flood or earthquake-related damages, living expenses during home repairs, and losses from sewer or drain backup. (The Insurance Information Institute, a research organization founded in 1959 and based in New York City, has a video that explains what’s typically covered and what’s not, such as damage from pests.)

The average annual cost of homeowners insurance in the United States is $1,083, according to a 2018 analysis of sample policies in each state by the personal finance company ValuePenguin, owned by the online lending exchange LendingTree.

States with the highest average homeowners insurance costs include Florida, Texas, Louisiana, Oklahoma, and Mississippi—all known for natural disasters—spending 67% more annually on premiums than the typical U.S. resident. States with the lowest average homeowners insurance rates include Oregon, Idaho, Utah, Wisconsin, and Washington State.

Do you need homeowners insurance to sell a house?

Because of the various add-ons in coverage, homeowners insurance can be confusing, even without the details of a real estate transaction. The majority of U.S. homeowners and rental insurance customers in a 2017 J.D. Power survey—52%—said they did not have a clear understanding of their policies.

Most mortgage lenders require homeowners insurance. Buyers who finance a mortgage typically must secure and pay a premium of homeowners insurance at closing. (The exact amount depends on the loan.)

As a seller, you might have prepaid your homeowner’s insurance and property taxes monthly as part of your mortgage payment. Until the mortgage is paid completely, the prepaid insurance and taxes go into an escrow account.

When you sell the house, your coverage is in effect until your title company sends in the payoff, or the funds to close the loan. If your homeowners insurance is escrowed, the bank will issue a check for any prepayments on the insurance, usually within about 30 days, Murtland said.

So although you don’t need coverage to sell a house, you likely have it, anyway—and it’s wise to keep it until the property fully passes into the buyers’ possession. “That’s why you have insurance,” Murtland said.

Do you need to be protected from any accidents on the premises during a showing?

Homeowners policies can include personal liability coverage, which handles financial losses from property damage and personal injuries to others, if a homeowner is found legally responsible. It also can include medical bills for people hurt on the property or by the homeowner’s pets.

Although you may want to review your coverage for your own peace of mind, the likelihood of a potential buyer being injured during a showing is rare. Bodily injury and property damage comprise only about 3% of liability damages as a percent of total homeowners insurance losses, according to Insurance Services Office (ISO), a data analytics provider.

The most frequent causes of property damage on homeowners insurance policies are wind and hail (33%), freezing and water damage (about 30%), fire and lightning (about 27%), property damage including mischief and vandalism (about 6%), and theft (about 2%), the ISO says.

Murtland, who also owns rental property, said she hasn’t had any clients injured during a showing. “Most people don’t worry about the liability of showings,” she said.

When should you cancel or transfer your homeowners insurance policy?

Essentially, you need to make sure that the closing has been processed before canceling or transferring your policy to a new home.

If your insurance has been escrowed, you won’t need to cancel anything, Murtland said, because your lender will issue you a refund check, indicating that your loan has been paid.

“How you know it’s done as a seller is, you have received a check that you can take to the bank,” she said.

If your insurance hasn’t been escrowed, or you pay your bill directly, you will need to contact your mortgage company about any changes.

But depending on your buyer’s financing, you should wait one to three days after closing to do so.

A buyer with a bridge loan, for instance—a loan that covers a gap between the purchase of one property and the sale of another—has a three-day right of rescission, meaning he or she under the Truth in Lending Act can cancel the loan within three days of closing, no questions asked.

If you’re buying a new house as well as selling your former one, you’ll have to prove insurance to a lender to finance the new one, so you’ll have coverage on both houses for a few days, but this shouldn’t be a financial burden. In fact, it’s smart, Murtland said. “You actually own two places, so you want coverage on everything you own.”

What if you have a vacant property?

The largest hassle for people with homeowners insurance tends to be with vacant property—perhaps somewhere you lived years ago that hasn’t yet sold, or rental property where you no longer have tenants. A vacant home isn’t just unoccupied, as if the owners might return at any time, but has no personal property inside, and the utilities may be shut off, according to the insurance-comparison website Insurance.com.

 A vacant home is harder and more expensive to insure—roughly between 1.5 and three times as much as standard insurance—and can be more restrictive than regular insurance, Insurance.com notes. That means covering standard perils such as fire and wind, but not water damage from frozen pipes or vandalism.

Sellers of such properties tend to wonder why this coverage is higher because the house is vacant, but from an insurance standpoint, these properties are riskier because any issues can take days or weeks to notice, Murtland said.

She and her colleagues regularly check empty properties for sellers who live out of town to make sure there are no problems. On one such occasion, she found a water heater had burst earlier that day.

“I was able to clean it up and turn it off, but if I hadn’t gone, mold would have been everywhere,” she said.

What’s the best homeowners insurance coverage for you?

 Generally, you want enough insurance to rebuild your home’s structure (don’t include the cost of the land), defray any costs if you’re unable to live there, replace your belongings, and protect your assets from liability, the III says. Interestingly, standard homeowners insurance often covers trees, plants, and shrubs in the event of a fire and other disasters (not for poor care or disease), generally about $500 per item.

But the price you paid for your home, or its current market price, may not cover the cost to rebuild. Find a quick estimate by multiplying your home’s total square footage by your local building costs per square foot. (Contact a local real estate agent, insurance agent, or builders association to learn your local construction costs.)

As far as your possessions, most policies will cover your belongings at about 50 to 70% of the insurance on the house itself. Creating a home inventory can help you assess whether you need more coverage. Coverage for Additional Living Expenses, or ALE, varies by company, but many policies provide coverage for about 20% of the insurance on your house, the III says.

As for liability, most policies provide a minimum of $100,000, but the III recommends at least $300,000 to $500,000 worth of coverage.

 It’s a good practice to annually check your policy and coverage, Murtland said. Just be clear about when you’re switching your policy, if you do.

“You don’t want to be self-insured when your tree falls on a porch, and then you have to redo all that. That would be a very bad day,” she said.

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