Can my insurance provider cancel my policy if I file too many claims?

For years, you dutifully paid your homeowners insurance every month. Then, one day, you decide to move your $1,200 flat screen TV to the family room. Unfortunately, it slips and crashes to the floor. You’re now left with a $1,200 mess. No worries, though. You do what any responsible homeowner would do: file a claim with your insurance. They pay, and you’re satisfied.

Two weeks later, lightning strikes your property and damages the well pump. It happens. I've been there too. Once again, you file another claim. Don’t forget the $700 roof repair claim from two years ago. Then, while you’re relaxing with your new flat screen, you receive a letter in the mail from your insurance company. The letter states: ‘Sorry, Charlie,’ as the famous tuna commercial goes. They won’t be renewing your policy.

What’s happening here? Simply put, your insurance company has decided you’re a high risk. You’ve submitted too many claims in too short a time. Can the company just cancel you like that? Absolutely.

Let’s take a step back: Homeowners purchase insurance to safeguard their homes and possessions from a range of potential disasters, both major and minor. Some incidents may be as catastrophic as tornado damage, or as seemingly trivial as Aunt Betty tripping over the walkway and breaking her big toe. (OK, it might seem trivial to you, but not for Aunt Betty.)

Filing a claim, or multiple claims, is a delicate matter. Too many claims could lead to higher premiums, or worse, result in cancellation or non-renewal of your policy. Before filing, take a moment to carefully consider whether it's worth it. For example, consider the $1,200 flat screen TV you’re claiming for. With a $500 deductible, the insurance company only pays out $700. Your well pump costs $1,000. You see where I’m going with this? You saved a bit of money, but was it really worth it? Probably not.

Keep reading. You’ll thank me later.

The Insurance Companies are Watching

Around 10 years ago, the Independent Insurance Agents & Brokers of America (IIABA) conducted the first-ever survey on homeowners insurance non-renewals and premium hikes. The results were eye-opening. In just two years, 2.5 million households lost their homeowners coverage, while 51 million saw their rates rise. Nearly 57% of these households faced rate increases of up to 10%, and 23.2% experienced jumps between 11 and 25% [source: Independent Insurance Agents & Brokers of America].

So, why were so many policies not renewed? The reason is simple: homeowners insurance isn’t a major moneymaker for insurers. For decades, insurance companies have paid out more in claims than they received in premiums. Many of these claims were triggered by a series of natural disasters that caused billions in damage [source: Christie].

In 2005, the property damage from Hurricane Katrina alone resulted in $123 billion in losses, setting a record. And the pattern has persisted. In 2011, the insurance industry faced another challenging year. A combination of earthquakes, floods, and tornadoes led to $116 billion in claims [source: Neligan].

Another reason insurance companies cancel policies so frequently is because they are constantly monitoring your claims. Insurers track individual claims through databases like CLUE, the Comprehensive Loss Underwriting Exchange.

In the past, insurance companies had to dig through public records and rely on homeowners’ honesty when deciding whether to issue a policy. Now, all they need to do is log into CLUE. This database holds up to seven years of personal property claims history [source: Wisconsin Office of the Commissioner of Insurance].

How can you ensure your insurance stays in place?

The key to keeping your homeowners insurance intact is using your head, even if you’re tempted to get a new flat screen. As the IIBA suggests:

Remember, there’s no guaranteed way to stop your policy from being canceled or your premiums from rising. All we can do is use our heads and think carefully.