When you buy auto insurance, you have duties as the owner of your auto insurance policy. If you don’t fulfill your duties as a named insured, you could be at risk of losing the coverage that you’re paying for when you need it the most.
Luckily, your duties are pretty basic and you’ll receive a notice defining them when you buy coverage.
Perhaps the most important duty as a policyholder is to be honest when you’re applying for coverage. If you’re not honest during the quoting process or when you’re submitting your application, you could lose your policy shortly after you pay for it.
The next duty in your insuring agreement is to pay your premiums on time. If you don’t, your insurance policy will lapse or be canceled shortly thereafter.
What does the term car insurance lapse mean?
A lot of industry terms are thrown around when you’re buying coverage from a standard car insurance company.
You might be familiar with the basic terms, but it’s the not-so-basic terms that can get confusing when you’re trying to understand what an agent is telling you. Misinterpreting the meaning of a word like “lapse” could really lead to trouble.
The auto insurance booklet that you receive when you sign up for a policy has definitions that thoroughly detail what every term means.
If you skim through your contract, you’ll find that a coverage lapse is defined as “a period where coverage is not afforded because the policy has been canceled or non-renewed.”
If you file a first-party claim under your policy during a lapse, the claim will be denied because you’re uninsured.
Why do auto insurance policies lapse?
There are a number of reasons why your insurance can lapse because of your actions or your lack of action. It’s important that you understand why an insurance company can cancel your insurance when you’re buying coverage.
When you know, you can avoid making mistakes that could leave you vulnerable on the road.
Insurance companies technically can’t cancel your policy for any reason they want after the policy has gone through underwriting.
This is called the 60-day binding period where the insurer is free to change their mind and cancel the coverage they offered. Once this period is up, the company can only cancel the policy for the following reasons:
- You’ve been found guilty of fraud
- You have filed a fraudulent claim
- Your license has been suspended or revoked
- You failed to make your premium payments
Your auto insurance due date is not like most due dates. If you’re late paying your cell phone bill or you’re late paying your cable, you can generally pay for both months the next time your bill is printed.
It doesn’t quite work like this with insurance because you’re required to pre-pay your premiums.
When you pre-pay your premiums, you’re paying for the upcoming month’s worth of coverage instead of paying for the previous month. Since you have to pay in advance, missing even one payment could result in a lapse.
Most insurance companies offer at least a short grace period for you to make your payment late without being penalized. Grace periods can last between one and 30 days. As soon as the grace period is up, your coverage will be terminated for non-payment.
Do you get a notice when your coverage lapses?
In every state, there’s a Consumer Bill of Rights that says that companies must send out notices when they take action on policies. When a policy is being canceled or non-renewed, the company must send you a letter in the mail giving you notice.
In most states, companies need to give you a 10-day notice when your policy is canceling for non-payment. They must give 20 to 30 days notice for any other reason.
If the policy is not renewing, the non-renewal notice will be sent 30 to 45 days before the policy expires so that you have time to find coverage elsewhere.
If you have a loss during the period when your coverage has lapsed, there’s no point in filing a first-party claim. During this lapse, no coverage is afforded regardless of what you carry under your policy.
You can, however, file a third-party claim through the other insurer if you weren’t to blame.
Unfortunately, being uninsured could make you liable for your own damages.
Some states allow third-party insurers to deny claims made by drivers with no insurance. This is something to take into consideration before you drive your vehicle after the coverage has already lapsed.
Are there penalties for letting your car insurance lapse?
If your coverage lapses and you keep the car parked, you still have to worry about facing penalties that are assessed to uninsured vehicle owners.
Each state sets different penalties depending on how serious they are about combating uninsured drivers. Some of the common penalties assessed for insurance lapses include:
- Vehicle registration suspension
- License suspension
- Vehicle impoundment
- Reinstatement and impound fees
- Fines for driving a car with no insurance
- SR-22 requirement
- Forced-placed insurance assessment
If your coverage has lapsed, you should either reinstate the policy or shop for coverage elsewhere. When you’re not eligible for a reinstatement, you can start to compare rate quotes online by using a comparison tool.