Some of the most common questions I am asked as an insurance agent include: Should I file a claim, and if I do will my rates go up because of the claim? Why should I even carry insurance if the increased premium will be more than the cost of paying for the claim? Can my insurance company cancel me for filing a claim?
These are great questions, and unfortunately, there is not a simple answer. There are many factors that should be considered when determining if a claim should be filed or not. Ultimately, it is up to the policy holder to decide, but several factors should be considered including coverage limits, deductibles, current market conditions, claim severity, claims frequency, and cash on hand.
The Scenario
When asked about filing a claim, I generally go through a few steps to determine if a claim should be filed. I will detail those steps in a scenario I personally experienced.
A few years ago, my basement sewer backed up during a heavy rainstorm. I was fortunate to have family nearby that quickly rushed to my aid and helped stop and remove the water from my basement before severe damage was done. But my carpet was soaked with all the unspeakables that go down your drain. In the end, after airing out my basement, we determined the carpet would not be salvageable and reached out to a local carpet supplier that gave me a great deal due to the circumstances. Total cost for carpet, pad, and install was about $1,500.
Deductible and Coverages
Now, should I file an insurance claim? In adding up my total expenses, I would only be able to claim slightly over $1,500 for the carpet and some minor expenses for disinfectant and mold treatment. My home insurance deductible was $1,000 and I verified that I had a sewer backup enhancement with a $15,000 sublimit. In short, I was fairly certain the claim would be covered. This is the first step: do your best to check for coverage and verify your deductible.
Keep in mind that it may not always be prudent to wait to file a claim. In situations like this, it is up to the property owner to do their best to prevent further damage by safely handling the situation or by hiring a professional. Once the situation has been contained, it may be best to file a claim as soon as possible. Your insurance company may have preferred repair providers and can often advise on necessary steps moving forward.
Market Conditions
The next step is to consider the current market conditions. In Utah, we have seen higher than average rate increases in recent years. Nationwide, we are also experiencing a “hard” insurance market. A hard market means that insurance companies are becoming more loss adverse and strict regarding what risks they will accept. There are also no laws in Utah preventing my insurance company from adding a surcharge upon renewal because of a claim.
Unfortunately, there is currently no good method to determine the exact premium increase from a claim, but I estimated it would result in an additional $50-$100 a year for the next 5 years. With this assumption I determined that in the long run I would save roughly $250 by filing a claim, but I also wanted to consider the other possible effects of the claim.
Claims Frequency
If I had another claim in the next 3-5 years, this could be perceived as a frequency or maintenance issue that could negatively affect my future insurability. Frequent claims will generally result in higher premiums and may result in non-renewal of coverage. Frequent claims can also cause difficulties when looking for another insurance provider. Some accounts with excessive claims may be unable to procure coverage or are forced into the surplus insurance market where rates are generally much higher and coverages limited. Most policyholders do not need to worry when filing one or two claims, but it is important to discuss claims frequency with a knowledgeable agent or claims representative.
Claim Severity & Cash on Hand
Long story short, I decided it was not worth having a claim on my insurance history for such a small savings. Now, you may be asking why carry insurance then? Well, the situation could have been very different and most likely would have drastically changed my decision. If I had to hire a disaster company, they would probably not have arrived until the water in my basement was much deeper. This would have resulted in further damage to my drywall and other aspects of my home. In turn I would have had increased costs for further repairs, damage to other personal property, and labor. In the end, if things had not worked out for me how they did, this event could have easily cost over $10,000.
I did not have $10,000 to pay at the time and would have been forced to file a claim. The severity would have then been significant enough for me to risk having multiple claims in a hard insurance market. I also could assume that the additional premium resulting from my claim would be far less than amount due for repairs over the next few years.
Final Words of Caution
In closing, I want to add a few words of caution. First, review your insurance policy and have at least a basic understanding of what is and isn’t covered. One of the least favorite parts of my job is telling someone there is no coverage for a loss. I do my best to advise on coverages, but ultimately, no one knows you or your business needs better. Be open with your agent and discuss possible claim scenarios and outcomes as you are able.
Next, use caution when accepting services from a door-to-door repairman. Locally, we have had many wind and hail related events, and in turn, opportunistic repair companies are becoming more common. I recommend getting a second opinion from a local reputable repair company prior to approving repairs to be made or claims to be filed.
Finally, remember that an insurance policy shouldn’t be depended upon as a maintenance policy. Regular maintenance and replacement of roofs, furnaces, air conditioners, water heaters, etc. should be budgeted for and performed before additional damage occurs. Poor maintenance can impact what is covered during a claim and affect overall insurability.
Please reach out to me with any questions or for help covering your unique insurance needs.
Disclaimer
Policyholders should review their policy for guidance on filing a claim. Timelines for filing a claim may vary and affect coverage if conditions are not met. This article is meant to provide general information and does not supersede any requirements found within your policy or insurance requirements.
