Things to consider before filing small claims

2011 saw more catastrophic weather events in the Northeast than any other year in recent history. In the winter we experienced storm after storm leave us with a heavy snow load that took it’s toll on roof tops creating severe ice dam losses and devastating rooftop collapses. Later we experienced a day of horrifying tornado damage, Irene and the Halloween snowstorm. We even had an earthquake mixed in with those events. With the exception of the earthquake, these weather relative events caused widespread power outages, downed limbs, roof damage and more.

During and after these events, we fielded hundreds of calls from clients with questions about tree removal and food spoilage, two types of loss that are not covered by an unendorsed ISO Homeowners policy. While most of our clients purchase “extension” or “enhancement” endorsements that often include some coverage for these losses, it’s not necessarily in their best interest to file a claim just for the food spoilage or tree removal.

The purpose of these endorsements is to enhance the coverage at the time of a large loss, not to simply provide $250.00 for food spoilage or $500 for tree removal. The unendorsed ISO Homeowners policy does not include coverage for food spoilage or removal of trees that don’t land on a covered structure. The “extension” or “enhancement” endorsements serve to provide broadened coverage at the time of a larger, more significant loss, such as when a tree falls onto a home causing serious damage, a fire, or something many of us are familiar with, extensive water damage from ice dams.

When we first write a homeowner’s insurance policy for a client, we address the policy deductible by asking “how much out-of-pocket expense can you afford to pay for smaller losses?”.  If our client says they could pay for all claims below $1,000 then we suggest that be their deductible.  Furthermore, if the client is comfortable paying for claims below $1,000 then why would they want to put in a claim for $250.00 for food spoilage?

Using a homeowners policy to pay for small claims is referred to in the industry as “being used as a maintenance policy”. This activity should be avoided as it may quickly result in the homeowner’s policy getting non-renewed.

I’m sure many reading this will think that I am simply against filing claims. That is not the case. The reasons behind sharing my viewpoint are for the benefit of insurance policyholders.  A homeowner’s policy is an extremely vital component of one’s financial protection portfolio. A homeowner’s policy insures what is to most, their single greatest investment, their home. It’s important that you, as a homeowner, do what you can to secure and maintain sound coverage for your home and personal liability.

When we shop for your coverage we use your good loss history (lack of or limited prior claims) to obtain the best possible coverage at a competitive price. Insurance companies pay claims; however, they are not social service agencies; they are in business to make a profit. They review each and every risk and decide to either accept or decline a risk. Then they make a decision to offer preferred or standard pricing; as well as enhanced or standard coverage, based on the characteristics of the risk. A homeowner who has no claims in 10 years is more attractive and will likely receive better pricing and coverage options than one who has 3 claims in the past 10 years. What’s worse, a homeowner who has 2 or 3 claims in a 5 year period may find themselves being “non-renewed” by their insurance company. When a homeowner is non-renewed, that information must be noted on any application for replacement coverage and most standard insurers will pass on the risk. The homeowner will likely find that their options for insurance are limited to specialty markets, whose coverage will typically be more restrictive and significantly more expensive.

2011 was not an ordinary year weather-wise. It will go down as one of the costliest years ever for weather-related losses. Through November , we experienced 4 catastrophic weather events in Massachusetts alone. Through the end of June, 2011, the insurance industry had incurred 23 billion dollars in direct, weather-related losses. That’s three times the first half year average for the past 10 years. Those numbers do not include the effects of Hurricane Irene or the Halloween snowstorm.

Over the past three to four years, we’ve enjoyed historically low property and auto insurance rates. Unfortunately, we’ve seen the bottom of the pricing bell curve and we’re looking at a period of higher rates and insurance carriers who will be looking to insure the “best of the best” and non-renew  less profitable business.

Those who self-insure smaller losses (use of higher deductibles) and use their homeowner’s insurance only for larger, more serious losses, will be more attractive risks and will likely benefit over time from better pricing and coverage tiers, not to mention the resulting premium savings a higher deductible will bring.

A few years ago, one of our clients experienced a total fire loss to their 80+ year old home. When the home was being rebuilt, the client called us to see if his coverage would be non-renewed. We called the underwriter to get a firm answer to this question. The underwriter responded “The insured has been a loyal customer for many years and this is the only claim they’ve ever had. Now they are going to have a brand new home. Why would we non-renew?”

Severity is not looked at in the same light as frequency. Smaller, more frequent losses are “red flags” to underwriters. Underwriters will pay close attention to accounts that experience multiple, small losses and will be ready to non-renew the moment they feel the account is no longer desirable.

Undoubtedly, some will suggest that we’re posting this article because we don’t want our clients to submit claims. That’s not the case. When our clients need their insurance to respond, we want it to pay them the way they expect to be paid; that makes for a satisfied customer. Referrals are the lifeblood of our agency and we only get them from satisfied customers.

We believe that by informing our clients ahead of time about how small claims can impact the cost and availability of their insurance, we are providing better customer service than the agency or company who only explains this after the customer is re-tiered or non-renewed following a loss.

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