Homeowners Insurance: When Should You File a Claim?

Your first home; whether it’s a small studio apartment or an actual house that you’ve purchased, is there anything more exciting? After four years of apartment and rental home dwelling, I experienced the thrill of purchasing my first home back in the summer of 1989 in the small town of Bixby, Oklahoma, just outside of Tulsa. My husband and I moved in on July 4th weekend and set about removing the hideous orange checkered wallpaper from our new kitchen. July in Oklahoma is hot and so we decided this might be a good time to try out our central air conditioning. We flipped the switch and nothing; not a buzz, not a hum and definitely no cool, refreshing air. Surprisingly, we were able to contact a repairman even though it was a holiday weekend, although after receiving the bill we understood why he had been so happy to take our call. We learned that the unit had been damaged by lightning and we agreed to the repairs. What else could we do? It was 108 degrees at 10:00 in the morning! But from my background as an insurance underwriter, I knew that lightning damage was probably covered under our brand new homeowner’s insurance policy. But, should we file a claim? That was the ultimate question.

There are many people who believe that you should always file a claim, subscribing to the “that’s why I have insurance” philosophy. However, there are times when it may not be to your best advantage to make a claim against your insurance contract. First, let’s talk about some of the negative consequences that could result.

Loss of Discounts or Added Surcharges

Some companies offer a “claim free discount” to those customers who have not submitted any claims for a given period of time. Depending upon the company, the policy type, the state in which you live and the length of time you have been claiming free these types of discounts can range from 2% to as much as 15 to 20% of the total premium. Companies may also have some type of claim surcharge rating plan where a penalty is actually assessed depending upon the type, size, and number of claims submitted over a given time period.

Forced Increase of Deductible

While not allowed everywhere, there are some states in which your insurance company could force you to take a higher deductible if they determine that your claim frequency is higher than average. For example, suppose you have a $100 deductible and your teenaged son has $200 to $300 worth of personal property (CDs, DVD, video games, etc.) stolen from his car three times within a 12 month period. If you were to submit each claim separately, your insurance company might decide to require you to switch to a $500 deductible in an effort to eliminate these small but frequent claims as an alternative to canceling your policy.

Policy Cancellation or Non-Renewal

While insurance laws do vary from state to state there are many states in which an insurance carrier can refuse to continue the policy based on either too many claims, known as “claim frequency” or excessively high payouts on claims, known as “claim severity”. Also, once your policy has been canceled or non-renewed for claim frequency or severity it can become very difficult to obtain new insurance coverage. Most states require that customers disclose prior losses and any non-renewals or cancellations of other homeowners insurance cover policies within the past three to five years when applying for new coverage. The new insurer may be able to refuse to write new coverage based on the prior loss and cancellation history or charge a higher premium. Think you can get away with not disclosing prior losses or cancellations or non-renewals to a new insurer? Think again. Many companies now routinely order Loss History Reports from outside vendors to check on a customer’s prior insurance history. If your company finds that you have been less than forthcoming about your insurance history the insurance contract could be voided based on misrepresentation.

Factors to Consider

When weighing whether or not to submit a claim there are a number of factors to consider including:

  • Type of claim
  • Estimated amount of claim
  • Deductible currently on the policy
  • Number of previous claims submitted (whether paid or not)

Type of Claim

While insurance policies may offer all sorts of “frills” in an effort to be competitive with other companies from a marketing perspective it is important to keep in mind that the main reason for having insurance is to protect your home from “sudden and accidental” damage that is “catastrophic” in nature.

The tornado or hurricane that dashes your house to bits, the electrical fire or water heater explosion that reduces your house to rubble or the heavy snow or ice storm that causes your garage roof to collapse would all be examples of claims that fit this description and which definitely should be submitted.

But what about the small losses like your child accidentally breaking a window with a wild pitch in the backyard, or the can of paint spilled onto the carpet while you are repainting your living room?

These claims do meet the definition of “sudden and accidental” but probably would not be considered “catastrophic” in most cases.

Also, there are certain types of losses that will be excluded under your policy. Since some claim free discount or claim surcharge programs may count claims even though no payment was made, you will probably want to avoid submitting claims for losses that are clearly excluded. Flood damage and cracking and settling of the foundation are two of the most common types of losses that are almost universally excluded.

If you are unsure whether a loss is excluded you can always contact your insurance agent, broker, or insurance company to make an informal inquiry about possible coverage. Be sure to make it clear that you are not requesting that a claim is opened but only asking a general question about your policy coverage.

Finally, in cases where you decide to fix the damage yourself instead of submitting a claim, you may want to check with your insurance agent or broker to determine whether there may be additional policy discounts available as a result of the improvements made to your home. For example, if you decide not to submit a claim for a worn out, leaky roof because it is more of a maintenance issue rather than a covered loss, your company may give you a discount because of the new roof, especially if you use hail resistant shingles.

Estimated Amount of Claim and Deductible Amount Currently on Policy

These two factors should be considered together when deciding whether or not to submit a claim especially if your policy currently carries a lower deductible (less than $1000). For example, if your policy currently has a $100 deductible and it would take about $125 to repair the window your child accidentally broke by hitting a baseball through it, you would probably not want to risk losing a claim free discount or incurring a claim surcharge for a payment of $25.

You might also want to consider raising that low deductible to at least $1000. Companies generally give deep discounts to customers willing to take on much higher deductibles. In the long run, the savings in premiums combined with additional claim-free discounts that might be offered would more than pay for the smaller claims that you do not submit.

Number of Previously Submitted Claims

Finally, your current claim history is an important factor to consider, especially in the case of a “borderline claim”, one which meets the “sudden and accidental” criteria and where the estimated payout is high, but may not be considered “catastrophic” in a traditional sense. One example might be a case where a windstorm blows a large tree down on a shed in your backyard and it will take about $5000 to replace the shed and the repair the damage that occurred to the lawnmower and other tools inside.

If you have never submitted a claim before and a weather-related claim would not cause you to lose your Claim-Free Discount, submitting this type of claim would probably be a wise choice. If, on the other hand, this claim would represent the fourth claim submitted in a three year period and would give your company the right to cancel your policy, you might want to consider absorbing the cost of the damage yourself.

Again, check with your insurance agent or broker for information on the types and amounts of claims that would likely result in your losing a Claim-Free Discount, incurring a surcharge or being canceled.

Homeowner’s insurance can be a wonderful source of protection and peace of mind when approached responsibly. Just make sure that you understand all the potential consequences involved when deciding whether or not to submit a claim.