By Robert J. Bruss
As the homeowner victims
of Hurricane Katrina are discovering, most homeowner insurance
companies are not swift to fully pay even valid claims.
Although the insurance
commissioners of Louisiana, Mississippi and Alabama have warned
insurance companies about possible consequences for failure to
promptly pay valid claims, already I've received two reader e-mails
about major insurers who claim home damage was not insured by their
Frankly, based on
Florida homeowner insurance experiences with hurricanes and
windstorms, it will take years to settle many of these claims.
Insurers know most homeowners need damage payments promptly. But
insurers are prepared to delay unless the insured is willing to
accept a small amount as "payment in full."
FLOOD DAMAGE IS NOT
COVERED BY HOMEOWNER'S INSURANCE POLICIES. As Hurricane Katrina
homeowners are fast discovering, their homeowner's insurance policy
does not cover damage caused by flooding.
To illustrate, suppose a
home has its roof severely damaged by high winds. That is usually
covered by most homeowner insurance policies. Or if a tree falls on
a house due to high winds, that's usually covered.
But damage caused by
flood waters is not insured (unless the homeowner has a federal
flood insurance policy). To avoid payment, the homeowner's insurance
carrier often claims the damage was due to flooding and it isn't
The result is the
homeowner must prove the damage was due to a "covered peril." Of
course, big nasty insurance companies argue the loss was due to an
uninsured cause, such as flood waters. Those folks in Mississippi
and Alabama whose homes were wiped away can't really prove if their
loss was due to wind (insured) or water (uninsured).
Neither can the insurers
prove conclusively the damage wasn't caused by high winds. But these
insurers control the cash. When an insurer refuses to pay, the
homeowner's only effective alternative is to hire an attorney to
file a lawsuit.
DON'T FILE SMALL CLAIMS
WITH YOUR INSURER. Just in case you haven't been paying attention,
in the last three or four years many major insurance companies have
been closely reviewing their loss ratios of claims paid to policy
premiums collected from specific policy holders.
To illustrate, if you
pay $500 per year for your homeowner's insurance policy, but you
have a low policy deductible and the insurer has paid several minor
claims of a few hundred dollars each year, you are ripe for policy
cancellation. Although the insurer is still earning profits on your
policy, you are a candidate for "non-renewal" because the insurer is
not earning much profit from you.
Rather than risk
non-renewal of your policy, you can take several precautions: (1)
don't file claims for small amounts just slightly above your
deductible amount; (2) raise your deductible from $250 to $500,
$1,000 or $2,000 per claim if you can afford to pay that amount
(this will also reduce your annual insurance premium), and (3) check
your coverage to be certain you will be insured for "a big one"
CUT YOUR LIABILITY;
INCREASE YOUR UMBRELLA
Several years ago, my
savvy State Farm insurance agent (with whom I have been insured over
30 years) wisely advised me to cut my liability insurance limit on
my properties and increase my "umbrella policy" coverage. He
suggested $300,000 liability coverage on each property, plus a $2
million "umbrella policy."
That sage advice came in
handy a few years ago when an ex-tenant brought a frivolous lawsuit
against me. The lawsuit was dismissed before trial, but my legal
costs were paid by my insurance policies. Although I am a real
estate attorney, I'm sure glad I hired another superb real estate
attorney who brought up defenses I never would have anticipated.
Didn't Shakespeare say "Only a fool has himself for a lawyer?"
HOW TO SAVE ON
HOMEOWNER'S INSURANCE. In addition to not filing insignificant
claims for small amounts exceeding your homeowner's insurance policy
deductible, and raising that deductible as high as you can
comfortably afford, here are additional ways to save on homeowner's
insurance costs without sacrificing coverage or risking cancellation
in the event of an insured loss:
1. REDUCE YOUR
LIABILITY INSURANCE COVERAGE. If a visitor trips on your sidewalk
and is injured, you might be liable for maintaining a defective
sidewalk. When an injury is minor, and just slightly above your
homeowner's insurance policy deductible amount, you might decide to
pay the visitor's loss without notifying the insurer. However, be
sure to obtain a signed written release for any payment.
If the injury is severe,
well above your homeowner's insurance policy deductible, be sure to
promptly submit the possible claim to your insurer. Even if you were
negligent, the insurer must pay the amount for which you are liable,
up to the policy limit.
When the damages exceed
your homeowner's policy liability limit, that's when you need an
"umbrella policy" for $1 million or more. The cost is very low
(don't tell the insurance companies or they will raise the
premiums). For an umbrella policy of several million, I only pay
about $700. Please don't tell the insurer. Maybe they made a mistake
on my bill.
2. SELECT DEPRECIATED
PERSONAL PROPERTY ACTUAL VALUE. Another way to reduce your
homeowner's insurance policy cost is to choose the controversial
depreciated value coverage for personal property losses.
If an insured theft,
fire or other insurance policy personal property loss occurs, the
insurer must then pay only the replacement cost of an equivalent
item. That means the insurer pays just today's depreciated value of
the personal property stolen or destroyed.
To illustrate, I have a
14-year-old Sony 42-inch TV, which cost $2,300. If I tried to sell
my perfectly-operating TV, it is probably worth $100 if I can find a
buyer. Should that TV be stolen or destroyed in a fire, my
homeowner's insurer would pay me only its $100 actual value.
However, if I carried the more expensive full replacement cost
personal property insurance, my insurer would have to pay me for an
equivalent new TV, perhaps $1,500.
CONCLUSION: Filing and
collecting a homeowner's insurance claim is not easy, as the recent
Hurricane Katrina shows. The homeowner's insurance situation has
radically changed in recent years. Before filing claims, homeowners
should consider if they risk non-renewal for filing too many recent
claims. To minimize the risk of non-renewal, homeowners should (1)
raise their deductible from $250 to $500, $1,000 or $2,000, which
will also reduce your premiums, and (2) avoid filing small claims
just barely above the deductible amount.
Additional methods to
lower homeowner insurance costs and avoid risk of policy
cancellation include (1) lowering the liability coverage and
obtaining an umbrella policy, (2) selecting depreciated personal
property replacement cost, and (3) consulting at least three local
homeowner's insurance agents to compare their policy coverage and
information on Bob Bruss publications, visit his
Real Estate Center.