You probably understand how a car insurance deductible works -- you pay that amount out of pocket before the insurance kicks in to repair your wrecked car. If the repair costs less than your deductible, then you're on the hook for the whole tab and there's no use in filing an insurance claim for the damage. But a shadowy force is at work when you decide whether to file when the cost exceeds the deductible. Dubbed the "pseudodeductible" by insurance researchers, it's the amount you're willing to pay out of pocket above the deductible before you file a claim. Lurking behind the pseudodeductible could be laziness -- maybe you figure it's just too much trouble to deal with the insurance company -- but usually it's fear. You worry filing the claim will spark a premium increase or, worse, a non-renewal notice -- a sort of "Dear John" letter from the insurer the next time your policy comes up for renewal. "You're swapping the uncertain for the certain," says Dana Kerr, an associate professor of risk management and insurance at the University of Southern Maine. The uncertain amount is how much your premium might increase, and the certain amount is what you'd have to pay out of pocket if you didn't file an insurance claim. Consumers have probably weighed the risks of filing claims since insurance was invented. "This is an issue that's been floating around anecdotally in the industry, but because of a lack of data, it's been difficult to research empirically," Kerr says.
Examining pseudodeductiblesResearchers at Southern Methodist University and the University of Pennsylvania coined the term pseudodeductible in a 2006 study. They relied on closed State Farm claims and used sophisticated statistical models to infer when consumers might not file claims that exceed the actual deductible. Their study suggests that homeowners with frequent losses might be choosier in filing claims than homeowners with fewer losses.
Kerr is the first to research the phenomenon for car insurance using actual data of people who said they didn't file claims when they had insured losses.In his 2012 study, "Exploring the Role of Pseudodeductibles in Auto Insurance Claims Reporting," Kerr used survey data from the Insurance Research Council of people who were injured in accidents. They included those who filed injury claims with their own insurance companies and those who decided not to file claims with their insurers. Coverage for injuries, such as personal injury protection, medical payments or uninsured motorist coverage, generally don't require deductibles. But the pseudodeductible phenomenon can still keep people from filing claims, says Kerr. According to Kerr's findings:
- As the claim gets larger, the pseudodeductible generally has less affect. In other words, you're more likely to file a claim for $800 than for $200.
- The pseudodeductible has the most impact on people who haven't had any accidents and those who have had two or more accidents. It has the least impact on people who have had one previous accident. Those who haven't yet made a claim may be more scared to file one because they want to preserve their perfect record with the insurer, Kerr says. Customers who have already made two or more claims may think they're on the brink of a premium increase if they file yet another claim.
- Women and adults under age 55 are more influenced by pseudodeductibles - and the fear of filing -- than men and people 55 and older. "They seem to be more dialed into that risk of what the premium increase might be," Kerr says.
Calculating your comfort with claims and deductiblesSo what's your pseudodeductible? The number is important to know if you have collision and comprehensive car insurance. Both types of coverage pay to repair or replace your damaged car and both have actual deductibles. "If your stated deductible is $500, but you would eat the cost up to $1,000, you should move the deductible up and save yourself some premium dollars," Kerr says. "Try to make your stated deductible and your own pseudodeductible consistent."
To file or not to fileIf you have an accident with another driver, you should notify your insurance company as soon as possible.
But what if you back into a cement pole or a hoodlum bashes in your windshield? How do you balance the benefit of the insurer paying for repairs against the chance your premium will increase?In some states, insurers can't add a surcharge if you file a comprehensive insurance claim, says Insure.com consumer analyst Penny Gusner. Comprehensive insurance covers theft as well as damage from natural disasters, vandalism and collisions with animals. But they may add a surcharge for collision claims. Check your policy's surcharge schedule, which details how much your rates will go up and for how long according to claims you file or traffic citations you receive. You won't automatically get the surcharge schedule when you sign up for coverage -- you'll have to ask the insurance company for a copy, Gusner says. Most state insurance departments say insurance companies are obligated to honor your request. The surcharge schedule can remove the uncertainty about whether filing a claim will hurt you in the long run. Ultimately, says Gusner, whether to eat the cost for your car repair or pay out of pocket is up to you. "It's going to be a personal decision based on your own finances," she says.