Why You Shouldn't Rush to File That Homeowners Insurance Claim

NEW YORK (MainStreet) – If a tree falls near your house, but doesn't hit a building and upends only one segment of your walkway, should you file an insurance claim?

Do the math and give some serious thought to that answer.

According to a report from insuranceQuotes.com, filing a single homeowner’s insurance claim can raise a policyholder's premiums by hundreds of dollars each year. The average rate hike for the first claim nationwide is 9%, but it's far worse in Wyoming (up 32% on average), Connecticut (21%), Arizona (20%), New Mexico (19%) and California (18%).

“Insurance is the only product we buy that we hope we're never going to have to use,” says Laura Adams, insuranceQuotes.com’s senior analyst. "That 30% rate increase is for one claim. If you have a second claim, get really unlucky and have a problem in the next 12 months, that's just going to skyrocket.”

And not by a little. According to the report, the average nationwide premium increase for a second claim is 20%, with Michigan's insurers socking policyholders with a whopping 71% uptick if they file more than one claim within a brief span.

“The home insurer looks at your past performance chart, and they're trying to price the policy according to the risk they're assuming on your behalf,” says Michael Barry, spokesman for the nonprofit Insurance Information Institute. “If you file two policies in a short amount of time, I think insurers are going to take note.”

So what should a homeowner do when considering a claim? Barry and Adams suggest weighing the cost of the claim against the deductible.

”Homeowners insurance policies are intended to cover the losses that you, as the homeowner, cannot cover out of pocket,” Barry says. “It's always a judgment call, and it's based in large part on the amount of your deductible. For example, if I have a $1,000 deductible and my loss is $1,500, it probably doesn't make much economic sense to file a claim.”

With that in mind, Adams and Barry recommend that policyholders increase their deductibles to $1,000 from $500, if they can. Barry notes that it will typically result in a double-digit percentage point drop in premiums, depending on the state, while Adams adds that it will help prevent consumers from filing smaller claims and increasing their premiums. While policyholders should never file claims for damage less then their deductible, as they'll be paying out-of-pocket anyway, Adams says that they should think carefully about claims that are double their deductible or less.

“Above that amount, you're probably going to want to file the claim,” she says. “If you have that much damage to your home, financially speaking, you're probably going to come out ahead making the claim.”

Basically, any steps that reduce the frequency of homeowners insurance claims are beneficial. The Insurance Information Institute notes that a typical homeowner files a claim every eight to 10 years. But Barry and Adams caution that insurance companies use the Comprehensive Loss Underwriting Exchange database to track claims, which can attach themselves to a policyholder's insurance history for five to seven years. A CLUE report, the insurance industry equivalent of a credit report, shares your claim history with all insurers and can result in years of inescapable premium hikes for just one claim.

”If I make a claim and it ends up increasing my premium by 30%, what does that mean for me in extra payments?” Adams says. “Those extra payments are going to last for multiple years because the CLUE report keeps that data for five years.”

According to the National Association of Insurance Commissioners, homeowner’s insurance costs an average of $978 per year (or $81.50 a month) nationwide. A single liability claim adds an average of $137 to that bill, which amounts to $685 over the five-year life of a CLUE report. That's roughly eight and a half extra payments, or more than two-thirds of a year's worth of payments above the original premium. A policyholder could call his or her insurance company and see how a claim for a certain amount of damage would influence premiums, but even calls to an insurer regarding damage can find their way onto a CLUE report and raise rates.

“If you're coming from this from the consumer's perspective, I would say that every interaction with the home insurer is closely tracked,” Barry says. “They're keeping track of who's calling, when they're calling and what they're calling about.”

If those calls are frequent enough or if there's damage directly implied, that could be enough to raise premiums. Adams advises that consumers who want to ask their insurers about potential claims do so as vaguely as possible (“if I had this amount of damage to my home, how would it raise my premium?”).

Also, since consumers can request a copy of their CLUE report, they can also add a note to any disputed entry, especially those involving calls to the insurer that didn't result in a claim. Finally, Adams and Barry suggest shopping around. Just because your current insurer has raised your premium after a claim doesn't mean every insurer will treat that claim with similar severity.

— Written by Jason Notte in Portland, Ore., for MainStreet

To follow the writer on Twitter, go to http://twitter.com/notteham.

This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.

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