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Where Claims Can Be Costly

Before you file a claim on your homeowner's insurance policy, stop! There are a few things you absolutely need to know before you even call your broker. The Saturday Early Show financial adviser Ray Martin explains.
A new reality in the business of homeowner's insurance has been brought about by a rise in claims and the increasing costs associated with losses. Insurers are changing the way they do business. How? They're either charging higher premiums for those with active claims history, or they're dropping people who present higher claims risk altogether.
Insurance companies are becoming increasingly selective about the properties they will insure.

Other practices include using tougher underwriting standards, canceling coverage for habitual claims filers, and terminating binder coverage based on the past claims history of a particular property.

This new reality is not going to change; that's a fact that homeowners need to accept. Insurance companies have charged more for life insurance coverage for smokers and set higher premiums for auto insurance for drivers with more accidents and traffic tickets. Now, insurance companies are charging more to insure properties that have a more active claims history.

Homeowners need to think twice about making a claim for a loss on their homeowner's insurance, just as they do for claims on their auto insurance.

Here's what you need to know to deal with this situation:

  • Don't file small claims.This advice may seem to go against the very purpose of insurance. After all, why pay for the coverage if you are not going to use it? But when it comes to claims on homeowner's insurance, some companies seem to take the position of "Use It And Lose It," where they refuse to renew the policies of those customers who file claims.

    Their reasoning: If you have a loss, you are 25 percent more likely to have a loss in the next 12 months. This likelihood increases to 75 percent if there are two losses in one year.

    Think twice before filing small claims for things like lost luggage or other personal property items, because you may need to claim a more substantial loss later. Even claims filed but not paid because the policy deductible was greater are still recorded on the property insurance records as a claim. Several claims over a short period may trigger your insurance company to view you as a "habitual claims filer" and they may decline coverage in the future.

  • Inquire carefully. Merely calling an insurance company to inquire about how a claim for a loss would be covered can become a trap for homeowners. At some insurance companies in certain states, calling your insurance company to report a loss and inquire about a potential claim can be added to the loss report for the property.

    Joseph Annotti of the National Association of Independent Insurers sums up this way of reasoning: "The loss may never turn into a claim, but nonetheless the loss occurred."

    Before calling your insurance company, first read your homeowner's policy carefully to better understand what is covered and what is not. If you do call your agent, be careful to speak in hypothetical terms when discussing claims situations with your insurer.

    Several weeks later, review your CLUE report to check if any comments were added to the report for your property. If there is any issue, ask to have these comments removed or properly described.

  • Get a CLUE report. The Comprehensive Loss Underwriting Exchange (CLUE) is a database monitored by ChoicePoint Inc. It includes more than 40 million insurance claims that have been filed over the past five years. CLUE provides the most widely used records of past claims and loss reports for insured property and is used by 90 percent of the homeowner's insurance market.