Why Shouldn't I Use My Insurance?

Any insurance agent worth a lick generally gets involved with their client's claims in some capacity. (Any agent that slides you a phone number to call your own claim in is otherwise useless in my opinion.) Often times a claim will be called in and the correct advice for the client is to actually NOT file the claim (even if it appears to be a covered claim).  Inevitably the knee jerk client response is:

Now, it is always up to the client if they want to file a claim or not.  An agent can't stop them from doing so. However what a good agent CAN do is provide the proper insight and information so that an educated decision can be made by the client. Nobody goes to college to study insurance voluntarily do they? Maybe they do, but nonetheless, I have yet to find a college that provides their graduating class with a practical understanding of general insurance knowledge or it's purpose. That said, its up to people like me, as the insurance agent/broker, to educate the client on it's purpose and when to and also when NOT to use it. 

Average Claims Frequency

The national average for homeowners insurance claims is once every ten years. That is the NATIONAL average. Locally in the Northeast it's more like one claim every seven years when you account for the string of catastrophe storms that occurred in and around Hurricane Irene and Superstorm Sandy.  Most homeowners go their entire lives without filing a single home claim. Others can't go more than a year or two without filing. So it isn't surprising then that most insurance companies view one claim in three years and two claims in five years as being the maximum acceptable frequency of claims. Every claim has some impact on your next renewal. Either your rates are impacted or your insurability is impaired. Its the latter in conjunction with future rate impact that needs be considered before filing a claim today. Exceeding that claim frequency most likely will get you cancelled by your current carrier at your next renewal. If that happens you are left with one option: Seeking insurance in the Non-Standard insurance market where the rates are twice the cost (or more) and coverage is half as good. That said, you MUST stop and think about the future potential impact of your claim relative to your deductible and payout. It is never worth filing any insurance claim if after your deductible you won't get more than $1000.  

The First Rule.

Whether we are talking home insurance or auto insurance collision claims, it is NEVER worth it to file a claim against your insurance if the most you will get is under one thousand dollars. I could argue on a case by case basis that this number should be ever higher in some cases. There are too many insurance agents that allow their clients to get themselves into poor insurability situations because they FAIL to provide the proper information to make an educated decision. I never fault the client. How would they know unless their agent taught them? This first claim is not really the problem. It is that second one that is likely right around the corner that will sink the ship. Clients need to know NOW that they must be careful not to waste a claim on something that is small because that second claim might be too big to avoid filing. 

Insurance was always meant to be used for catastrophic purposes. It is NOT a maintenance contract and shouldn't be treated as such. Self insure the small stuff. Consider what your budget can handle and then adjust your home deductible accordingly. Why not save the money too? 

The Optimal Deductible.  

In any homeowners insurance rate structure there is ultimately a optimal point where cost savings and appropriate deductible meet. The most common home deductible is $1000. however, if your home is insured for over $1m, then chances are you are paying too much for your home insurance with a $1k deductible.  What I recommend is looking at the savings over a 3 year period. (Considering that the average in the northeast is 1 claim every 7 years this is a safe bet). So if the cost savings on your insurance over three years is greater than the difference between the current and the higher deductible, take the higher deductible option.

Its worth noting, all of this math goes out the window if your budget cannot withstand the impact of the higher deductible. Remember, in the scenario above, you will have a $2500 deductible. When you apply the first rule to never file a claim against your insurance if the most you get AFTER your deductible is $1000, THEN you are essentially self insuring any loss below $3,500. If that type of risk worries you, then either save and set aside the emergency fund to cover it or stick with a lower deductible.   

Claims Adrenaline. 

When claim calls come in the shock of the event always blows the cost of the damage out of proportion. So many calls come in assuming a $20k loss that then turns out to be $3k. Before you file, do your due diligence and find out what the cost to repair or replace might be.  Often times claims get initiated and cancelled after. Usually this is not a big deal...however that open and closed claim will show in the (CLUE) claims database that all insurance carriers use. Human underwriters will ask questions about it if your record shows other losses. It muddies your record. So its best to keep your record as clean as possible.  Make your claims decision an educated one. 

Conclusion.