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We pay Insurers to assume risk, so why is filing a claim risky?

Thu Oct 24th, 2013 on     Homeowners Insurance,    

A recent article about insurance claims reminded us of the movie “Roxanne.” Steve Martin plays the fire chief whose crew is in dire need of some training. One mishap after another leads to the scene in which an exasperated Martin exclaims, “You can’t have people with their houses burning down saying, ‘Whatever you do, don’t call the fire department!'”

In many states, the same can be said about homeowners insurance: If your house is burning down, whatever you do, don’t file an insurance claim! The reason is simple: One claim can result in a premium increase. But here’s the surprise: Florida’s insurance companies will hike premiums, on average, less than insurers in the vast majority of states.

According to a study from InsuranceQuotes.com, Florida homeowners can expect an increase of about 2 percent for a homeowners claim. Nationwide, a property insurance claim will result in an average 9 percent increase. The highest increase, logged by two states, was 21 percent. It seems that Florida’s experience with bad weather works in our favor here.

Our experience with natural disasters means that our premiums are, on average, higher than other states’. As some consumer advocates would say, insurers are already charging more than they should, so they have no reason to raise rates after a single claim.

State insurance laws also play a role in the premium increase. Not every state caps insurance rate hikes, and some states actually bar insurers from raising an insured’s premium based on one claim.

Homeowners, then, have a decision to make with every unfortunate event, whether it’s a baseball through the window or a leaky pipe: They must decide if the risk of a premium increase is worth the insurance payout. Unfortunately, there is no magic number, though an expert at the Insurance Information Institute suggests that it may not pay to file a claim worth $1,000 to $2,000 above the deductible amount.

What experts do suggest is that homeowners purchase policies with the highest deductible they can stomach. They should think about how much they could afford to pay out-of-pocket and use that as a threshold.

Of course, insurance is one of the most important purchases a homeowner will make during the year. How much coverage and how high a deductible are things each homeowner should determine based on his or her unique circumstances.

Source: CNBC, “Think carefully before filing a homeowners claim,” Herb Weisbaum, Oct. 22, 2013

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