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Don't Overuse Insurance

Andrew Allentuck
Financial Post
April 2, 2011

If a tree falls on your house, that's a reasonable claim. But there are other kinds of claims that can end up costing you more premiums or even your policy

Homeowner insurance is a piñata of good things for bad times. The trouble is that once you tap this gift horse, you may not get another crack at it. Insurance companies are not running giveaways, after all. They market protection but are ready to take it away or to make it a lot more expensive if their clients show a tendency to make claims.

But homeowners need the coverage. Thus the irony of the product: It's vital to the homeowner's financial health, but use it too often and the insurer is likely to cut your coverage or to terminate the policy. They can raise rates a little or a lot, even 50% or more. They don't want serial claims makers, after all.

Homeowners may be tempted to claim for the risks for which they are paying -the more bells and whistles, the more temptation. Even the most basic homeowner plans, such as what the insurance industry calls the Standard Plan, cover the structure of a house for mayhem from fires to lightning strikes, hits by speeding cars and falling aircraft. Go to the next level, the Broad Form policy, and the contents of a house are insured for all of that and numerous named perils to contents, such as theft. And the Comprehensive Policy, the insurance industry's widest net of hazards, covers the structure of the house and everything

that is not specifically excluded. Floods and acts of war are excluded. No policies cover slowly progressive damage such as termites and other vermin eating up your joists, nor do they cover the cost of maintenance such as replacing corroding water pipes.

Many modern perils are not covered. If your local nuclear power plant has a meltdown and makes your home too dangerous to live in, your policy won't cover it. A tsunami is also not covered by conventional policies that exclude both nuclear radiation and flood damage. In effect, a peril that can affect every home in an area is not likely to be covered. A risk that hits one home at a time, such as falling aircraft or a lightning strike, can be covered.

The irony of going up the scale of hazards covered is that, though you pay about 10% to 15% more for every boost in coverage from the Standard Plan to the Comprehensive Plan, making use of such coverage can lead to higher premiums or outright cancellation.

Beware of insuring for benefits that you may not really need. If you claim for "mysterious disappearance," such as forgetting a watch somewhere while washing your hands, insurers may jack up your rates or lower benefits. If they think you are the sort of person who is prone to make claims, they can raise your cost for every benefit you want.

"If you do make small claims, such as the loss of a $700 bicycle when you have a $500 deductible, the insurer is likely to raise your premium and eliminate your claims-free discount," says Cathie Pottie, a licensed insurance broker in Winnipeg. "The purpose of home insurance is to pay for losses that will seriously strain your budget."

The general rule is that a single claim won't flag you as a bad risk, but the second claim will set off alarms, she explains.

If you have a total loss, then the wider the coverage, the greater the chance that most or all of your costs will be covered. But using a policy for small losses is not only an abuse of the idea that insurance is for major losses, it is an invitation for the insurer to raise premium costs or to reduce available benefits.

"One way or another, the insurer is going to get its costs reimbursed by frequent claimers," says Andy Husband, a licensed insurance agent in Edmonton. "Make two or three claims within a few years, and the insurance company is likely to jack up your rates."

That is the bottom line of insurance shopping. If you have a mortgage, chances are the lender has required you to have at least basic fire and windstorm coverage on the structure. But the homeowner with no mortgage who has not bought coverage is at risk. For that owner, a large loss could be catastrophic.

Thus the balance between insuring for small stuff, like damage to your drapes caused by water spilling from clogged downspouts -likely covered by a comprehensive policy -that you could pay out of pocket, and the incineration of your whole house and everything in it, which you could not cover.

Homeowners concerned that they may set themselves up for policy cancellation can raise their own deductibles. One can save about 10% to 13% of the cost of a policy with a $500 deductible by opting for a $1,000 deductible. That reduces the temptation to make minor claims. And if you do have a claim to make that you can afford to cover out of pocket, it can be a good idea to discuss it with your insurance agent, Ms. Pottie adds.

It is important to read home insurance policies carefully, for there is no uniform policy that every company uses. Yet the differences between types of coverage and each company's special features are vital.

"Unlike auto insurance, which is compulsory in every province, homeowner policies are optional except for covering the financial interests of lenders," explains Pete Karageorgos, manager of consumer and industry relations for the Insurance Bureau of Canada for Ontario. "The wording of policies varies from one company to another, so it pays to shop the market."


If a homeowner makes too many claims in a period of two to three years, he or she can face additional costs in the form of higher premiums or reduced coverage. Before submitting minor claims, it pays to weigh the consequences.

"Our company, like others, offers a claims-free discount to people who have made no claims within a three-year period,"says Michael Tarr, regional claims manager for Portage Mutual Insurance Co. in Portage la Prairie, Man. "If there is a claim, then the discount is lost for three years, when it can be reapplied to the policy. If we see a lot of claims, then our underwriting department could raise the deductible or they could cancel the policy."

That's the principle, but it is not uniform in the home insurance industry. "Each company would have its own way of looking at the risks involved," says Tom Hampton, chief operating officer of the Alberta Insurance Council, the provincial insurance licensing authority for agents and brokers. "Often a company will go back to the insured and say, we want to raise the deductible to avoid multiple small claims. They might even want to downgrade the coverage in order to reduce the losses to which they are exposed. Outright cancellation is possible, but it is rare."

Many problems of excess claims are handled by negotiation, says Lyn Wagner, branch manger of Interior Savings Insurance Inc. in Kelowna, B.C. "The broker who sells the homeowner policy on behalf of the insurer should be able to mend fences. We can tell our client that putting through a lot of claims will either raise premiums or lead the insurer to put in a higher deductible. There are even rare cases in which the company does not offer to renew based on frequency of claims."

Where there are too many claims, the insured can also try to make restitution to the insurance company. "It is possible to pay an insurance company back for a loss that they covered," Ms. Wagner explains. "If that happens, the company would be likely to erase claims and could even restore the claims-free discount."


Posted on Wednesday, April 6, 2011 at 04:00PM by Registered CommenterElaine | CommentsPost a Comment | References1 Reference

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