Homeowners who file frequent insurance claims, have bad credit or even call their insurer to dutifully report a broken window may be in for a rude awakening when the time comes to renew their policies. That’s because all of these actions can be noted in homeowners’ history files, causing insurers to view them as greater risks for filing future claims. These homeowners could face higher premiums or outright cancellation of coverage.
To avoid unpleasant surprises, policyholders need to understand why they have homeowners insurance and what happens in the event of a claim. “The reason for insurance is to pay for major losses or claims that are too large for a homeowner to bear under ordinary circumstances,” says Marjorie Young, a vice president with E.G. Bowman, a New York-based insurance broker.
“The conventional wisdom (among consumers) is that if you file one really big claim, you’re thought of as being a ‘bad’ customer for the insurance company,” says Michael Braun, assistant professor of marketing at the Massachusetts Institute of Technology’s Sloan School of Management. “However, we’ve found that people who file larger claims are not necessarily bad customers.”
Instead, small claims — the ones that are not particularly catastrophic — are disproportionately expensive for an insurer to process. This is because smaller claims bear the same administrative costs as large ones. “Companies have to staff a call center to answer the phone when people call, they have to have adjusters ready and they have to have people reviewing all of the claims to make sure they are legitimate,” says Braun.
Smaller claims are also more expensive if they happen frequently. “If a claim was made because lightning struck a house, the likelihood of (lightning striking twice) would be small. It would probably not deter a competing insurance company from offering a competitive quote on that house,” says Young. “But if that house had a series of burglaries, it could deter an insurance company.” Premiums would likely increase substantially unless the homeowner could prove that significant protective devices were installed to reduce the chance of loss, she adds.
If you have filed a claim on a home within the past five years, you likely have a Comprehensive Loss Underwriting Exchange, or CLUE, file, though you’ve probably never seen it. Similar to a credit report, a CLUE lists a homeowner’s history of losses and helps insurance companies determine that person’s risk for future insurance claims. “As part of the application process, clients will always be asked about their prior claims history,” says Bob Otis, vice president of National Programs Property Lines at Travelers Insurance in Hartford, Conn. “But there are third-party data sources (CLUE is the market leader) that almost every insurance company will use to find out someone’s prior claims history” — whether the client reveals it or not.
In some states, CLUE reports could include information about inquiries homeowners make about their policies, even if they never file a claim. So if you called your insurer to ask what you should do about a broken window, the call could go on your record as a report of damage to your property. That, in turn, could be the basis for denying insurance in the future.
Consumers can learn what’s included in their claim history by getting a CLUE — that is, asking for a free copy of their personal report. CLUE files are administered by ChoicePoint, a data collection company near Atlanta. ChoicePoint’s consumer Web site, www.choicetrust.com, offers options for ordering reports online. Under the Federal Credit Reporting Act (the same law that allows people to view their credit reports), a CLUE report can be obtained for free once every 12 months. CLUE files can also be obtained at any time if a prospective insurance company denies coverage or makes any other adverse decision based on information in the report.
In addition to pulling CLUE reports, insurance companies gather personal data from other sources to determine a homeowner’s risk for reporting future claims. This risk profile is often expressed as an insurance score.
“There are so many things that could go into your insurance score: your past claims history, your credit scores and your driving record, to name a few,” says Mark Rackley, an agency owner with Allstate Insurance Co., in Davidson, N.C. The score is an actuarial math model that places everybody in different risk tiers, he explains. So tier one could include the top 10 percent of people in the population who will likely never file a claim. Tier 10, on the other hand, would include the group with the worst claims history.
Rackley says that each company uses a different model for computing an insurance score, and it is nearly impossible to determine what that score would be before a customer applies for insurance. However, each homeowner can expect to be placed somewhere on the risk spectrum. “Every company uses an insurance score. And your score is going to dictate the rate you pay,” he says.
Since companies weigh different aspects of a risk profile differently, it is beneficial for homeowners to shop around for a policy that is the best match for their circumstances. For example, a consumer with a long claims history but excellent credit may find a lower rate with an insurer that puts more emphasis on a high credit score. On the other hand, a consumer who does not have stellar credit, but has no background of claims or inquiries, may find better premiums with a provider who puts more weight on a clean claims history.
Even if your credit is great and you have no history of claims, you could still encounter higher rates based on a home’s past. Any damage reported on that property, even if it occurred before you lived there, will adversely affect your insurance.
If you are considering purchasing a home, ask the seller for a CLUE report. Prospective homeowners can’t pull CLUE reports for properties they don’t yet own, but they can ask the current owner to provide one. Even if the house appears to be perfectly fine, a past inquiry from a previous owner about minor water damage could cause your insurer to deny coverage on that home — and derail a scheduled real estate closing. It may be a good idea for a prospective buyer to insert a clause in the purchase contract demanding the right to review a CLUE report prior to closing.
If you are facing a catastrophic claim, and if you’re concerned that the settlement won’t be high enough to repair, it may be useful to hire a public adjuster before contacting your insurance company. Public adjusters assist homeowners in the documentation process following an instance of property damage, and they present the claim to the insurance company on behalf of the policyholder. Since they are hired by the homeowner, rather than the insurance company, they work for the homeowner’s interests.
“We come out immediately (after a loss), view the damages, and most importantly, we review the insurance policy to verify coverage,” says Keith Hayman, regional public insurance adjuster for Adjusters International in New York, N.Y. “We are licensed as experts in (homeowners insurance) policies,” he says. Public adjusters can help homeowners understand whether or not their policy offers replacement coverage for a home that is completely destroyed, and they will discuss the likelihood of property damage that is not immediately visible.
Before hiring an adjuster, make sure the person is properly licensed in your state, and there are no complaints or disciplinary actions on file against that person. Your state insurance department has this information. Also, ask the prospective adjuster for references, and check them. Understand how much the adjuster charges. Beware of anyone who requires a large upfront fee. “We generally charge a 10 percent contingency on the settlement of the claim,” says Hayman. To find a local adjuster, ask friends for recommendations, or look in the member directory of the National Association of Public Insurance Adjusters.
Fear of a policy cancellation should not deter a policyholder from filing a claim when necessary. Big or small, losses happen. Even insurance agents and their families are not immune. “It happened to my wife. She lost a diamond once,” says Rackley. If your claims are not frequent, you can still be regarded as a good customer.
“Decent insurance companies do not cancel their clients because they file a claim,” says Young. “Insurers don’t want to penalize people for claiming the big stuff as long as the claim is legitimate and it doesn’t happen too often,” says Braun.
Homeowners insurance policies are designed to provide owners with a level of security and protection against major property damage. If homeowners are knowledgeable about their past history, their present coverage and the process for filing a future claim, then they are in a good position to avoid expensive policy surprises.