Dangers of Water-Damage Claims

I put in a claim about three years ago for a $1,200 leak caused by wind with my homeowners insurance. Now, I had a pipe burst in my wall. It caused damage to the ceiling below, and there is water under my bathroom tile floor. I may have to remove the tiles. I had to rent fans and a dehumidifier, which was expensive. I was thinking of just paying for it all, but what is homeowners insurance for? The result of damage is adding up quickly. If I put in a claim, I have heard that you get dropped or your rates rise. What do you suggest? If you have a legitimate claim, should you eat the cost or put it in?

It depends on the size of the claim and your deductible. Submitting a claim that only pays a few hundred dollars after your deductible could end up costing you a lot more in the long run -- especially because this is your second water-damage claim. And insurance companies are particularly worried about small water-damage claims that could end up growing into very expensive mold problems. They pay out the legitimate claims but are much more likely to drop the customers when their policies are up for renewal.

In a study by the California Insurance Department, 25% of the companies refused to renew the policies of customers who made one or two nonwater-damage claims in the past three years. And 32% refused to renew policies for people who made one or two water-loss claims in the past three years.

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You're right that this seems strange to avoid submitting legitimate claims when you actually have insurance. But these are the new rules of homeowners insurance. A few years ago, many homeowners insurance companies made an effort to become more profitable and decided they didn't want to deal with people who submitted small claims. The administrative costs were big even if the payouts were small, and they also worried that small claims could lead to much larger ones -- like very expensive mold claims that could arise from water damage. That's why you need to be particularly careful in your situation.

And getting dropped by your insurance company isn't the only problem. Insurers share claims information with each other through a database called the Comprehensive Loss Underwriting Exchange (CLUE), and other insurers may not want to insure you after you've had a few small claims either, even if they were with another insurance company. In the California Insurance Department study, 62% of the top 13 companies refused applicants with only one or two claims in the past three years.

If you do find an insurer to cover you, you may end up paying a lot more for the coverage than you had in the past. We've talked with way too many people who submitted claims that paid out just $200 or $300 after their deductible then were dropped by their insurer and ended up having to pay double the premiums with a new insurance company -- costing them way more than $200 or $300 extra in premiums over the next year or two.

Because these are the new rules of the game, it's best to adjust your game plan, too. If you aren't going to submit small claims, then you shouldn't have to pay for insurance you aren't going to use. The best move is to increase your deductible to $1,000 or $2,500, which can reduce your premiums by as much as 30%. Then you'll avoid the temptation to submit small claims but still have the coverage for the big claims, which is what homeowners insurance really is for. And you'll be more likely to qualify for a claims-free discount, which could reduce your premiums by 25% to 35% after seven to ten years without a claim.

The best step for you to take now is to add up how much money you think you'd get from the insurer, subtract your deductible, and then decide whether it's still worthwhile to submit the claim.