Lessons from Hurricane Katrina

October 14, 2005
By Robert J. Bruss

As the homeowner victims of Hurricane Katrina are discovering, most homeowner insurance companies are not swift to fully pay even valid claims.

Although the insurance commissioners of Louisiana, Mississippi and Alabama have warned insurance companies about possible consequences for failure to promptly pay valid claims, already I've received two reader e-mails about major insurers who claim home damage was not insured by their policies.

Frankly, based on Florida homeowner insurance experiences with hurricanes and windstorms, it will take years to settle many of these claims. Insurers know most homeowners need damage payments promptly. But insurers are prepared to delay unless the insured is willing to accept a small amount as "payment in full."

FLOOD DAMAGE IS NOT COVERED BY HOMEOWNER'S INSURANCE POLICIES: As Hurricane Katrina homeowners are fast discovering, their homeowner's insurance policy does not cover damage caused by flooding.

To illustrate, suppose a home has its roof severely damaged by high winds. That is usually covered by most homeowner insurance policies. Or if a tree falls on a house due to high winds, that's usually covered.

But damage caused by flood waters is not insured (unless the homeowner has a federal flood insurance policy). To avoid payment, the homeowner's insurance carrier often claims the damage was due to flooding and it isn't covered.

The result is the homeowner must prove the damage was due to a "covered peril." Of course, big nasty insurance companies argue the loss was due to an uninsured cause, such as flood waters. Those folks in Mississippi and Alabama whose homes were wiped away can't really prove if their loss was due to wind (insured) or water (uninsured).

Neither can the insurers prove conclusively the damage wasn't caused by high winds. But these insurers control the cash. When an insurer refuses to pay, the homeowner's only effective alternative is to hire an attorney to file a lawsuit.

DON'T FILE SMALL CLAIMS WITH YOUR INSURER: Just in case you haven't been paying attention, in the last three or four years many major insurance companies have been closely reviewing their loss ratios of claims paid to policy premiums collected from specific policy holders.

To illustrate, if you pay $500 per year for your homeowner's insurance policy, but you have a low policy deductible and the insurer has paid several minor claims of a few hundred dollars each year, you are ripe for policy cancellation. Although the insurer is still earning profits on your policy, you are a candidate for "non-renewal" because the insurer is not earning much profit from you.

Rather than risk non-renewal of your policy, you can take several precautions: (1) don't file claims for small amounts just slightly above your deductible amount; (2) raise your deductible from $250 to $500, $1,000 or $2,000 per claim if you can afford to pay that amount (this will also reduce your annual insurance premium), and (3) check your coverage to be certain you will be insured for "a big one" major loss.

CUT YOUR LIABILITY; INCREASE YOUR UMBRELLA: Several years ago, my savvy State Farm insurance agent (with whom I have been insured over 30 years) wisely advised me to cut my liability insurance limit on my properties and increase my "umbrella policy" coverage. He suggested $300,000 liability coverage on each property, plus a $2 million "umbrella policy."

That sage advice came in handy a few years ago when an ex-tenant brought a frivolous lawsuit against me. The lawsuit was dismissed before trial, but my legal costs were paid by my insurance policies. Although I am a real estate attorney, I'm sure glad I hired another superb real estate attorney who brought up defenses I never would have anticipated. Didn't Shakespeare say "Only a fool has himself for a lawyer?"

HOW TO SAVE ON HOMEOWNER'S INSURANCE: In addition to not filing insignificant claims for small amounts exceeding your homeowner's insurance policy deductible, and raising that deductible as high as you can comfortably afford, here are additional ways to save on homeowner's insurance costs without sacrificing coverage or risking cancellation in the event of an insured loss:

1. REDUCE YOUR LIABILITY INSURANCE COVERAGE. If a visitor trips on your sidewalk and is injured, you might be liable for maintaining a defective sidewalk. When an injury is minor, and just slightly above your homeowner's insurance policy deductible amount, you might decide to pay the visitor's loss without notifying the insurer. However, be sure to obtain a signed written release for any payment.

If the injury is severe, well above your homeowner's insurance policy deductible, be sure to promptly submit the possible claim to your insurer. Even if you were negligent, the insurer must pay the amount for which you are liable, up to the policy limit.

When the damages exceed your homeowner's policy liability limit, that's when you need an "umbrella policy" for $1 million or more. The cost is very low (don't tell the insurance companies or they will raise the premiums). For an umbrella policy of several million, I only pay about $700. Please don't tell the insurer. Maybe they made a mistake on my bill.

2. SELECT DEPRECIATED PERSONAL PROPERTY ACTUAL VALUE. Another way to reduce your homeowner's insurance policy cost is to choose the controversial depreciated value coverage for personal property losses.

If an insured theft, fire or other insurance policy personal property loss occurs, the insurer must then pay only the replacement cost of an equivalent item. That means the insurer pays just today's depreciated value of the personal property stolen or destroyed.

To illustrate, I have a 14-year-old Sony 42-inch TV, which cost $2,300. If I tried to sell my perfectly-operating TV, it is probably worth $100 if I can find a buyer. Should that TV be stolen or destroyed in a fire, my homeowner's insurer would pay me only its $100 actual value. However, if I carried the more expensive full replacement cost personal property insurance, my insurer would have to pay me for an equivalent new TV, perhaps $1,500.

CONCLUSION: Filing and collecting a homeowner's insurance claim is not easy, as the recent Hurricane Katrina shows. The homeowner's insurance situation has radically changed in recent years. Before filing claims, homeowners should consider if they risk non-renewal for filing too many recent claims. To minimize the risk of non-renewal, homeowners should (1) raise their deductible from $250 to $500, $1,000 or $2,000, which will also reduce your premiums, and (2) avoid filing small claims just barely above the deductible amount.

Additional methods to lower homeowner insurance costs and avoid risk of policy cancellation include (1) lowering the liability coverage and obtaining an umbrella policy, (2) selecting depreciated personal property replacement cost, and (3) consulting at least three local homeowner's insurance agents to compare their policy coverage and costs.

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