You elect the protection options and limits you want. You pay your premium. Your insurance company pays your covered claims.
That’s the deal.
Then why all this talk about the “consequences” of claims? Why can claims increase my price or even get my policy canceled? That’s what insurance is for!
That’s absolutely true. It’s just not the whole story.
I don’t want to turn this report into an insurance manual, and you don’t want that, either! But this is a common question I get from clients, so I want to explain it to you here … very simply.
Insurance, and the price you pay for it, is based on risk – the risk of a loss occurring.
High risk of loss means higher prices are necessary to pay for those increased losses.
And low risk of loss means lower prices.
Now, what determines the level of risk? Lots of things. But claims experience is one of the most important.
Statistics show that people who have a claim are more likely to have another claim. So, when compared to someone with no past claims, someone with claims on their record represents a higher risk of loss to the insurance company.
And you already know what a higher risk of loss means. Yep…higher prices.
Therefore, when you have a claim you now represent higher risk of future loss to your insurance company. And sometimes that increase in risk will be met with an increase in price.
This allows the company to keep prices lower for people who represent lower risk.
The Size of Your Loss
If it’s not obvious, this discussion about whether or not to submit your claim really only comes into play with small losses … losses that come close to your deductible.
Clearly, if you have a $15,000 car wreck…or $50,000 of damage to your home…or $35,000 of inventory stolen from your store, it’s highly unlikely that you would even consider not submitting that claim. That IS what you buy insurance for!
On the other hand, small losses can sometimes hurt worse by submitting them. The consequences of submitting the claim may outweigh the money you receive from the company.
Sometimes it just makes sense to pay your loss yourself and avoid the consequences of submitting a claim.
Your deductible has a direct impact on whether you should submit your claim or not.
A quick review … Your deductible is the amount you pay out-of-pocket toward the amount of your loss. The insurance company then pays the balance.
For example, let’s say you suffer $3,000 of damage to your home under a covered claim. And let’s say your deductible is $1,000. In this case you pay $1,000, and your insurance company pays the remaining $2,000.
Clearly, if the amount of your loss is less than your deductible there’s no point to submitting your claim. You’re going to pay it all anyway, so why report it?
For example, if your deductible is $1,000 and your suffer $800 in damages, then your insurance company isn’t going to pay anything. The amount of damage is less than your deductible. You’re responsible for the first $1,000, so you’re responsible for the full $800 in this case.
But here’s where it gets a little tricky.
What if the loss is just a little bit more than your deductible amount? What if your deductible is $1,000 and the damage is, say, $1,200?
In this case, your damages are only $200 more than your deductible. Therefore, you’ll receive only $200 from the company. Is it worth getting $200 to suffer the consequences of submitting the claim?
It depends. It depends on what those consequences are!
Depending on the type of loss and your personal situation, this claim may cause an increase in your rates, possibly a significant increase. It may cause your policy to be non-renewed.
You may find – once you know the exact situation for your personal circumstances – that it’s less costly for you to pay the additional $200 out-of-pocket and keep the claim off your policy.
The point is … unless you know what the impact will truly be you can’t make a good decision. So, if you’re not sure, get the facts.
Did Someone Get Hurt?
Many incidents involve only property damage. For example, maybe the wind blows some shingles off your roof. Or perhaps you back into a pole in a parking lot.
The point is nobody’s hurt. There are no injuries.
When your loss involves property damage only, it sometimes makes sense to take care of it yourself and avoid the consequences that come with submitting the claim. You pay for the damage and it’s over.
However, when someone’s injured it’s never a good idea to keep that to yourself. Why?
Because no matter how minor the injury may be, the injured party can come back and sue you many months or even years later.
If that happens and you didn’t report the claim when it occurred, your insurance company can legally refuse to defend you in the lawsuit and deny any payment, as well.
Your policy requires you to report your claims promptly so the company can control the claim. If you don’t, they can deny coverage.
In the case of a small property loss, nobody’s ever going to come back and sue you. But when someone’s injured you never know. Defending yourself in court is expensive – even if you win – so don’t take a risk when someone’s injured. Always report those claims.
Company Rules and Practices
Regardless of what TV commercials try to tell you, every insurance company is different. They all have their own rules, practices and rate plans. And they all treat claims differently, too.
Some companies have a price for just about everybody. That means that no matter how bad your claims record gets they’ll keep you insured. Of course, your price will go up and up to match your claims experience!
On the other hand, some companies don’t have a price for everyone. When your claims record gets too bad, they’ll non-renew your policy (within the circumstances allowed by law). When that happens you’ll be forced to get insurance elsewhere, and it’s likely you’ll pay a significantly higher price with a new company.
State insurance laws protect you, the consumer. Among other topics, those laws define the circumstances under which a policy can be canceled or non-renewed. Depending on the type of insurance, these laws can provide you a lot of protection or very little.
For example, personal auto insurance is generally well protected under the law. An insurance company can’t cancel or non-renew a policy simply because they don’t want to insure you any longer. The law states the conditions under which cancellation is allowed.
However, other lines of insurance – like business insurance, for example – have fewer such defined cancellation criteria. In many cases, the insurance company can non-renew your policy just because they don’t want to keep your risk on their books.
I can’t emphasize this enough … there are no clear-cut guidelines for making this decision. State laws, company rules and practices, the size of your loss, your deductible and your personal claims history and experience all mix together to create your unique circumstances.
If you’re wondering whether or not it makes any sense to submit your claim, give me and my team a call FIRST. Get the facts for your specific situation. And then make an informed decision.