Water damage and insurance claims: which ones to file and which ones to pay out of pocket

Most of us know that insurance premiums often go up after filing insurance claims. After all, the more you cost the insurance company in claims, the more risk you take. Homeowners insurance often covers water damage, but which water damage claims will cost you higher insurance premiums in the future and which won’t? How do you know which water claim to file and which to pay out of pocket?

First, let’s take a look at one reason water damage claims raise red flags with insurance companies: the possibility of future mold claims. It is conceivable that after the water has been cleaned and the final bills have been paid, a mold claim will be next. It’s also conceivable that after a claim, the insurance company could look forward to these future expenses and raise your premiums in advance, or worse yet, cancel your policy.

Next, let’s look at the total cost of repairs compared to your insurance deductible amount. A typical homeowners insurance policy has a $500 deductible. If water damage repairs fall below that amount, definitely pay for repairs out of pocket. If water damage repairs are only slightly above your deductible amount, consider paying out of pocket anyway because insurance companies often look at the frequency of claims. Having a series of small insurance claims on your policy can raise red flags, perhaps even more likely to increase your premiums than a single large claim. In addition to alerting your existing insurance company, these claims are recorded in a national database that is accessible to all insurance companies. If you change insurance companies, the new company will see a history of claims filed and price your premium accordingly.

Did you know that as soon as you call your insurance company about a water damage issue in your home, a claim can be opened and filed? Even if you call to find out if the damage is covered, if the insurance company opens a claim, the claim will appear as part of your claim history, even if the insurance company isn’t involved in the repairs. Again, your claims history is considered by future insurance companies, so be careful calling the insurance company directly. Instead, call your insurance agent or get estimates from contractors before filing a claim.

Some states have introduced legislation that prohibits insurance companies from using certain types of claims, such as weather events, to base insurance ratings or impose policy surcharges. Each state has its own insurance laws, so be sure to browse your state insurance department’s website before filing or not filing a water damage claim. For example, if your roof needs to be replaced after a wind storm, the resulting claim may not result in a premium increase under your state’s insurance laws.

Another example illustrates how states restrict certain types of water damage claims. In Texas, an insurance company cannot increase your insurance premiums or deny coverage for an appliance-related water damage claim if both of the following conditions are met:

o The damage was properly repaired and remedied
o Damage repair/remediation was inspected and certified

However, if three or more appliance-related water damage claims are filed in three years, then the insurance company may increase your premiums or deny coverage.

So what claims do you have to pay out of pocket?

o Any claim that is below the amount of your deductible
o Any claim you can reasonably pay that could raise red flags with your insurance company

What claims should you submit to your insurance company?

o Any claim above your deductible amount that is protected from rate increases under your state’s insurance laws
o Major claims where extensive repairs are needed and it is not reasonable to pay out of pocket.

Since it’s wise to pay many water damage claims out of pocket, consider raising your insurance deductible to $1,000 or more and benefit from a large premium reduction. Put these savings into an emergency account for out-of-pocket repairs.