Water Damage and Insurance Claims: Which to submit, which to pay out of pocket

Most of us know that insurance premiums often climb after filing insurance claims. After all, the more you cost the insurance company in claims, the higher a risk you become. Homeowners insurance often covers water damage, but which water damage claims will cost you in increased future insurance premiums and which will not? How do you know which water damage claim to file and which one to pay out of pocket?

First, let’s look at one of the reasons why water damage claims raise red flags with insurance companies: the potential for future mold claims. It is conceivable that after the water has been cleaned up and the final bills paid, a mold claim will be next. It is also conceivable that following a water damage claim, the insurance company may expect these future expenses and raise your premiums in anticipation – or worse yet cancel your policy.

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

Some states have introduced legislation prohibiting insurance companies from using certain types of claims, such as weather events, to base insurance ratings upon or impose surcharges on the policy. Each state has its own insurance laws, so make sure to browse your state’s insurance department’s Web site before submitting, or not submitting, a water damage claim. For example, if your roof needs to be replaced after a windstorm, the resulting claim might not result in a premium increase depending on your state’s insurance laws.

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

  • The water damage was properly repaired and remediated
  • The water 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 can increase your premiums or deny coverage.

So, which water damage claims should you pay out of pocket?

  • Any water damage claims that fall below your deductible amount
  • Any water damage claims that you can reasonably afford to pay that could potentially raise red flags with your insurance company

Which water damage claims should you submit to your insurance company?

  • Any water damage claims above your deductible amount that are protected from rate increases under your state’s insurance laws
  • Major water damage claims where extensive repairs are necessary and paying out of pocket isn’t reasonable.

Since it’s advisable to pay many water damage claims out of pocket, consider raising your insurance deductible to $1000 or more and receive the benefit of a large premium decrease. Put these savings into an emergency account for out-of-pocket repairs.

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