Homeowner’s Insurance: Are You Getting What You Think You Paid For?


Your policy says you’re covered for various damages, but today’s homeowner’s insurance is actually nothing more than disaster relief…and if you believe otherwise, there’s a good chance you’ll regret it. In the current fickle insurance market, even if you file only for smaller claims, you run a very real risk of getting cancelled. So don’t file for the small stuff. And when you’re shopping for a policy, don’t be afraid to take a higher deductible.

If you’re never going to file for small amounts anyway, there’s no sense in paying extra for a lower deductible. Last winter, a colleague’s sister experienced about $1,500 worth of damage from a blown water heater. The first thing she did was call her insurance agent — and he promptly told her not to file a claim. It was nice of the agent to give her the advice and leave it at that. There are reports of people having had polices cancelled just for inquiring about a claim, especially one that’s water-related. So…why the crackdown on homeowner’s policies?

Simple: The insurance companies aren’t making any money. Insurers make their loot off of investments — not policy premiums. And because of the unremarkable performance of the stock market, they lost $5 billion in 2001 and $3 billion in ’02. Add to that skyrocketing mold-related claims and a string of natural disasters, and you can, perhaps, begin to understand why the industry tried to save its skin by starting a witch-hunt to find and release customers AND homes that were even the slightest bit suspect.

In 2001 and 2002, nearly 2.5 million homeowner’s polices were dropped. How do they decide which properties to cover and which to drop? By using something called CLUE (Comprehensive Loss Underwriting Exchange), which was originally designed in 1992 to detect insurance fraud and currently holds home-claim information for approximately 90% of all insurers in the U.S. CLUE usually comes into play when a home is changing hands — and it’s throwing an increasing number of homebuyers for a loop.

Although not yet common, there are more and more stories of closings being cancelled at the final hour, or policies not being renewed, because of information in CLUE. Non-coverage and non-renewal usually occur if a policyholder has made two claims in as many years — no matter how small. It’s also more common for a policy to be denied if water damage is somehow involved — either on the property being acquired or on the buyer’s old property.

Either one could mark the buyer or the property as higher risk. The problem is particularly bad in the bellwether state of California, where insurance commissioner John Garamendi said that he was recently inundated with complaints about CLUE errors. He also recently stated that complaints about non-renewals have quadrupled. One 75-year-old homeowner was “blacklisted” after she made a telephone inquiry about her policy coverage with Allstate, where she’d had continuous coverage for 30 years.

Garamendi is introducing a “homeowner’s bill of rights,” which would give a potential buyer the right to review the claim history of a property. But what Garamendi can’t do — what nobody can do at this point — is to get water from stone. If the insurance companies’ margins continue to be thin (and they may be for many years to come if I’m right about the stock market), they will continue to be very tight with payouts and very liberal with bumping claim-prone people. It’s not personal. It’s business.

[Ed. Note.  Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]