Real estate investors typically experience a property loss at least once in their career. And when it comes to filing an insurance claim for that loss, it can be complex and overwhelming. So, today, our favorite claims expert, Zach Baker, is going to share what every real estate investor should know about insurance claims. We are discussing if filing claims impacts your premium, how to avoid claim denials, and more. Let’s get into it!
Does filing a claim impact your insurance premium?
The answer is one that nobody likes to hear, which is sometimes. There’s a lot of factors that go into premiums and that’s what makes it hard and tricky for people. The thing you want to remember is that insurance is a transfer of risk. You’re paying your premiums, the carrier is collecting the premiums, and in return, the carrier is taking the risk away from you. When you’re filing claims and the carrier is paying claims out, at some point they will likely try to reevaluate if the premium they’re collecting from you is sufficient for the claims that they have been paying and the risk that they’ve taken from you.
If you file a claim where no payment is made, it likely won’t have an impact on your premium because the carrier won’t have to really reevaluate what they’re collecting from you. But what you want to avoid doing is filing a lot of claims where no payment is made because it’s not just the quantity of payments made by the carrier for the risk, it’s the quality of the risk as well. So, if you file a lot of unnecessary claims, at some point the carrier is going to wonder if you are a desirable risk or not. It’s not just whether there’s a payment made, it’s also the frequency of unnecessary losses that you want to be aware of.
What would insurance companies consider an unnecessary claim to file?
Basically, any claim where you really didn’t need to involve insurance in the first place would most likely be an unnecessary claim. If you file a claim, go through the investigation, and there’s no claim payout, there’s no benefit to you as the insured.
One example is when the damage is right at or below your deductible. If the damage is at or below your deductible, you won’t receive a payout making it an unnecessary claim to file.
Another example is when the damage is caused by a peril that’s not covered by the policy. If you have a policy where water damage isn’t covered and you file a water damage claim, the carrier is going to investigate, turn around and say the claim is denied.
You also want to be aware of filing unnecessary claims, where you file just to see if you have damage. You really want to avoid using your insurance company to decide if you have damage to begin with. We’ll sometimes see a storm roll through an area and a client does not know if they have hail damage, so they file a claim to find out. You really want to avoid that if you can.
Any maintenance-type claims or frequent controllable losses should also be avoided because those are more in the sphere of you, as a homeowner, maintaining the property.
You want to find a good resource, whether it’s your agent, a trustworthy contractor, or both, to help you evaluate if the damage is significant enough for a claim.
What is a controllable loss?
A controllable loss is a claim that you file where maintenance is a component of it. For example, you have a pipe that bursts because it freezes. You fix the damage and now it’s your responsibility as the property owner to prevent that from happening again. That could look like adding insulation, moving or updating the pipe, or dripping water when it’s cold – anything to prevent that pipe from freezing again in the future.
Another example is if you have a tree branch that falls on your house. You don’t want to have that claim occur again. So, you would want to get the tree inspected and possibly trim or remove the tree.
If these types of losses happen frequently, an insurance carrier will see that these claims could have been prevented with maintenance. So, if you have a pipe burst claim three years in a row, at some point the insurance carrier is going to look at your desirability of risk and wonder if you are doing your job as a property owner and if they want to continue to insure you. Make sure you understand that insurance is not a maintenance plan.
Why do claims get denied?
There are a lot of reasons. But at its core, it’s the policy that is going to decide whether a claim is covered or not. Policies outline excluded perils. So, not every loss is going to be covered. The most common excluded loss is going to be wear and tear or mold. If you file a claim for those things, you’re likely going to get denied. Policies also have a timeline for how long you have to file a claim. So, if you wait too long to file a claim it may be denied.
And if you’re committing fraud or misrepresenting, that claim is likely going to be denied.
Other than that, you want to make sure that your policy information is accurate. If it’s not, there’s a chance your claim could be denied, or the policy could be invalid altogether.
Let’s talk more about incorrect policy information. What are some key policy details that could lead to the denial of a claim?
The biggest, most important policy detail that needs to be accurate is who you have listed as the Name Insured. The Name Insured always needs to be the legal owner of the property because the carrier wants to know who has an insurable interest in the property. If a property is owned by one entity and it’s insured under a different entity, then there is an insurable interest issue there, which could invalidate the entire policy and lead to a claim denial. The classic example of this is when somebody inherits a property from a relative and they title it in their name, but they leave the insurance under the relative’s name. As soon as the transfer of title happens, the relative’s insurance becomes invalid. They no longer have an insurable interest in the property and a claim most likely isn’t going to pay out.
Additionally, you want to make sure the Additional Insured and all parties with financial interest are represented appropriately in your policy.
Lastly, the occupancy or status of the property needs to be accurate on the policy. If your property is listed as “occupied” but is actually vacant, and a loss occurs, your insurance carrier may deny the claim.
Let’s recap. What are some things investors should NOT do when it comes to filing insurance claims?
If you learn anything, don’t file unnecessary claims. Evaluate damage with a trusted professional to determine if repairs will be above your deductible. If not, then it’s probably not worth filing a claim.
You also want to avoid controllable losses by taking proper mitigation steps and maintaining the property.
The other thing you shouldn’t do is take a passive approach to how your policy is set up. Check to see if the Named Insured is correct and if all the proper entities are on there. People often feel ill-equipped to take ownership of their policies, but you don’t want to take a passive role when it comes to understanding your coverages and how your policy is set up. Empower yourself to understand what your policy does and what risk you have transferred.
And what about some things that investors SHOULD do?
When you do have a loss, you really want to do your best to document the state that it was originally in when you experienced the loss. It can sometimes take a carrier a little bit of time to do the actual inspection. So, take photos or record a video. You really want to get a good snapshot of what the damage looked like when it happened. It’s super helpful to the carrier and can also be helpful for you and contractors down the road.
Most importantly, you want to mitigate any further damage. You want to prevent the loss from causing further damage. For example, if you have a hole in the roof, call a roofer to have them properly tarp it. Do as much temporary work as you can to prevent further damage from happening, but don’t do anything permanent, if possible. You don’t want to hinder the carrier’s ability to do their investigation, but you do want to make sure you limit the damage from getting worse.
— Game Segment: Should They File a Claim? —
We pulled questions from BiggerPockets, where people asked for advice on whether they should file an insurance claim. Zach is going to offer his thoughts on the situation from an insurance perspective. Please note, that Zach’s feedback is limited to the information provided and is for general information purposes only.
Question #1: I bought a property recently that ended up flooding in the basement. I filed an insurance claim to fix and repair the basement. I am now having leaks on my roof. I had a roofer look at it and he wants to replace the whole roof, saying it has a lot of weather-related damage. Should I file another insurance claim for this? I want to buy multiple properties and rent them out. My concern is that my current insurance will drop me, or my future properties will have high premiums due to my past claims.
Answer #1: The first thing that comes to mind is asking the roofer if that weather damage is from one storm or does it look like it’s been happening over time? You don’t want to file a claim to try and catch years worth of weather damage when you should have been maintaining the roof. You’re likely to be unsuccessful in doing that. If your roofer thinks that a specific storm that rolled through on a certain day caused the damage and the damage is over your deductible, that seems like a valid claim to file.
With there being a previous claim, you want to evaluate how close the claims would be to each other. You really want to be careful about filing multiple losses in a really short period of time, if you can. So, if the previous flooding claim was relatively recent and now you’re going to turn around and file a prolonged roof-related claim, that’s something I would probably avoid and work with your contractor to see if you can get a good deal and repair that yourself.
Question #2: One of my rental properties suffered water damage and I’m wondering if I should file an insurance claim or just eat it? I’ve never filed an insurance claim on a rental property, so I do not know what impact filing a claim will have on my insurance rates for this property and other rentals that I have insured with the same and other companies. The event was triggered when a pipe feeding the upstairs bathroom burst over the living room ceiling while my tenant was at work. For hours water rained down, damaging the living room ceiling and carpet/padding and drained down to the basement, damaging the drop ceiling tiles, insulation, and more carpet/padding. It does not appear the sub-floor or walls were damaged and no apparent mold. It will all be fixed for between $4,500 to $6,000 and my deductible is $500. I’ve also got a plumbing bill for fixing the pipe that is not covered by insurance. To file a claim or not to file a claim?
Answer #2: That one sounds sudden and accidental with a pretty substantial amount of damage and feels like a valid claim. You want to make sure you understand how that pipe burst in the first place and make the necessary adjustments and repairs to ensure you don’t have a loss like that in the future.
Question #3: I just purchased a property to flip. It was just broken into, and the copper was stolen. The damages are about $1000 over my deductible. This is my first house. If I submit the claim to insurance, will I have a problem getting coverage in the future?
Answer #3: This one’s tricky. The damage is not substantially over the deductible. So, I would consider just taking care of it yourself, especially if you plan to purchase properties in the future where this may happen again. Because again, you want to stay out of the space where you are filing frequent similar or controllable losses, so you don’t present yourself as an undesirable risk to a carrier.
If you plan on flipping more properties, this is something you may run into again, especially if you don’t get a chance to properly secure the property in time. I would consider not filing because $1000 doesn’t feel worth the potential risk of presenting yourself as an undesirable risk.
You can also reevaluate your deductible and consider selecting a higher one, so your premiums may be lower.
Lastly, I’d like to say all claims are unique in all circumstances. Anyone who heard these examples should or shouldn’t file a claim based on what I said because every circumstance is unique. That’s why you really want to trust a professional to help you evaluate. There’s no right or wrong answer when it comes to whether you should or shouldn’t file a claim.
Watch the full interview here!
