Six Ways to Avoid Home Insurance Snafus

Homeowners who file frequent insurance claims, have bad credit or even call their insurer to dutifully report a broken window may be in for a rude awakening when the time comes to renew their policies. That's because all of these actions can be noted in homeowners' history files, causing insurers to view them as greater risks for filing future claims. These homeowners could face higher premiums or outright cancellation of coverage.

To avoid unpleasant surprises, policyholders need to understand why they have homeowners insurance and what happens in the event of a claim. "The reason for insurance is to pay for major losses or claims that are too large for a homeowner to bear under ordinary circumstances," says Marjorie Young, a vice president with E.G. Bowman, a New York-based insurance broker.

Knowledge is power

If you have homeowners insurance, knowing these points upfront -- before you file a claim -- can prevent homeowner headaches later.

1. Small claims can cost more than large ones
"The conventional wisdom (among consumers) is that if you file one really big claim, you're thought of as being a 'bad' customer for the insurance company," says Michael Braun, assistant professor of marketing at the Massachusetts Institute of Technology's Sloan School of Management. "However, we've found that people who file larger claims are not necessarily bad customers."

Instead, small claims -- the ones that are not particularly catastrophic -- are disproportionately expensive for an insurer to process. This is because smaller claims bear the same administrative costs as large ones. "Companies have to staff a call center to answer the phone when people call, they have to have adjusters ready and they have to have people reviewing all of the claims to make sure they are legitimate," says Braun.

Smaller claims are also more expensive if they happen frequently. "If a claim was made because lightning struck a house, the likelihood of (lightning striking twice) would be small. It would probably not deter a competing insurance company from offering a competitive quote on that house," says Young. "But if that house had a series of burglaries, it could deter an insurance company." Premiums would likely increase substantially unless the homeowner could prove that significant protective devices were installed to reduce the chance of loss, she adds.

2. Get a CLUE (report)

If you have filed a claim on a home within the past five years, you likely have a Comprehensive Loss Underwriting Exchange, or CLUE, file, though you've probably never seen it. Similar to a credit report, a CLUE lists a homeowner's history of losses and helps insurance companies determine that person's risk for future insurance claims. "As part of the application process, clients will always be asked about their prior claims history," says Bob Otis, vice president of National Programs Property Lines at Travelers Insurance in Hartford, Conn. "But there are third-party data sources (CLUE is the market leader) that almost every insurance company will use to find out someone's prior claims history" -- whether the client reveals it or not.

Next: "Every company uses an insurance score..." >

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