Home Repair: Insurance Advice

This is the second installment of The Simple Dollar writers’ personal stories. Take a look at Karla’s story about naming her baby the beneficiary of her life insurance policy over here.

Today, I’m excited to share Randy Woods’ experience with home insurance claims and how much of a Catch-22 they can be. Be sure to read Randy’s guide to home insurance and some of the articles he’s written for The Simple Dollar too. Check out his tips on renters insurance, DIY home repairs, and home replacement costs.

Feel free to share your experiences in the comments, or reach out to the writers via their contact info.

-Trent
___________________________

Sometimes people acting with the best of intentions end up causing the greatest damage. Several years ago, some neighbors of mine – I’ll call them the Waterstons – found out the hard way that contacting your insurance about a seemingly innocent home repair question can end up costing you dearly. Remember: Talking to an insurance company is like talking to a police officer: Everything you say can and will be used against you, no matter how noble your intentions.

Talking to an insurance company is like talking to a police officer: Everything you say can and will be used against you, no matter how noble your intentions

3 Questions Before You Call
Often the status of a claim involving home repair comes down to three simple questions:

  • What did the homeowner know about the maintenance issue?
  • When did the homeowner know it?
  • And who did the homeowner share this information with?

The Issue

The Waterstons first noticed a problem when they discovered a small amount of water flowing from under the concrete foundation of their home. Being conscientious folks, they looked at the age of the pipes in their home (about 30 to 40 years old) and noted that many of them had experienced a few pinhole leaks due to corrosion and rust. They determined that the old pipes under the foundation were starting to fail.

They knew that under their homeowners policy, repair of aged plumbing fixtures falls under the Property Not Covered exclusion, which also included repairs to flues and drains in the house. These repairs are considered to be part of the regular maintenance for “wear and tear,” which is not covered by most homeowners policies. Neither is seepage of water that occurs over a period of 14 days or more.

The Waterstons fully understood the reason for these exclusions. Their policy really only covered them for what the insurance industry calls fortuitous events, or losses that occur randomly and by accident, which nobody can accurately predict – for example, when a pipe with an undetected flaw suddenly bursts, causing water damage to the walls and floor.

The Policy Question

However, they did notice some wording under the Additional Coverage clause, stating that the insurer wouldn’t pay for repairs to the old pipes themselves, as well as any resulting loss or damage caused by the old pipes. After getting a few plumbers’ estimates on how much it would cost just to dig up the foundation to get to the pipes, the Waterstons heard a whole range of figures — from $5,000 to $15,000 — which were all well above their $1,000 deductible. They decided to file a claim to recover these costs.

Small Mistake #1

There was one small but significant error with the Waterstons’ thinking: They never experienced an actual property loss due to the leak. The water never entered their dwelling, instead escaping into the soil and down the hillside; this was not considered a loss.

Because of this, the insurer denied their claim. The insurer ruled that if no loss exists, any expenses to repair plumbing fixtures would fall under the exclusions clause. So, in essence, even though the Waterstons were trying to do the right thing and prevent what might be a much more expensive covered loss, they were denied coverage because the loss hadn’t yet occurred. Those familiar with Joseph Heller’s novel “Catch-22” might be slowly nodding your heads right now.

Bigger Mistake #2

But wait, it gets worse. After hearing that their insurer would not pay for the tear-out costs unless they actually experienced a covered loss, the Waterstons decided to leave the pipes as is and waited for a covered loss to occur. Huge mistake!

By admitting in their claim that they had intended to make repairs to their old plumbing fixtures, the Waterstons tipped off their insurance company that the pipes in their house were ready to fail. At that point, the insurer knew that any claims arising from future ruptures in the old pipes would no longer be considered “fortuitous,” and thus plausibly be denied.

Sure enough, several months later, the Waterstons did suffer a sudden rupture in their underground pipes, and this time there was minor flooding in the interior, costing tens of thousands of dollars in damage to wood floors, drywall and other possessions. The insurance company – cruelly, but correctly – denied them coverage again, saying the loss was entirely expected.

Would the insurance company have ruled the same way had the Waterstons never contacted them about repairs? It’s hard to say what they might have concluded without any prior knowledge of the pipe’s condition. Perhaps the insurer would have ruled it fortuitous after all. But the poor Waterstons did not do themselves any favors by tipping their hand with that first phone call and then shot themselves in the foot by not following protocol.

The Gray Area of Home Repair

One partial reason for the confusion over these kinds of claims is the murky relationship between insurers and their policyholders over maintenance disputes. This is especially true when it comes to water claims.

For most policies, property owners have no contractual duty to make any specific home repairs. Most only require that property owners only “take steps to protect their property in the event of a loss to covered property.” But with some policies, the insurer can prove that a policyholder knew about, and ignored, a potential problem. In this case, when something bad actually happened, the insurer considered that peril to be non-fortuitous.

One partial reason for the confusion over these kinds of claims is the murky relationship between insurers and their policyholders over maintenance disputes. This is especially true when it comes to water claims

Lessons Learned

After reading this sad cautionary tale of the Waterstons, you can avoid a similar fate by following these three rules of thumb:

  1. Make sure you have suffered a covered loss before you file a claim. If you aren’t sure, re-read your policy language closely or contact your state insurance department for guidance. Otherwise, leave your insurer out of it.
  2. Don’t report to your insurer damage or deterioration that isn’t covered. Most phone calls and emails to insurance agents and adjusters are monitored and/or recorded. A slip of the tongue over the phone about the condition of your property could potentially cause a future claim denial or cause your premium to increase upon renewal.
  3. If you do mention that your property needs repairs – for goodness sakes, make them! The temptation may be strong to save your money and hope for the best in this troubled economy, but this short-sighted frugality could come back to haunt you. Once word gets out about a home maintenance issue, think of the Waterstons and start bringing those repairs to a speedy conclusion.

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