Nobody expects the worst to happen—a hailstorm, a break-in, someone gets burned at your backyard barbecue—but unfortunately, these types of accidents can and do happen. And that’s when home insurance really comes in handy.
Home insurance helps homeowners pay for an array of disasters that can take place on their property. But how does homeowners insurance work, exactly—and how do you go about using it when you need it?
In this installment of our Home Buyer’s Guide to Home Insurance, we’ll walk you through the ins and outs of how home insurance works, how (and whether) to file a claim, and what could happen as a result (e.g., a higher insurance rate).
How does home insurance work?
Home insurance works just like other types of insurance—your car or health insurance, for example. You pay a fee, called a premium, typically once a year in a lump sum. In exchange, your insurance company promises to help you out financially if something bad (and expensive) happens to your home—e.g., a tornado rips through the neighborhood, a burglar smashes your bedroom window, or your dog bites a UPS driver.
While the benefit to homeowners is clear, home insurance companies aren’t just covering these calamities out of charity. These enterprises make a profit by playing the odds that most homeowners won’t have a disaster wreck their home, so much of their members’ premiums will remain in their coffers to pay for the few who do file claims.
“Like other forms of coverage, insurance is based on pooling risk,” says Amy Danise, chief insurance analyst at Forbes Advisor. “Put simply, a lot of people pay into the pool through premiums, and when someone has a problem or claim, the pool is able to pay out to help them.”
This is how home insurance companies manage to stay in business—while providing a safety net and peace of mind to homeowners.
How to file a home insurance claim
So what happens when something bad does happen to your home—say, you’re awakened in the middle of the night by a burglar shattering a window or a tree falling on your roof?
Before you do anything, be sure to alert the authorities (like the police) if necessary. Make sure you evacuate any building that is not safe; go to a hotel if necessary and keep the receipts to submit to your insurance company later.
Once everyone is safe, you can move onto the insurance itself. Don’t delay, since many claims must be filed fairly soon after the incident occurs.
Most insurance companies allow policyholders to file claims online or over the phone. One benefit with calling is that you can ask some quick questions of a representative, who can help give you an overview that will help you decide whether to file a claim or not.
The first questions to ask an insurance representative:
- Is the problem you experienced typically covered?
- Will it surpass your deductible (the amount you must pay before your insurance kicks in)?
For example, if a tree branch fell on your home and barely scratched your gutters, you likely wouldn’t want to go through the claims process, since the damage is probably less than your deductible. Yet if the incident is likely more costly to repair than your deductible, then it may be worth filing a claim.
If you decide to file a claim, your insurance company will typically assign an adjuster to visit your home, assess the damage, and estimate how much it will cost to repair (or replace). After this, your insurance company may tell you to go ahead and get the damage fixed, then submit your receipts for reimbursement up to a certain amount. It might also write you a check upfront.
What happens if my home insurance claim is denied?
Of course, there’s also a possibility your insurer will deny your claim. There are a few common reasons this can happen:
- The incident is not covered by your policy.
- You filed your claim too late.
- The damage is determined to have resulted from normal wear and tear or lack of maintenance on your part.
- The damage doesn’t surpass your deductible.
- You misrepresented the incident (also known as insurance fraud).
- You haven’t paid your insurance bill or you let your coverage lapse.
Similar to how your car insurance works, your insurance company might also try to get someone else’s insurance company to pay for the damage—say, if a contractor accidentally started a fire while working on your house, or a neighbor’s obviously rotted, dead tree fell through your roof.
If you feel your insurer has wrongfully denied your claim, you can typically appeal its decision, try to negotiate with the insurer on a compromise, or, if necessary, hire an attorney to pursue legal action.
Should I file a home insurance claim? Will my rates go up?
Now, you might be wondering: If I file a home insurance claim, will my rates go up? That will depend on your policy and the type of incident, as well as your own track record (whether you’ve filed claims before or not).
For instance, certain claims like theft and dog bites are more likely to cause your rates to go up because these incidents could happen again. Other types of claims, like a once-in-a-lifetime windstorm that knocked down every single tree on your property, are one-off events that are less likely to affect your rates.
Bottom line: Yes, your rates may go up a bit if you file a claim. But if the damage to your home is extensive—and expensive to fix—then a small increase is probably still worth it since it will save thousands of dollars in repairs.
Think of it this way: The average insurance payout is about $8,800 per claim—do you have that kind of money sitting around to fix the giant hole in your roof or to replace a sopping wet drywall after a pipe bursts? If not, then filing a home insurance claim is probably worth every penny.
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