Homeowners’ insurance is a must for any owner of residential real estate. It has been around for many years, coming to the rescue of many real estate homeowners. Leaky pipes and their subsequent damage have been causing homeowners grief for an even longer time. Homeowners’ insurance has alleviated such problems by underwriting the cost for repairs.

I remember as a child my father making repairs with money from our homeowner’s insurance policy. He told me that there was never a claim too small, unless it was within the deductible range.

While my father’s information was correct for the times, the rules for small claims on residential real estate have changed. Submitting a small claim today, especially for water damage, could cost you multitudes more in the future.

A California Insurance Department study showed that 25 percent of insurance companies refused to renew policies for residential real estate owners, who made one or two non-water damage claims within the past three years. The figure rose to 32 percent, when the claims were water damage-related. This means the insurers are paying the legitimate claims but are apt to drop those real estate customers at policy renewal time.

Additionally, all insurers share claims information through the Comprehensive Loss Underwriting Exchange (CLUE) database. Not only are you apt to be dropped by your current residential real estate insurer, but others may not approve you. The study also showed that 62 percent of the top 13 insurers in the state of California refused applicants with only one-to-two claims in the past three years.

If another insurer does approve you, it will most definitely be at a much higher premium rate that will add up over the years to a much larger amount than the small water damage claim you made.

So, what has changed?

Toxic Mold

Litigators have jumped on the toxic mold lawsuit bandwagon. Toxic mold comes from water damage repairs that were incorrectly made or only partially cleaned up. It can literally make the real estate residents very ill. Some toxic mold is created by homes that were not quality built and allowed water to seep in between the outer and inside walls. There have been a few multimillion-dollar homes in California that had to be totally leveled due to toxic mold.

Insurance companies generally are expected to pick up the tab and then sue the repair contractor or original builder for reimbursement. This attitude has caused a lot of litigation — between insurers and residential real estate owners, as well as between insurers and parties assumed to be responsible for the toxic mold. They often lose court cases for reimbursement, as well as incurring attorney fees and court costs. Is it any wonder insurance companies have become gun-shy of small water damage claims that could lead to costly repairs and litigation later.

Administrative Costs

Another reason for the change in attitude toward water damage claims is the change in real estate insurers’ business practices. Since the early 90s, real estate insurers have looked for more practical ways to increase profits. Through studies, they found that small claims created the same large administrative costs as the larger claims, even though the payouts were small. They now weed out residential real estate customers who make small claims.

Alternative Game Plan for Real Estate Homeowners

Today, it is better not to make small damage claims of any type. Real estate homeowners should increase their deductibles to $1,000 or $2,500. This reduces their premium costs by as much as 30 percent. They are covered for large damages but not paying for services (small claims) that they are not receiving.

With the larger deductible, the premium savings can be placed into a savings account to pay for small claims that would earlier have been submitted to the insurer. Whenever used, the money should be replaced as soon as possible.

After seven-to-ten years of submitting no claims, most real estate insurers will qualify you for a claims-free discount, saving you even more money.

Is It Worth It?

In deciding if you should submit a claim (even a larger one), first determine if it is worth the possibility of losing your policy and/or paying higher rates. Add up all the repair costs. Determine how much the real estate insurer will pay, based on your policy. Subtract your deductible. Is the remainder only a couple hundred dollars or substantially more? Now, determine if it is worth it. Remember, even moving to another state will not escape the CLUE database.

John Harris

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