You buy insurance to protect your home and car from damage, but when an accident happens, is it in your best interest to file a claim? It seems like the answer should be a resounding "yes," but a middling "maybe" is a far better response. Why the ambiguity? The decision to file a claim can have a major impact on your insurance rates, even if the accident was minor or was not your fault.
The Insurance Claim Game
Regardless of the scope of the accident or who was at fault, the number of insurance claims you file has a direct impact on your rates. The greater the number of claims filed, the greater the likelihood of a rate hike. File too many claims and the insurance company may not renew your policy.
If the claim is being filed based on damage you caused, your rates will almost surely rise. On the other hand, if you aren't at fault, your rates may or may not increase. Getting hit from behind when your car is parked or having siding blow off your house during a storm are clearly not your fault and may not result in rate hikes, but this isn't always the case. Mitigating circumstances, such as the number of previous claims you have filed, the number of speeding tickets you have received, the frequency of natural disasters in your area (earthquakes, hurricanes, floods) and even a low credit rating can all cause your rates to go up, even if the latest claim was made for damage you didn't cause.
Most/Least Damaging Claims
When it comes to rate hikes, not all claims are created equal. Dog bites, slip-and-fall personal injury claims, water damage and mold are red flag items to insurers. These items tend to have a negative impact on your rates and on your insurer's willingness to continue providing coverage. Surprisingly, the much dreaded speeding ticket may not cause a rate hike at all. Many companies forgive the first ticket. The same goes for a minor automobile accident or a small claim against your homeowner's insurance policy. (For related reading, see: 6 Things That Spike Your Auto Insurance.)
Filing a claim often results in a rate hike that could be in the 20-40% range. The increased rates stay in effect for years, although the size and longevity of the hike can vary widely from insurer to insurer. At some firms the increase lasts just two years, while at others it may last for five. If your insurer drops your coverage, you may be forced to purchase high-risk insurance, which can come with extraordinarily expensive premiums.
To File or Not to File?
There are no hard-and-fast rules around rate hikes. What one company forgives, another won't forget. Because any claim at all may pose a risk to your rates, understanding your policy is the first step toward protecting your wallet. If you know your first accident is forgiven or a previously filed claim won't count against you after a certain number of years, the decision of whether or not to file a claim can be made with advance knowledge of the impact it will or won't have on your rates. Talking to your agent about the insurance company's policies long before you need to file a claim is also important. Some agents are obligated to report you to the company if you even discuss a potential claim and choose not to file. For this reason, you also don't want to wait until you need to file a claim to inquire about your insurer's policy regarding consultation with your agent.
Regardless of your situation, minimizing the number of claims you file is the key to protecting your insurance rates from a substantial increase. A good rule to follow is to only file a claim in the event of catastrophic loss. If your car gets a dent on the bumper or a few shingles blow off of the roof on your house, you may be better off if you take care of the expense on your own.
If you car is totaled in an accident or the entire roof of your house caves in, filing a claim becomes a more economically feasible exercise. Just keep in mind that even though you have coverage and have paid your premiums on time for years, your insurance company can still decline to renew your coverage when your policy expires.
A Strategy to Save on the Cost of Your Policy
Understanding the logic behind filing a claim only in the event of a large loss also provides insight into how to save a few dollars on your insurance premiums. Because you aren't going to file a claim in the event of a minor loss, having a low deductible on your policy makes no financial sense. If you already plan to pay for the first $500 or $1,000 dollars worth of damage out of your own pocket, set aside that amount in an interest-bearing savings account and raise your insurance deductible to match the number. Increasing your deductible will result in lower insurance rates, and the cash in the bank will cover your out-of-pocket costs in the event of an accident.
The Bottom Line
When you pay your insurance premiums regularly and on time, it may seem like you should be able to file as many legitimate claims as you want. Unfortunately, the industry doesn't work this way. Filing too many claims or certain kinds of claims can have an adverse effect on your insurance rates or even get your policy canceled altogether after the claim has been paid. To avoid unfair rate hikes and unpleasant financial surprises, do your homework and learn about your particular insurer's policies and industry practices long before you ever need to file a claim.
(For related reading, see: How an Insurance Company Determines Your Premiums.)