Homeowners Insurance: Will You Be Treated Fairly If You Have to Use It?

holding a model of a house

(Part 1)

Horwitz & Horwitz is largely devoted to Chapter 7 and Chapter 13 consumer bankruptcy clients. In assisting clients through bankruptcy, issues often arise regarding homeowners, automobile, or life insurance coverage. Most people have as many concerns and questions about homeowners insurance as they do about bankruptcy.

My law practice over the years has also included a great deal of insurance work. I have worked for insurance companies by representing policyholders who have been sued by someone injured on their property. An example of this might be a case where a visitor to the homeowner’s property slips on ice in the driveway, suffers a broken ankle, and sues the homeowner, who is covered for that liability under his homeowner’s insurance. I also have, at times, represented the injured party (the “plaintiff”), usually due to an auto accident but occasionally regarding a homeowner’s liability for those injuries.

I also have represented clients who are homeowners themselves and have been denied coverage under their own insurance policies for damages to their property resulting from storms, flooding, and other calamities.

From this experience, I know how to read insurance policies, and I have a good understanding of Ohio law regarding various issues that arise when a claim is made for insurance coverage. I also have found that insurance companies vary widely in protecting their insureds, especially when the insured is bringing the claim. I write now to share my knowledge with you in the event that you have to make a claim on your homeowner’s insurance.

Let’s start by looking at what a homeowners insurance policy is and its intended benefit to you. You must remember the special nature of insurance and its role in society. In one sense, an insurance policy is a contract between you and the insurance carrier. Your signature on the contract indicates your agreement with the terms and provisions that the carrier has written into its various policy forms.

On the other hand, an insurance policy is a special contract. It’s not the same as a contract for the purchase of engine parts by GM, where if the supplier doesn’t come through with the goods, GM can buy them from another supplier and still sell its cars at a profit. You don’t buy homeowners insurance for some monetary advantage. Instead, you purchase it to protect yourself from unknown, unexpected calamities which may or may not ever occur. You pay the premiums to ensure that you won’t face financial ruin if a calamity does occur. [That’s why your mortgage company will require that you keep homeowners insurance in place to protect their interest in your residence.]

Therefore, unlike a commercial contract for engine parts, a homeowners policy promises to provide financial security in the event of a catastrophe. As a policyholder, what you have purchased is some peace of mind. However, if you have a loss and your insurance carrier doesn’t follow through with coverage, you face a nightmare. At that point, you cannot replace its lack of performance merely by paying the prevailing market price for another insurance company to come in and cover the repairs. Instead, you are completely dependent on your insurance carrier’s performance to protect you when you are most vulnerable.

But what happens when disaster does strike, and your insurance company doesn’t live up to your expectations?   What can you do to protect yourself? How do you ensure you’ve picked an insurance company that will deal fairly with you on a significant claim, say a $30,000 or more claim?

Unfortunately, surveys of homeowners who filed claims over the last few years indicate that the greater the number of damages, the greater the probability that your insurance company will dispute the assessment, the amount of the claim, and the delay in handling it.   Insurance companies realize that property loss claims are uncommon. Therefore the policyholders will tend to be unfamiliar with the process when the need for them to make a claim arises. Most consumers shop for home insurance once or twice in their lives and then forget about it. If they do have a claim, it’s usually relatively minor, such as hail damage to a roof or water damage from a burst pipe. That means most consumers don’t develop much expertise in shopping for this product and rarely get a chance to “test” it firsthand to see how it performs. Insurance uses this to their advantage when adjusting claims, especially for significant losses.

Of course, protection against large losses is exactly why you buy home insurance. So what can you do to protect yourself against catastrophe?   First of all, do some research to make sure you’re using a good company. Ask your friends and associates to see how satisfied they are with their homeowners’ insurance carriers, being sure to ask if they’ve ever had to make a claim and if it was resolved to their satisfaction. [Keep in mind that insurance companies are very amenable so long as you’re paying the premiums and they’re depositing them. It’s only when they have to provide coverage that disagreement arises!) Also, when using an “independent” insurance agency that sells insurance for more than one carrier, rather than a “captive” agency that sells only for a particular insurance carrier. An independent agency can provide you with information comparing how the companies they represent deal with claims. Use only a top-rated insurer, keeping in mind that you get what you pay for, and the stakes may be too high for you to gamble when the need arises. A couple of companies have stellar reputations for customer satisfaction, including USAA, Amica, Auto-Owners, Erie, and Nationwide. In Ohio, Cincinnati Insurance Company is held in high regard.

Second, once you’ve selected the insurance company, don’t underinsure. Obviously, requesting lower policy limits should result in lower premium payments. That makes perfect sense to keep money in your pocket so long as you don’t have to use insurance. However, if you have a significant catastrophe, those savings won’t begin to cover your expenses. It’s estimated that 1 out of every ten claimants found themselves in trouble because their policy limits were not enough to cover their losses.   Rather than intentionally underinsuring yourself on the basis that you likely will not suffer a catastrophic loss, it might be better to get adequate coverage but save money by raising your deductible. Most people have deductibles of about $500 on their standard homeowner’s policies. Keeping in mind that insurance should be called on to cover significant losses, not just broken windows, a deductible of $1000 would be better to reduce the premium. Of course, in that case, you should consider keeping enough in savings to cover that deductible if your luck runs out and you need it.

In my next blog, I’ll give you some advice with regard to the particular type of policy you should purchase and how that can affect the insurance company’s coverage of your claim.

(Part 2)

In my last blog, I explained that a homeowners insurance policy is a contract between you and the insurance company that covers a private residence.   It is a special type of contract under which you expect to be protected by the insurance company for certain damages to your property in exchange for paying the premiums. I discussed a few things that you should consider when you choose the company to provide that coverage. In this blog, I will explain the different types of homeowners policies that you can purchase.

Once you have decided on the insurance company, you will likely want to purchase your auto policy through them as well. This “bundling” of policies with one carrier should save you money on your premiums, possibly as much as 30%. Both homeowners and auto coverage are considered “term” contracts. This means that they are in effect for a fixed period. You must pay the insurer the premium each term to keep the policy in effect.

Most homeowners insurance carriers charge a lower premium if it appears that the home is less likely than average to be damaged or destroyed: for example, if your home is protected by a home security and fire alarm system, the premium will likely be less, as is the case if the house is situated next to a fire station. On the other hand, if you request additional coverage not generally included in a homeowners policy, such as flood insurance, or if you insure specific pieces of jewelry, your premium will be adjusted a bit higher.

The homeowner’s policy itself combines various personal insurance protections, which can include:

  • damages to your home itself,
  • damages to the contents of your home,
  • loss of use (commonly called additional living expenses for times when you cannot live in the home because of the damages to it),
  • additional coverage for debris removal, reasonable repairs, etc.
  • Loss of other personal possessions,
  • Liability insurance for accidents to other people that happen on your property or as a result of some act by you or a family member residing in your home.

Insurance companies protect you from specific “perils.” Before considering what a policy does and does not cover, it’s important to understand insured perils. A peril is an event or disaster that causes damage to a home or property. Common perils are fire, tornado, and theft.

Next, you need to be aware that there are two types of basic homeowners policies. They differ in regard to the kinds of perils they cover.

The “basic policy form” (also referred to as a “named perils policy”) only provides coverage for perils that are specifically listed in the policy. If the source of the damage is not specifically listed, it is not covered. The perils typically listed include fire or lightning, windstorm or hail, vandalism or malicious mischief, theft, damage from vehicles and aircraft, explosion, riot or civil commotion, glass breakage, smoke, volcanic eruption, falling objects, damages to certain electrical appliances, failure of heating or plumbing systems, and personal liability. Damages resulting from kitchen and laundry appliances are generally not covered. Under a basic policy form, water infiltration or a slow water leak affecting the wooden structural members of a home would not be covered. Damage resulting from a ruptured washer hose would not qualify for coverage. Nor would there be coverage for floods or earthquakes. This is generally referred to as an HO2 policy.

The other type of policy is just the opposite of the named perils policy — it covers everything not specifically excluded. This is called an HO3 or an “open perils” policy. The perils that are specifically excluded from an open perils policy will be listed in the policy’s Exclusions section. Any event can be excluded, but the most common include events such as wars, nuclear hazards, intentional damage or destruction, and earth movements. In recent years, many insurance companies have excluded coverage for mold damage due to the number of mold claims they experienced a few years back. However, most policies now include a “mold endorsement” to the policy, which gives a limited amount of coverage for mold cleanup.

The HO3 (open perils) policy is the most typical form for single-family homes. Therefore, rather than naming exactly what will be covered and excluding the rest, this policy includes coverage for everything except those items specifically excluded.   An HO3 policy covers much more than an HO2. Under an HO3 policy, also, water infiltration or backup from rain and snow that affected the wooden structural elements of a home would be covered. A claim for floor repairs due to a leaking dishwasher would qualify for coverage.

Another important factor distinguishing HO3 from HO2 is that if you and the insurance carrier are not in agreement over whether the claim is covered, under the HO2 policy, you have the burden of proving that coverage exists, while under the HO3 policy, it is the insurance company’s burden to prove that it does not work because of the exclusions. Not surprisingly, the premium is higher for an HO3 policy, but there is no contest that it provides the better insurance coverage.

We have now explored what you should look for in selecting an insurance company to carry your homeowner’s insurance, and what kind of policy you should get. In my next article, I will explore common problems that arise when a major peril occurs, and you have a significant claim for that insurance.

(Part 3)

In the previous two sections of this blog, I have shared some tips on choosing an insurance company and determining the type of homeowner policy you should purchase. Now it’s time to discuss what happens if you experience major damage to your home but the insurance company refuses to compensate you on your claim adequately. Unfortunately, those situations typically arise from catastrophic damage to your property when you are most at risk financially without the coverage. A survey recently conducted by Consumer Reports found that the greater your damages, the greater the likelihood that your homeowner’s insurance carrier will disagree on the dollar amount to compensate you for the loss, and the greater its delay in handling your claim.

Insurance companies frequently try to use the policy language to avoid paying claims. Remember that an insurance policy is a contract and that the terms of the policy set the obligations for both you as the policyholder and the insurance carrier. Your premiums pay for the amount of protection you receive. Therefore, if you decide to purchase the least expensive insurance you can get, the coverage will likely be less than optimal. Further, keep in mind that whatever policy you purchase comes as a form document, with the language composed by the insurance company (as an example, you might choose to purchase homeowners policy form H03). You have no input into the form language. Since the insurance company drafted the provisions of coverage and exclusions, obviously, they are meant to protect the insurance company rather than the homeowner. So long as the language of the policy is clear on its face, you are stuck with that language. If the language is capable of being interpreted as having more than one meaning, however, under the law of most states, it must be interpreted in your favor since you had no input in writing it. The only problem with this is that you may have to file a lawsuit against your insurance company to get the matter before a judge who can make that determination. The insurance companies realize that most homeowners will not want the expense and delay of going through the litigation process but rather will reluctantly take what they believe to be the company’s “best” offer. The insurance companies are counting on that.

This is particularly troubling given the special nature of insurance and its role in our society. You don’t purchase homeowners insurance for the purpose of making money on it. Rather, you purchase it to protect yourself from unknown calamities which may or may not ever occur. After paying the premiums for several years and, in turn, expecting protection, you are in an especially vulnerable economic and personal position when a loss occurs. The entire purpose of insurance is defeated if the company can refuse or delay prompt and full payment.

On the other hand, when you pay your premiums, the insurance company invests and earns interest on them. So long as they can avoid paying out claims under the policy or keep those payouts at a minimum, the company takes in huge profits from these investments. That being the case, they reward their claim adjustor, who can keep claim payouts low. When you think about it, if you’ve paid premiums for several years before making a claim, those premiums have earned a significant amount of interest that could be used to pay the claim, which is the basic theory of how insurance works. The trouble arises when the insurance company does not wish to part with those investments but would rather apply them to its company profits.

This creates a kind of conflict for insurance companies because they are also considered to have a fiduciary relationship with their insureds. A fiduciary relationship is one in which the fiduciary is required to act at all times for the benefit and interests of another, over and above its own interests. Therefore, since an insurance company has access to your premiums, and you have no knowledge or control of how the premiums are invested or applied, the law of most states recognizes that the insurance company has a fiduciary relationship to its policyholders. As a fiduciary, the insurance company has responsibilities and duties to you. The very nature of the insurance contract, where you turn over your financial interests to the insurance company, dictates that the insurer has no right to sacrifice your interests. This is especially true when you consider that if a claim for damages arises, you are stuck with your existing policy. You cannot go out in the insurance marketplace to find a better policy after the peril occurs.

Thus, a breach of the insurance company’s fiduciary obligation to you is a betrayal of a promise. Insurance companies owe their policyholders a high duty of care. This does not mean they have to accept every claim submitted. It does obligate them to use diligent care to investigate each claim with an inclination to find in favor of the policyholder unless the policy clearly and distinctly excludes coverage.

Insurance policies, by their nature, are tough to read and understand. Glance through your policy, and you’ll see what I mean. It would be virtually impossible to review a policy before purchasing it and be able to figure out if it would cover whatever peril could arise in the future. What you are forced to do when damage occurs is to review the policy to see if the particular peril that caused your damages is covered. As mentioned in my previous blog, there is a greater chance that there will be coverage under an open perils policy rather than a policy that covers only named perils.

If you think that your claim has been mistreated by the insurance company, you can try to negotiate with the adjuster. If the adjuster argues that your policy doesn’t cover certain damage, ask to see the specific language in the policy that excludes it. Before meeting with the adjuster, ensure you’ve reviewed the policy for language that you believe permits coverage, and be ready to point that out to them. Stand up for your position — the adjuster may try to convince you that your interpretation of policy limits is faulty since you don’t regularly work with these contracts. However, remember that your understanding of the policy language matters, and if your interpretation is reasonable, your argument should ultimately win the day.

If you cannot get satisfaction from the adjuster assigned by the insurance company to your claim, you should ask to have the matter referred to their supervisor. There are several levels of supervisors in each insurance district office. Understand that you have a right to take your claim up the ladder of command.

If the dispute centers upon the contractor’s cost of repairs, you can request a meeting with the adjuster, contractor, and yourself to go over the estimated costs. The adjuster may hire a contractor to come out to calculate the cost of repairs. You do not necessarily need to use this contractor, but keep in mind that his estimate will play a role in the amount of coverage awarded to you.

If you still cannot resolve satisfactorily with the insurance company, your next stop should be to meet with a lawyer knowledgeable in insurance law. Homeowners’ insurance policies are generally organized in sections, which have been somewhat standardized throughout the insurance industry. Section I defines the property covered under the policy: Coverage A addresses your dwelling, Coverage B addresses other structures on the property, and Coverage C addresses personal property. Section D is directed to loss of use and additional living expenses resulting from a loss. Additional Coverages are generally listed next, including such things as debris removal, the collapse of a structure, etc. In an open perils policy, specific Exclusions are stated in the following section. Section II of your policy addresses liability coverage if someone sues you for injuries. Attached to the back of your policy may be one or more endorsements, which purport to add additional coverage, usually resulting in additional premiums. A mold/mildew/rot endorsement is a typical example. As you will quickly realize in reviewing your policy, the coverage you have are widely separated in the policy from the Exclusions that apply to limit coverage, which is again separated from any applicable Endorsements that may mitigate the Exclusions to again provide for coverage. You must go back and forth between these sections to determine whether coverage for a particular loss exists, which is very difficult. A lawyer familiar with insurance policies will be able to fit the various sections of the policy together to advise you as to whether you have a good argument for coverage under the circumstances of your claim.

An experienced attorney should be able to advise you as to whether you have a good claim against the insurance company based on his review of the policy as applied to your facts. A competent attorney should next prepare a thorough letter to the adjuster and her supervisor, describing in detail the facts of the claim, the damages, and the specific provisions in the policy that support coverage. Hopefully, at that point, the company may be willing to negotiate a favorable resolution of your claim without further legal action. All too often, however, the insurance carrier is unwilling to deviate from its position, once again believing that the homeowner will shy away from the expense of litigation. If your claim is significant, and the amount offered is ridiculously low, you may be forced to stand up for yourself and file suit.

If you have more questions about homeowners insurance and need a professional’s experienced opinion, contact the lawyers at Horwitz & Horwitz today.

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