Homeowners Insurance: Will You Be Treated Fairly If You Have to Use It? (Part 3)

In the previous two sections of this blog, I have shared some tips on choosing an insurance company and on how to determine the type of homeowners 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 adequately compensate you on your claim. 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 homeowners 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 in the policy set the obligations for both you as the policyholder and for 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 as well. Further, keep in mind that whatever policy you purchase, it 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. In fact, 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 adjustors 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 policy holders. 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 that they have to accept every claim submitted to them. 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 very difficult 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 basically 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 treated unfairly 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, make sure you’ve reviewed the policy for language that you believe does permit coverage, and be ready to point that out to him/her. 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, keep in mind that your understanding of the policy language is what 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 his/her 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 estimate the cost of repairs. You do not need necessarily have 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 come to a satisfactory resolution 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, 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 Coverages you have are widely separated in the policy from the Exclusions that apply to limit coverage, which are 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 plainly is very difficult. A lawyer familiar with insurance policies will be able to fit the various sections of the policy together in order to advise you as to whether you have a good argument for coverage under the circumstances of your claim.

A good attorney should be able to advise you as to whether you have a good claim against the insurance company based upon his review of the policy as applied to your facts. I believe 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. We’ll take up the situations you face if you do sue the insurance company in my next blog.

About Barbara Horwitz

Barbara Horwitz is an experienced bankruptcy attorney helping people get past financial difficulties. She believes in creating a relationship with clients and is dedicated to making the bankruptcy process as easy and stress-free for clients.

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