Homeowners Insurance FAQ Claims

What is a homeowners insurance claim?

An insurance claim is a request to an insurance company for compensation when the person with the insurance has a loss or sustains damage that is caused by an event or peril covered by the insurance agreement or policy.

My property has been damaged. What do I need to do?

As soon as possible after discovering the damage, you must give notice to your insurance company. Every homeowners policy requires the insured to give prompt notice in case of a loss. Generally, you can report the loss to the insurance agent that sold the insurance to you. Many insurers also have toll free claims numbers their insureds may call regarding claims.

What information do I need to provide to the insurance company when I make a claim?

When you report a claim, your insurance company needs to know:

  • The name of the person insured
  • The location of the property that was damaged
  • How the property was damaged.
  • The date and time the loss occurred.
  • The policy number

What if I don’t remember my policy number?

It is not essential that you provide the insurer with your policy number. It might speed things up some, but it is not essential.

My house was destroyed and all of my important papers, including my insurance policy, were blown away. What do I do?

You may request a copy of the policy and declarations page from your insurance company. You may make this request when you call and report the claim or sometime later. You may also request a copy of your insurance policy from your agent.

When I called the insurance company to report my loss, the person I spoke to said that an adjuster would come to my house. What is an insurance adjuster?

An insurance adjuster investigates insurance claims to determine the extent of the insurance company’s obligation to pay money to the insured. There are several different types of insurance adjusters:

An inside adjuster is a person who is employed by an insurance company and that works in an office setting and reviews information about claims received from the insured or from other insurance adjusters.

A field adjuster is a person that goes to the location of the loss and performs an investigation. Most of the time, a field adjuster will prepare a written estimate of the cost of making repairs or replacing the damage or destroyed property.

An independent adjuster is a person that works for insurance companies to investigate reported claims but is not an employee of the insurance company. Many independent adjusters work for more than one insurance company.

A public insurance adjuster is a person that is employed by the insured to assist investigate claims and estimate the insured’s losses. In some states, like Texas, individual insureds may hire public insurance adjusters directly. In other states, like Alabama, public adjusters frequently hired by attorneys to work for their clients.

My insurance company denied my claim, what should I do?

You should consult with a qualified lawyer immediately.

I got my insurance check, but it was $1,000 less than my damage. I asked the adjuster and he said that was the “deductible.” What is a deductible?

A deductible is the amount of a loss that a homeowner must pay in order for the insurance to apply to the loss. For most homeowners policies, the deductible is a flat amount stated on the declarations page of the policy. The deductible is frequently withheld from a settlement.

The value of my loss exceeded my policy limits. The adjuster says I still must pay a deductible. Is that right?

Be aware that if the value of your loss exceeds your policy limits, then you may not have to pay a deductible. This is because the order in which claims are adjusted. First, the adjuster determines the amount of loss. Second, the adjuster applies the deductible. Third, the adjuster imposes the limits of coverage. Joe suffers a loss on his house and has $10,000 in coverage. The adjuster determines that the loss at $20,000. Joe has a $1,000 deductible.

  1. Determine the amount of the loss – $20,000
  2. Apply the deductible –    -1,000
  3. Impose the limits   10,000

The insurance company pays $10,000 because the deductible came “off the top” or was absorbed.

I made a claim on my policy because my house was destroyed by fire. The insurance company sent me a letter saying that it wanted to take my statement under oath. Do I have to give a statement?

Yes. Insurance policies impose certain duties on insureds following a loss. One of these duties is to submit to an oral examination under oath. Failure to submit to such an examination would breach the terms of the policy. If the insured breaches the policy, the insurance company is relieved from paying.

What happens when one of the parties to insurance policy breaches its terms?

Breach of the terms of an insurance policy frees the other party from its obligation to perform its duties under the policy. If a homeowner suffers a loss and then refuses to submit to an examination under oath, then the insurance company is not required to pay the loss.

What is a first-party insurance claim?

A first party insurance claim is made by a person that is named as an insured in the policy.

What is the difference between a first-party insurance claim and a third-party insurance claim?

An insurance policy is a contract between an insurance company and the insured. An insured is considered to be a “first-party” because the contract anticipates protecting him or her against damage or losses that give rise to claims covered by the policy. A third-party claim arises when a third-party makes a claim against the insured for liability due to damage or losses caused by the insured. A single example to illustrate both types of claim.

Joe owns a car that he insures through ABC Insurance Company. Joe’s wife, Joy, occasionally drives Joe’s car and is identified in his policy as an insured driver. Joy, while operating Joe’s car, is texting while driving and crashes into George’s car damaging both vehicles.

  • Joe’s ABC policy insures his car against damage caused by collisions with other cars. He makes a first-party-claim on his own policy for the damage to his car caused by the collision.
  • Because Joy was at-fault in causing the damage to George’s car, he makes a third-party claim against the liability coverage afforded by Joe’s ABC policy.

Joe’s first-party claim is a matter of contract. He paid ABC to cover his vehicle from damage caused by collisions. Joe also paid for coverage for damages suffered by third-party’s due to his or Joy’s negligence. Thus, George’s claim is a matter of tort law.

What is the difference between Replacement Cash Value (RCV) and Actual Cash Value (ACV)?

Replacement Cost Value is the method used to determine the cost to replace property for an insurance claim. Usually, RCV is figured on the cost of a new replacement of the item. For example, if a tornado blows the roof off of your home and it will cost $10,000 to replace it, then the RCV is $10,000.

Actual Cash Value (ACV) is the method used to determine the value of property for insurance claims given its age. ACV takes into consideration the effects of time on property. While some property gains value or appreciates over time, usually property loses value over time which is called “depreciation.” For example, if a tornado blows the roof off of your home and the roof is 10 years old, then its Actual Cash Value is determined by computing its replacement cost value, described above, and then subtracting the depreciation from the cost to replace.

A roof shingle that was nailed on a roof 10 years ago is worth a great deal less than a shingle that is new and still bundled. It is worth less because it has nail holes in it and has been left out in the weather for 10 years. Usually, the ACV of building components, are figured by a formula that considers the rate an item, like a shingle, loses value. The formula for computing ACV

RCV – (DPR * RCV * AGE) = ACV
ACV Actual Cash Value
DPR The rate of depreciation
Age the age of the item in years
RCV Replacement Cash Value

 

Assume that the cost of a new roof to replace a 15 year old roof is $6,750. We will assume that the depreciation rate for asphalt shingles is 5% a year.

RCV – (DPR * RCV * AGE) = ACV
$6,750 – (.05 * $6,750 * 15) = $1,687.50
ACV Actual Cash Value $1,687.50
DPR The rate of depreciation 5%
Age the age of the item in years 15
RCV Replacement Cash Value $6,750

 

I have replacement coverage on my home and had a loss to the roof. The adjuster told me that the roof had to be replaced. When I got my claim check, it was for a great deal less than the cost to replace the roof. What is going on?

Most insurance policies require the insured to actually replace the damaged property before paying the depreciation under replacement coverage. That is, the company will pay the ACV, but hold back the amount of the depreciation until the property is actually replaced. Once it is replaced, the insured makes a supplemental claim for the amount held back.

I got my claim check and discovered that the insurance company made it payable to both me and my mortgage company. My bank won’t cash the check without my mortgage company’s endorsement. I need to pay the contractors that have worked on my house. What do I do?

Obtaining a mortgage company’s endorsement may be as easy as dropping by your bank and having your loan officer endorse it or as difficult as being required to file a lawsuit against the mortgage company. If a local bank financed your house and did not sell the mortgage, then start with it. Many times banks want assurance that the insured will use the money to repair the house. If the repairs have been made to your house, but the contractors remain unpaid, the bank will frequently take the claims check and issue payment to contractors directly. If your mortgaged was sold to Penny Mac, it’s web page has directions for obtaining its endorsement and getting the contractors paid. Other national lenders may prove more difficult. When dealing with any mortgage company payee, keep notes on telephone conversations, get first and last names of customer service representatives, and use either Priority Mail with tracking, certified mail with a return receipt or a national express delivery service like Fedex to transmit the claims check to the lender. Before sending your claims check off, check with the insurance company that issued the check to see if it has an alternative method for getting payments to the contractors. Consult a qualified attorney.

Coverage

The insurance adjuster says my claim is not covered. What does that mean?

“Coverage” is a multipurpose insurance term. In this case, the insurance adjuster is telling you that the insurance company won’t pay because your policy does not address the type of loss suffered to your property. Insurance policies either does not include or excludes certain types of damage and certain types of property from the insurance.

For instance, most homeowners insurance policies exclude damage caused by flood water from coverage. “Flood” usually means a sudden inundation by water of land that is ordinarily dry. The classic case is when a big rain causes more water to run off than the land can drain, like when several inches of rain fall in a couple of hours. If my home is damaged by water rushing into it because it rained 5 inches in two hours, my insurance company will deny my claim for the loss caused by flood water because flood damage is excluded from coverage on my policy. But, that does not mean that every loss caused by a sudden inundation of water is not covered. Many policies make an exception to the flood exclusion with a sewer backup endorsement. In this case, even though the policy excludes flood damage, the endorsement insures over the exclusion when the flood is caused by sewage backing up from the system and out of the drains and into your home.

However, the prudent homeowner always consults with a qualified attorney to determine whether the company’s denial of coverage is appropriate.

What is replacement coverage?

Replacement coverage insures property against devaluation by depreciation. The loss benefit is paid according to the property’s Replacement Cash Value.

I insured my house to $50,000 even though it is worth $100,000 because most of the time homeowners claims are less than the full value of the house. I am betting that if I have a claim, $50,000 will cover it. Sure enough, I had a house fire that did $40,000 of coverage to my house. The adjuster wrote me a check for $20,000 because he said that I co-insured the house. What does he mean by “coinsurance”?

Co-insurance is imposed on a homeowner who insures his house for less than a stated percentage of the value of the property. If a homeowner insures her house for $50,000 and it is actually worth $100,000, then the insurance policy penalizes the homeowner when a claim is made at the same percentage the home is underinsured. In our example, the home is insured to 50% of its value and that means that there is a 50% coinsurance rate. When the homeowner makes a claim for $40,000 in damage, the insurance company will apply the coinsurance rate of 50% and only pay $20,000. Obtaining insurance through an experienced agent who explains the way this works when the policy is purchased is the best way to avoid coinsurance surprises.

My insurance policy was canceled, and my mortgage company got coverage for me. Does the policy my mortgage company got on my house fully protect me?

Absolutely not. When a mortgage company obtains insurance coverage because its borrower has failed to keep the residence insured, the policy issued is called a “force-placed” policy. Force-placed policies only cover the mortgage company’s interest and not necessarily the homeowner’s interest. These policies do not insure the homeowner’s equity or personal property. Forced-placed policies do not insure the homeowner against liability claims and do not have coverage for losses caused by loss of use.

Appraisal

What is insurance appraisal?

Insurance claim appraisal is an alternative dispute procedure found in most property insurance policies. It is an “alternative” to litigation for determining the amount of a covered loss. The following is a typical appraisal provision found in residential policies:

If you and we do not agree on the cost to repair or replace, actual cash value of or amount of loss to covered property when loss occurs, either party may demand that these amounts be determined by appraisal. If either makes a written demand for appraisal, each will select a competent, independent appraiser and notify the other of the appraiser’s identity within 20 days of receipt of the written demand. The two appraisers will then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, you or we can ask a judge of a court of record in the state where the property is located to select an umpire.

The appraisers will then determine the amount of the damage stating separately, in detail: the cost to repair or replace, actual cash value of, and amount of loss to each building item and item of personal property. If the appraisers submit a written report of any agreement to us, the amount agreed upon will be the amount of the damage or value. If the appraisers fail to agree within a reasonable time, they will submit only their differences to the umpire. Written agreement so itemized and signed by any two of these three sets the cost to repair or replace, actual cash value of and amount of loss to each item. Each appraiser will be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire will be paid equally by you and us.

My house was damaged by a tornado. When the adjuster came out to inspect it, he didn’t even get out of his truck. It’s been 3 weeks and I haven’t heard a word. Should I go ahead and invoke the appraisal provision?

No. The first 7 words of the appraisal provision – “If you and we do not agree” – inform about the necessity of a disagreement between the insurance company and the insured prior to demanding appraisal. In the ordinary course of things, the insurance company will eventually make some payment on the loss. When payment is made, the insured should consult with a qualified attorney about the adequacy of the payment given the terms of the policy. If the payment reflects all that is due under the terms of the policy, then there is no disagreement and no need to demand appraisal. On the other hand, if the payment is inadequate to repair or replace the damaged property, on consultation with qualified counsel and a qualified insurer appraiser, a disagreement of the amount of loss may exist and give rise to a demand for appraisal.

An example:

Joe owns a house in Jacksonville, Alabama. Joe’s house was damaged when it was hit by a tornado. Joe reports the loss to his insurance company, ABC Insurance Company. ABC sends an adjuster who inspects the damage to Joe’s house and prepares a written estimate of Joe’s loss, $10,000. Joe’s contractor also prepared an estimate of the cost to repair the damage, $40,000. Assuming that everything that the contractor estimated was covered by the insurance policy, Joe ought to consider invoking the appraisal provision of his policy. On the other hand, if ABC issues a check to Joe for $39,000, which is the full amount of the loss less his deductible, then there is no disagreement and no need to demand appraisal.

My insurance company denied my claim because it said my damages were not covered. Can I still invoke appraisal?

Not in Alabama, where the purpose of appraisal is to set the amount of money associated with the loss. This means that the appraisers can determine the value of the loss but cannot say what caused the loss or whether it is covered by the policy.

Can I name myself as my own appraiser?

No, policies generally require that the appraiser be independent and competent. Even if the homeowner is competent to serve as an appraiser, he would not be considered independent.

What qualifications should an appraiser have?

Ideally, an appraiser is familiar with both insurance claims and construction methods and materials. Appraisers rely on specialized software for estimating the loss, so training in the use of that software is essential. As a rule, residential real estate appraisers do not have the qualifications necessary to serve as an insurance appraiser.

Bad Faith

What is bad faith in the context of insurance claims?

The law requires the parties to a contract, like an insurance policy, to deal fairly and in good faith with each other. Because an insurance company has such unequal power in dealing with its insureds, the law recognizes two special types of bad faith in the context of insurance claims. The first is bad faith failure to pay a claim. The other is bad faith failure to investigate a claim.” Both types of bad faith claims In order to prove that an insurance company has acted in bad faith, the insured must prove that the company did something underhanded or deceitful in failing to pay the full amount of a claim.

What must a plaintiff prove to establish a claim of bad faith?

Alabama has one claim for bad faith that may be proved in two ways. The four requirements below – or elements – must be shown by the evidence in order to prove a “normal” case of bad faith.

Legalese Plain English
an insurance contract between the parties and a breach thereof by the defendant The person suing had to be covered by a policy of insurance.
an intentional refusal to pay the insured’s claim The person suing has to show that the insurance company was trying to beat him or her out of claim money. An insurance company will want to say that it was all a big mistake.
the absence of any reasonably legitimate or arguable reason for that refusal The insurance company has to show that it didn’t pay because it believed that there was a good reason not to pay. For instance, an insurance company has a legitimate basis for not paying a flood loss if flood damage is not covered. But, it would be bad faith to deny the claim because of a flood exclusion when damage was caused by a fire.
the insurer’s actual knowledge of the absence of any legitimate or arguable reason The insurance company knew it was trying to beat the insured when it denied the claim for the wrong reasons.

Alabama has another method of proving an “abnormal” case of bad faith. In order to do so, the plaintiff must prove one of the following:

Legalese Plain English
The insurance company intentionally or recklessly failed to investigate the plaintiff’s claim The insurance company did not send out a qualified adjuster to respond to the plaintiff’s reported claim.
Intentionally or recklessly failed to properly subject the plaintiff’s claim to a cognitive evaluation or review Even though it sent out an adjuster that investigated the loss, the insurance company never takes the facts gathered by the adjuster into consideration in deciding whether to pay the claim or not.
Created its own debatable reason for denying the plaintiff’s claim The insurance company just made something up in order to tell the insured it wasn’t going to pay. For example, after the insured suffered a loss, the insurance company cancels the policy retroactively because the insured signed the application in red ink and not blue.
Relied on an ambiguous portion of the policy as a lawful basis to deny the claim The insurance company played games with the way it wrote the policy in order to deny the claim. Assume that the policy covers damage caused by lightening, which struck the house and knocked it off of its foundation. The company denies the claim because damage cause by earth movement is excluded

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