Costly Insurance Mistakes

The following is a post from a reader who's a CFP and blogs at Swimming Upstream to Wealth:

Having lived in Florida, I have witnessed how the insurance companies look for any little violation to deny a claim. Numerous homeowners in Florida were denied a claim after the slew of hurricanes hit in the last few years.

While insurance is probably the most boring topic in the world, it becomes awfully important when you file a claim. Here are a few items that can catch you off guard.

Rental Car Coverage

Most people know their existing car insurance will cover them in a rental car so they decline the expensive insurance offered by the rental car companies. As rental car income dropped due to savvy customers declining this coverage, the rental companies changed their contracts.

If you read the contract now, you will see that, if in an accident, you agree to let the rental car company pick the repair shop, and you agree to pay for the lost rental value of the car while in the shop. Typically, your personal auto insurance company will reimburse you the amount it would cost to repair the damage in one of their approved repair shops. 

So let’s say you back into a street light in a rental car and smash the bumper. Your insurance company provides you with $1,000 because that is what they would pay one of their approved repair shops. The rental car company may choose a repair shop, usually an internally owned shop, that charges $1,200 for the same bumper. Guess who pays the extra $200—you do.

And, the rental company alerts you that it will take 10 days to repair the bumper, which costs you $50 a day due to the lost rental income. Of course, the 10 days are probably 3 or 4 more than what it should take to repair the bumper. As much as it pains me to say it, you may want to purchase the rental car insurance the next time you rent a car.

Inadequate Home Coverage

Most homeowners are under-insured when it comes to their homes. You probably put the policy in place years ago when you bought the house and haven’t revisited the policy in some time. Like some, you probably think your friendly agent reviews your policies periodically to ensure you are adequately covered. Don’t count on it.

The biggest area most homeowners are under-insured is the replacement cost. If your home burned to the ground, how much would the insurance company reimburse you? The best policy is guaranteed replacement cost. This means the insurance company will pay whatever it costs to rebuild your home. Most folks have policies where the replacement cost is well below the actual cost to rebuild. Or they have coverage for 80% of the replacement cost. With the average cost to build a home at $125 a square foot, that 20% could cost you thousands.

This is even a bigger problem for folks that have older homes since these homes were often built with more expensive woods and stone than today. Older homes can cost $300 per square foot to rebuild.

Remember, insurance should only be used to cover catastrophic losses, but you need to review your policies to make sure a catastrophe won't break your bank.

Comments

[specialkindofstupid.com]

Gotta love those insurance companies.

[Traciatim]

Not sure about the rental cars around here as I haven't rented in a while. Howeer this is one option that I like about my home insurance. When I was purchasing the home the information was sent to my Lawyer as the replacement value as listed was $1,000,000. We called assuming it was a type-o since on the phone they calculated my replacement value on my square footage at just under 180K.

Turns out they have a policy in place that the replacement cost is calculated at the time of a loss based on the most recent available home data in the area up to the $1,000,000 listed. So no need to keep looking over policies year after year.

I still will be reviewing the policy and comparing providers yearly, just to be sure I'm still getting a good deal, but it's just one less thing on my mind, so I'll probably stick with them a while.

[SAHM-CFO]

@ "Having lived in Florida, I have witnessed how the insurance companies look for any little violation to deny a claim. Numerous homeowners in Florida were denied a claim after the slew of hurricanes hit in the last few years."

Just to throw this out there: it is my experience that companies offering homeowners insurance are not "look(ing) for any little violation to deny a claim". You buy a policy, if the policy does not cover xyz problem, then you will not be reimbursed for xyz if it happens. Lesson: buy the right policy for your needs.

re hurricane damage: Basic homeowners insurance does not include flood damage. You must buy additional flood coverage. Your ins. company administers the plan, the federal government determines the limits/benefits of coverage.

The bast part of the guest post "You need to review your policies"