Insurable Interest & Homeowners Claims
Insurance companies advise customers to read and understand their homeowners insurance policies. If there are questions, they are directed to contact their agent for more information. Sound advice, but in the real world, generally ignored. The recommendation itself is offered more as a disclaimer than a source of additional information.
Reading a homeowners insurance policy can be intimidating and off-putting. With all the jargon, exclusions, and conditions encountered, policyholders are more than likely, not going to read it at all. As long as nothing “happens”, it’s a no harm, no foul situation. When something does happen, the consequences of this approach will surely lead to a “disaster within the disaster”. Let me explain why I use this phrase to describe the experience of most claimants.
Property conditions in all homeowners policies detail Insured Duties After a Loss. The insured is required to do the following:
- Provide the insurer with prompt notice of the loss.
- Notify the police if a loss is caused by theft.
- Protect the property from further damage, keep records of any repair expenses.
- Allow the insurer to inspect the property.
- If requested, submit to an examination under oath.
- Within 60 days, send a signed, sworn proof of loss.
- Prepare an inventory of damaged and undamaged property including quantity, description, age, and replacement cost and loss amount. Attach to the inventory any bills, receipts and related documents that substantiate the figures of the inventory.
Generally, homeowner/claimants have no idea this will be asked of them at the point of a large loss or total loss claim. One might question, “Why is the insurance company asking the claimant to do this”? and “What’s the point, if it’s perfectly obvious the claimant has lost everything”?
Why are they asked to do this?
Three basic reasons why an inventory must be completed by the insured.
- Unlike a life insurance policy, an insurable interest must always be shown at the point of a homeowners insurance claim. That’s why the insurance company asks for all of the proof a claimant can provide; to establish that they owned the property claimed and therefore have a valid claim with the insurance company. Many classes of personal property have coverage limitations, known as sub-limits. Other types of property may be excluded from coverage entirely. Photo’s, lists, receipts and other forms of documentation combined are generally accepted ways to prove ownership of personal property. Ultimately, the burden of proof lies with the insured to establish their ownership and insurable interest in what they are claiming as lost.
- In a typical large loss/ total loss claim, there are two broad categories of personal property to be accounted for: 1) Seen Personal Property – This can include three sub-sets of personal property: undamaged property, salvageable property and destroyed property, and 2) Unseen Personal Property – Hidden under the rubble pile or completely destroyed and unaccounted for due to the circumstances of the claim. Generally, the more severe the loss, the larger the percentage of unseen personal property. Unseen personal property can be a very large percentage of a claim that can remain unaccounted for due to the failed recollections of an emotionally involved claimant. Ultimately, this places the claimant in a severely compromised position when negotiating with the insurance company to arrive at a fair settlement of the claim.
- Unknown to most claimants, settlement of a homeowners claim is a three-step process to arrive at a final payout and closure of the claim.
STEP #1 – Once a complete inventory of items to be claimed is produced by the insured (within 60 days of the disaster), the adjuster will use the information provided by the insured to depreciate each line item of the claim to arrive at a total depreciated settlement amount. This amount is referred to as the Actual Cash Value aka ACV. The initial check to the claimant will generally be an amount 50% or less of what current replacement cost may be.
STEP #2 – The insured will then be tasked with replacing each item of personal property with a similar item also termed as “like kind and quality”.
STEP #3 – Receipts are turned into the insurance company as each item is replaced. The company will then issue a supplemental check for the difference between the original ACV check issued and what the replacement cost ultimately is. The key concept most claimants fail to understand is that the insurance company promise to pay is based upon replacement with an item of like kind and quality. This process continues until all personal property has been replaced or the policy maximum for Coverage C (Contents) has been reached.
The key take-away for insureds’ and their financial advisor to remember regarding homeowner claims is even if there is a replacement cost endorsement for contents on the homeowners policy, the insurance company only owes the claimant an actual cash value settlement until the claimant proves they have replaced each item claimed AND that they have replaced each item with a similar item of like kind and quality. This can only be done after an itemized claim has been produced by the insured indicating in complete detail what they intend to claim as lost.
Most homeowner and business claimants enter a disaster claim settlement process wondering what’s going to happen? By the time the claim closes, they often leave wondering what happened? Unnecessary lessons learned the hard way; this can truly be a “disaster within the disaster”.