The Wall Street Journal recently ran an informative article about insurance deductibles. In most parts of the country consumers were accustomed to deductibles of$500 or $1000. Of course in Texas we have been well acquainted with percentage based deductibles for a number of years now.

The article gives some good advice for consumers who want to remain educated about their insurance coverage.

1. “Newer policies adopted in the last decade provide less coverage than before for plumbing leaks, backed-up drains or damage to foundations.
   • Traditionally insurance carriers have covered sudden and accidental discharge of water up to the full limits of the policy. Many are now listing a sublimit for these water claims that can be as low as $5,000.
   • Water Backup is typically an extra endorsement on most insurance policies.
   • Foundation Water Damage is also typically an extra endorsement on most insurance policies. A must have in the DFW area.
   • Seepage or Slow Leakage coverage is not offered by most insurances carriers any more. It is still offered as an extra endorsement with a few and is important for leaks that are hidden or take a long time to become apparent.
2. “Play ‘what if’ games with your agent so you understand what is covered”
   • Many consumers focus on the limits of the policy as spelled out on a quote or a declaration page. But neglect a more important question, what perils does this actually protect against. In Texas we have many different forms of insurance from an HOA to HOC, HO1 to HO5, and many carriers have their own forms they have created. Make sure to have an agent who is educated about their policies and also their competitions.
3. “Two losses in three years that aren’t related to weather will result in higher rates or even a decision to not renew your policy.”
   • I advise my clients to consult with me before a claim is made just to make sure it is a smart decision for the long term. Immediately relief may be desired right now, but planning for the future is equally important.
4. “Claims for catastrophic events like fires and tornadoes are less likely to hurt you.”
   • An important lesson here is that claims are weighted differently with insurance companies. Wind/Hail related claims will not increase your price in the short term. But water and theft claims definitely will. While comprehensive claims on your car insurance will have an extremely minimal impact on your pricing, a $400 fender bender could increase the cost of your premium far beyond that.

Unless you’ve been hidden under a rock you have probably heard or noticed that almost every major insurance carrier uses a credit rating when calculating insurance premiums. Different carriers use this information to different degrees but almost all of them use a credit based insurance score in some way.

I found a very informative article from Mint.com that explains their rationale and it’s not the reasons you’d immediately think.

“Insurance companies have the same issues lenders have: understanding the risk of doing business with certain consumers. It’s not necessarily the risk of being paid or not being paid for their services (premiums). It’s more so the risk of providing a policy for someone who is more likely to file claims and thus be a less profitable customer. It’s all about the money.”

Sadly, insurance companies are not charities but do exist as a profit seeking business. The sole responsibility of an actuary is to find a correlation between individual characteristics and the likelihood to file a claim. Over time that correlation has been found between credit and likelihood to file a claim.

“Determining whether or not you’ll pay your premiums is not the primary reason some of them pull your credit reports and credit scores. The primary reason is to determine if they even want to do business with you and/or under what terms. Despite what many believe, how you manage your credit is very predictive of what kind of insurance customer you’ll be. It’s predictive not only of your likelihood of filing claims but also predictive of how profitable you’ll be. If it weren’t, insurance companies wouldn’t spend the money buying millions of credit reports and scores each year.”