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Insurance risk

Increasingly, insurers raise rates or cancel policies if ratepayers file a claim - and sometimes if they merely call to ask about filing a claim.

Alicia Medeiros had potential claims recently on both her auto and homeowner's policies, but she didn't file for either.

Instead, the Clearwater accountant paid about $1,000 that her insurance company probably would have reimbursed. Part went for car repairs after a fender bender. The rest was for a new refrigerator after an apparent lightning strike. Her logic was simple:

"The atmosphere in the insurance industry is so explosive that they'll use anything to cancel you," she said. Medeiros, 44, said an auto insurance company once dropped her after paying a $400 claim. She didn't forget the lesson.

Like Madeiros, many consumers are starting to realize that filing an insurance claim may be more costly in the long run than paying for modest damages out of pocket. Increasingly, insurers are raising rates or canceling policies if ratepayers file a claim - and sometimes even if they merely call to ask about doing so.

The only good news: Once people know how the system works, they can save money by raising their policy deductibles and lowering their insurance rates.

"It's a bit outrageous to pay premiums for claims and not be able to file them, but you certainly don't want to have a low deductible if you're not going to file a little claim," said Robert Hunter, director of insurance for the Consumer Federation of America and a former Texas insurance commissioner.

Some consumers haven't caught on. They remember the days of $50 deductibles and think insurance is something you are supposed to use.

"There is a little bit of an attitude on behalf of a lot of consumers who feel "This is what I pay my bills for,' " said Tom Terfinko, assistant director of consumer services for the Florida Department of Financial Services. "Not filing a claim is a new way of thinking. But it's a hard market out there, and people should take that into consideration."

So what do you really risk by filing that small claim?

If you are at fault in a car accident, you may get hit with a surcharge on your premium. Even worse, your insurance may not be renewed if you have other accidents or traffic violations. Three accidents over three years can result in non-renewal even if you were not at fault in any of them.

The situation with homeowner's insurance is worse. Since Hurricane Andrew hit Florida in 1992, insurance companies have been shedding policies, even dropping people who have never filed a claim.

"It's a re-underwriting each time a policy comes up for renewal," Terfinko said. "Companies have their underwriting guidelines, and claims frequency is one of the things they look at." He said it's not just the payout that matters, it's also the administrative cost of processing claims.

"It costs the company just as much to do a $500 claim as a $5,000 claim," he said.

If you apply for insurance with a new company, it can check your claims history in a national electronic database, the Comprehensive Loss Underwriting Exchange, otherwise known as CLUE. If the company does not like what it sees, you may have to pay higher premiums to get coverage or you may be turned down. Some insurance companies are so worried about future mold claims that they will not write new home insurance on properties with past water damage claims.

So the question for consumers to consider whenever they have an insured loss is: Will the reward for filing outweigh the potential risk?

"I've become pragmatic about the situation," said Charles Settgast, 66, a retired executive in Pinellas Park. He said his rule of thumb is to file a claim only if damages are at least twice the amount of his policy deductible.

How big should that deductible be?

Hunter at the Consumer Federation recommends a $1,000 deductible on both home and auto policies and calls $500 an "absolute minimum."

"If you have some money in the bank, you can go higher," he said. "That's the way businesses insure. They self-insure the first layer and buy insurance above the self-insurance."

Hunter said he does this for himself, using a bank account he set up 25 years ago. Each year he deposits the money he saves on premiums by buying policies with a $5,000 deductible rather than a $500 deductible.

"I've got nearly $10,000 in the account, and I've paid myself some claims," he said.

The insurance industry also urges consumers to opt for higher deductibles.

"It's important to recall what insurance is really for," said P.J. Crowley, vice president of the Insurance Information Institute. "Insurance first and foremost is to compensate you for losses you can't afford yourself."

State Farm Insurance, the largest U.S. underwriter of homeowner's insurance, is moving toward a system in which pricing is based on a deductible of 1 percent of the insured value of the house. So a home insured for $160,000 would have a $1,600 deductible. The annual premium might be $1,000.

A homeowner who wants a $500 deductible instead would pay a hefty 29 percent surcharge, or $1,290 a year. On the other hand, one willing to accept a 2 percent ($3,200) deductible would get a 14 percent discount, or a premium of $860 a year. If state regulators approve, Florida will become the 23rd state in which State Farm policies are priced this way.

"It's a way to help hold down the cost of insurance," State Farm spokesman Tom Hagerty said.

Many insurance agents tell their customers that paying extra for a low deductible is a losing proposition. Most consumers who opt for low deductibles will pay more in premiums for the coverage than they will collect on the small claims.

"You don't want to put yourself in a position to swap dollars with an insurance company because I can guarantee you that you're going to lose," said Mark Berset, president of Comegys Insurance Corner in St. Petersburg.

He said a couple with two cars might save $120 a year on auto insurance by increasing the deductible from $500 to $1,000. While they could bank the savings, he recommends that they use it to buy an umbrella liability policy that will increase the upper limits of their liability coverage.

"You can afford a $1,000 deductible on your car," he said. "You can't afford a $1-million claim."

For homeowner's insurance, Berset recommends a $2,500 deductible on an expensive house.

He said homeowners already have large deductibles for hurricane coverage - typically 2 percent of the insured value of their homes - although many do not realize it.

You do not have to file a claim to create a problem for yourself. Merely reporting that damages have occurred may prompt your insurance company to open a claim file. If you don't follow up, the case may show up on your CLUE report as a claim closed with zero damages paid. However, not all companies and not all agents handle reports and other inquiries the same way.

While the current situation is painful, it should improve eventually, said Hunter at the Consumer Federation.

"We go between a soft market and a hard market," he said. "In a soft market, insurance companies actively try to gain market share. You can have three, four or five claims over a five-year period and probably maintain your insurance. Then there are periods of what are called hard markets where it becomes less competitive. Someone with one or two claims might lose their insurance. During those times people should be very wary about filing small claims. The market will soften and things will get easier again."

- Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.

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These factors weigh in favor of not filing a insurance claim when damages are relatively minor. How much is "minor" depends on your financial resources. If you call your insurance agent, ask if you can discuss the situation without opening a claim file.

- No one was injured.

- The accident was your fault.

- You hit a stationary object such as a tree or parked car.

- You or someone else on your policy had an accident or traffic violation in the previous three years.

- You have a teenage driver on your policy.

- No one was injured.

- Your damage is from water or mold.

- You had a claim in the previous five years.

* Source: Times research