3 Strikes and You’re Out . . . Maybe

Whenever there is an auto insurance claim, insurers must determine fault. If you are found to be at fault for a claim, the insurer will consider you an increased risk and use this information to increase your premiums. If you are not at fault, the claim will not directly result in an increase of your premiums. This probably makes sense to most people, but you may be surprised to learn that things are a bit different when it comes to home insurance claims.

Assume you make a claim to repair a roof damaged by a hail storm, or your expensive mountain bike is stolen. What should you expect to happen to your home insurance rates?

Home insurers provide new customers with a “claims-free” discount. Claims-free means just that, you have not made a claim with that insurer. File a claim of any kind under your policy and you are no longer “claims-free”. The discount is lost and your home insurance premiums increase. However, in addition to paying a higher insurance premium, you are now 1 out of 3 claims away from the possibility of having your policy cancelled by the insurer. 3 strikes and you’re out!

“3 strikes and you’re out” is not a rule that’s set in stone, but a guideline used by insurers to recognise and address clients that may be inclined to make frequent small claims, or have claims that indicate they are not taking reasonable precautions to protect or maintain their property. While there are differences from one insurer to the next, most would consider cancelling, or not renewing a policy for a customer with 3 substantial home repair claims, or 3 claims for similar events such as theft of property.

You never want to have a home insurance policy cancelled by an insurer as things can get very difficult and expensive for you when you attempt to find new coverage. Knowing that you’ve had your policy cancelled will make you far less attractive as a new client to other insurers.

So knowing that even a single small claim can lead to a premium increase, and that there is a significant risk that your insurance will be cancelled if you make 3 claims, why do insurance companies sell coverage that could encourage frequent claims? The short answer is “that’s what people want”. The home insurance industry is extremely competitive and insurers that only offer catastrophic coverage would find it difficult to compete.

You really should think of your home insurance, like all insurance, as protection against a catastrophic loss. Let’s face it, you’re not going to be financially devastated if you have to replace your stolen bicycle at your own expense, but you could be if your house is destroyed. With that in mind, you can reduce your home insurance premium by increasing your deductibles. Yes, it hurts a little to pay for something that you know your insurer would honour, but it could hurt even more to pay an increased premium or have your policy cancelled.