How to tell if your home insurance settlement is fair

The truth is there are a lot of questions you might have about home insurance. (“How much is home insurance?” “How much does home insurance pay?” and “How much does average home insurance cost?” are a few that come to mind.) Consider that insurance premiums are on the rise, and insurers and consumers are feeling the crunch. Severe weather conditions, caused by increasing temperatures in Canada, mean that we’re more likely to see snowstorms, hail, floods, droughts, wildfires and extreme heat events, which can all damage property. In fact, between 2009 and 2020, Canadian insurers spent an average of $2 billion a year on losses related to natural events. Even condo insurance has gone up as a result of extreme weather, with condo insurance increasing from 25% to 240% per year.

So, insurers and consumers alike are paying more for coverage. Should you have to use it, you’ll want to be certain your settlement is fair, and the extra money you’ve been forking over hasn’t been for naught. So, most of us could use a little unbiased advice when it comes to insurance—a simple way to assess whether or not we’re getting value (the settlement) for what we pay for (home insurance coverage).

It’s important to understand that insurance settlements are not windfalls. It’s not a way to make money or a way to upgrade your home. Nor should claims be used to cover expenses for repairs or to replace maintenance costs associated with owning a property. The fact is: If you own a home, or condo or another type of residential real estate, part of that ownership includes paying for its upkeep. And that sometimes includes expensive and unexpected costs.

But if you find yourself in an unexpected and expensive situation—such as a basement full of water or a hole in your roof from a fallen tree—then making a claim is often the way to go. It’s what we get in return for paying the cost of home insurance, right?

Determine if the insurance settlement is fair

Once you’ve made the claim and the adjuster has done their due diligence, you should be looking at a proposed insurance settlement—a sum of money your insurance provider is willing to pay to fix the unexpected problem. To determine if the proposed settlement is fair, we first need to understand how claims are processed. Let’s use this example: A tree has fallen on the roof of Pat‘s home over the holidays, and she wants to know if her insurance provider—who was offering $14,000 in compensation for the damage—had made a fair offer.

1. The insurance adjuster estimated the repairs to her roof at $17,153.86, including harmonized sales tax (HST).
2. However, insurance policy coverage doesn’t include HST, so you need to deduct $1,973.45 from the cost. This means Pat’s maximum claim coverage is $15,180.41. (Go here for a great work-back HST calculator.)
3. But the insurance policy only covers the “actual cash value” (ACV) of the damaged roof. ACV is the term used by insurance companies to capture the fact that all goods depreciate in value over time. For Pat, it means that the age of her roof, as well as the roof’s typical life expectancy, should impact her settlement amount. In this case, her roof shingles were installed five years ago and have a guaranteed 25-year lifespan, according to the shingle manufacturer. Hence, her roof has depreciated in value (based on age and life expectancy) by 20%. The ACV, then, is $12,144.33 (or a 20% reduction from the $15,180.41 maximum claim coverage). Know that you can buy a replacement cost policy and get the full value back, but it’s much more expensive. Ask your insurance broker. 
4. At a $1,000 deductible, this means Pat will receive $11,144.33 on her claim. (Although, some insurance companies will actually waive the deductible, if it’s your first claim, or if you have something called a “disappearing deductible.” Talk to your provider for details.)

Basic tips on when to make a claim

What’s the impact of the home insurance claim on your premium? In essence, your home insurance policy is your “get out of debt” card—to be used only when the impact of a repair cost would be catastrophic (or at least a hardship) on your finances. It means you need to be judicious about making a claim. Here’s how to decide on when to make a claim:

Never file a claim if the deductible is bigger than the repair cost  

The biggest reason is that you’ll end up increasing your home insurance rates (because you made a claim) and you’ll end up paying for the repairs because you first need to pay the deductible. So, if your deductible is $1,000 and the repairs are $3,000, your provider will only pay $2,000.

Don’t submit claims for a home-maintenance project

If the fence is rotting away, and you know that one big windstorm will blow it over, budget the household finances for a new fence. There’s a plus to this too: Better-maintained homes get better premiums.

Make sure you’re actually covered for the claim you’re making 

Not everything will be covered with a basic home insurance policy, so check before making any claim. As a homeowner, you may assume that your flooded basement will be covered, but that’s not always the case. Traditional home insurance policies don’t cover flood damage, unless it’s from a burst pipe (in winter, make sure your heat is on) or leaky appliance. For overland water or sewer backup, you need to purchase extra insurance—known as a rider.

And don’t be too surprised if your insurance provider refuses to offer this extra coverage. For instance, homeowners in certain Hamilton, Ont., neighbourhoods and in certain parts of Manitoba will find it impossible to get flood insurance, as they live in designated “flood zones.”

In Windsor and its surrounding areas, homeowners pay some of the highest home insurance rates due to their proximity to water. Now back to that claim: If you make a claim and you’re not covered, you won’t see any money. Worse, your claim is now on record, which is used to assess the premiums you pay. The more claims you make, the higher your premiums.

Don’t be a repeat-claimer

Remember: The more often you make a claim, the higher your premium will be. That said, it’s statistically not unusual for a homeowner to file up to two claims in a 10-year period. But any more than two and alarm bells will go off (even as they are increasing your rates).

With files from Courtney Reilly-Larke