[Editor's Note: This is a guest post from Dr. Cory S. Fawcett, the author of The Doctor's Guide to Starting Your Practice Right and the brand new The Doctor's Guide to Eliminating Debt. He describes himself as “author, speaker, entrepreneur, personal coach, and semi-retired general surgeon.” He blogs at Prescription for Financial Success. We have no financial relationship. In this post he discusses what your insurance may or may not cover.]
Insurance companies make their profits from collecting premiums, not paying claims. I found out the hard way about this little factor on two separate occasions. It is very important that you understand fully what is and is not covered by your insurance policy or you may be left holding the bag.
Burglary and Valuable Jewelry
Dr. Cory S. Fawcett
My first learning experience was after a burglar hit my home. We lost all of my wife’s jewelry, a laptop computer and a bicycle. The burglar also damaged the house as he broke a window to gain access. I had been buying my wife nice pieces of jewelry over the years for special occasions. Since we save all important receipts, I had a detailed list to give to my homeowner’s insurance company for the claim. Our total loss was about $15,000. I had good insurance and expected a quick replacement of our losses.
The agent very politely pointed out that I would not be getting the full amount. How could I not be covered for the full amount? I had homeowners insurance and it covers theft. I had been paying premiums for many years without a single loss. But none of that mattered. The only thing that counted was what the fine print on the policy stated. I was about to find out why the policy was dozens of pages long.
It seemed I was only covered for jewelry up to a total loss of $1,000. Jewelry is an excluded item. If I wanted the jewelry covered completely, I needed an individual rider, also known as an endorsement, for each separate piece of jewelry. Each of the endorsements would be a small extra premium charge on the policy. About $12,000 of our loss was my wife’s jewelry. Years of birthday, anniversary, Christmas, and Mother’s Day presents were now worth $1,000. They also paid a prorated value for the laptop, replaced the bike and covered the repairs to the window. In total we were paid around $2,500 for our loss.
It turns out, we lost the wrong stuff. If the burglar had stolen our couch, we would have been fully covered. In reality, insurance companies don’t cover anything a burglar would actually steal. If they did, that would result in claims being paid. I don’t buy fine jewelry anymore, as the imitation stuff looks just as nice and if someone steals it, I won’t mind so much.
Excluded Water Damage
The second time I got burned by the fine print was with a loss at one of my investment properties. My maintenance man informed me I needed to contact my insurance company because a late night bit of water damage was going to get expensive. Seems a tenant in an upstairs apartment made a big deposit into her toilet and decided to give it a flush while still seated. She didn’t realize the toilet bowl was plugged and now filled to the brim with water and other stuff. When she gave it a second flush, it gushed over.
This elderly lady was caught by surprise by the code brown and didn’t know what to do. The over-flowing water filled her small bathroom, went out into the hall carpet, and leaked through the floor to the apartment below where it did similar damage. Because this was a “black water” spill, the wet carpet in the hall and both bedrooms off the hall were immediately discarded on both floors and fans were set up to dry everything. The total damage was in the neighborhood of $16,000 to dry everything and replace the damaged carpets and drywall. The downstairs tenant was a bit upset to have a sagging ceiling with brown fluid dripping from her light fixture.
My insurance company was right on top of it and arrived the next day to assess the damage. The agent took beautiful pictures and agreed with everything being done for the cleanup. He then informed me I was not covered for this particular type of water damage. If the tank on the back of the toilet had broken, spilling water into both apartments, I would have been covered. But overflowing toilet bowls were excluded from coverage unless I had a separate endorsement. More fine print. When I inquired what this endorsement would cost, I learned it was only about $15 a year. For lack of a $15 endorsement, I lost $16,000.
Those two events cost me just short of $30,000. The small print in the middle of page 67 excluded the insurance company from having to pay for the losses. There is a reason insurance policies are so long. Be sure you know exactly what is and is not covered in each of your policies. I know that is a tall order, since you will need to read a lot of pages with a lot of exclusions and it will be hard to keep it all straight. But read it carefully and if there is anything you think you need extra coverage for, get it.
Over the years, as I’ve been helping doctors with their personal finances, I’ve noticed they often own things of high value that are likely to get stolen such as jewelry, art, Turkish rugs, furs, antiques, musical instruments, coins, and camera equipment. All these things will likely have some limit on coverage, unless you buy a specific endorsement. Be a smarter consumer than I was and don’t get caught with your endorsements down.
What do you think? Have you been burned by the fine print? Is this another reason to only insure against financial catastrophe? What extra riders have you paid extra for with your property insurance? Comment below!
Wow that’s horrifying. I will never perform a seated double flush again
Best comment in blogging history.
IRL, lol’d.
This past summer we switched insurance policies because of rising premiums and I tried to compare a couple policies by reading them. The problem I ran into is that you never know what is left out. There is an information imbalance because insurance companies know what most claims are for and you as the consumer don’t. So it becomes easy for them to issue a policy that covers the rare scary things such as fire, while excluding common things such as theft of jewelry or an overflowing toilet which can actually be quite expensive.
Exactly. You never know what’s left out. As a lawyer, I spend a good deal of my time drafting contracts trying to protect against all kinds of possible ways the transaction could south, but you never really know what’s left out until that event happens and you realize the contract is deficient in some way. This article worries me most about health care. I honestly have no idea how well my insurance covers me. It feels a bit like Vegas where I pay into a premium each month, hope my employer picked a “good” policy and that I’ll never get sick.
I even finished at the top of my class in insurance law, and it’s an arduous process to really figure out what a policy does and doesn’t cover. Very often like you said, you don’t even know what deficiency to look for until the specific instance happens to you or your client.
The health insurance is another story… even if you have the coverage under your plan, you’ve got to rely on about 8 layers of physicians, nurses, admin, billing dept, collections and then the insurance company itself not to screw up your claim.
When the lawyers have a difficult time with this, what does that say for us lay people?
I’m not sure about water damage, but USAA was great about talking me through jewelry and electronics coverage when we got our policy. Most people will need a separate rider for an engagement ring alone, but it can be increased to the total value of all your jewelry.
We insure our wedding rings, mostly cause we feel they’re most likely to get stolen and/or lost. I don’t know why you would want to insure against every conceivable unfortunate event. Just self-insure and take your chances. Use the home insurance for when your home burns down, not when a toilet bowl overflows because you flushed too many times.
When a tenant flushes and it costs $16k, I’d imagine most people want coverage for that. That tenant might only pay half that in rent that year.
But you have to weigh that against the probability of a tenant so inept they couldn’t figure out the toilet shut off valve.
You would be surprised what tenants are not able to do or figure out themselves.
I imagine there are lots of things. Kinda like the progressive “we’ve seen a thing or two”commercials. You just can’t have riders for every possible scenario not typically covered by insurance.
Sounds like it wasn’t a problem with the tenant. It was the tenant’s upstairs neighbor. No way to account for your neighbors idiocy.
took the tenant above me mere minute or so to realize it overflowed- guess they flushed and left bathroom. But 30sec to a min of flowing water did $15k in damage!
JustSayin
Via email:
Going through the similar issue in my rental property. Unit above toilet leak. Damages at $16k. Good news for me is USAA did pay their share of $5k (minus a $500 deductible.) Problem is master carrier for the condo association/building is dragging its feet, and seems to be arguing that there is a $10K deductible before they step in and pay. Still not resolved and possibility that I may have to fork over $5k to get the master to pay the last $3k. Date of damage from water in toilet above was July and its Christmas time and the renter cannot live in unit yet. Make sure your readers know about “loss of rent” coverage. USAA gives about $6k in lost rent a year which is based on the value of the property and lease. Otherwise you maybe out of cash flow and paying for damages. Great article
Same issue – toilet leak caused approximately $5,000 mitigation damages (drying out, tear out, assess)+ $11,000 repairs (putting stuff back in, replacing trim, painting, replacing drywall). Deductible $250. Traveler’s paid for everything but the “depreciation” on the carpet/padding, which was a fine term in their agreement. Haven’t crunched the final numbers yet, but it should only be $200 at most given the estimates. All insurers on both renter and landlord side were dragging their feet until I put everyone on the same e-mail chain so people could stop blaming the other side for the slowdowns OR double-dipping.
Dealt with loss of rent issue too. It’s a little tricky. Either the tenant’s renter’s insurance OR the owner’s can cover. Neither side is going to want to, so you need both of them at the table to hash it out with each other, usually with the tenant’s input.
Loss of rent coverage only kicks in if you decide to give your tenant a rent credit. If you do decide to give them a rent credit, it’s actually your insurer’s decision as to how much that’s going to be, or at least what they will cover (which often includes a site-visit). Have a percentage in mind that you’re willing to do because if the tenant makes that first pitch, they control the negotiation. If you go the rent credit route- that means your tenant stays in the property but gets a discount while you’re doing repairs. CAUTION: Once the tenant decides this is the route they want to go, that means they’ve met the definition of “habitable” – which most policies define as one bedroom and one working shower/bathroom in the dwelling. If they choose this route then later decide they’d prefer a hotel they will get denied by both their insurance and yours. TIP: If they want that hotel stay, do it at the “mitigation” stage, not rebuild. After your mitigating team goes in, they’ll give you an official document declaring the property meets the definition of habitable at some point, at which point the hotel stay is no longer covered unless the tenant is already there (I’m simplifying this bit).
If the tenant uses their renter’s insurance to get a fully covered hotel stay – their insurance pays out and they immediately become ineligible for rent credit (they’re still paying you full rent – they can’t get the hotel stay + not pay rent). If they tell you they can’t afford the rent then reimbursement – that’s a load of crap. There are multiple options and they’re either trying to give you an additional problem or they truly don’t know (in which case you can help educate them). All the insurers can set up 3 forms of payment: (1) hotel reimbursement – tenant pays first, then insurer pays tenant (2) direct Purchase Order – insurer sets up a PO with the hotel of choice (usually from a preferred vendor list), or (3) insurer sends tenant cash/check in order to let them choose their hotel of choice. What the tenant isn’t going to want to do is to negotiate with their insurance.
As for our premium jump after all of this – about $123 annually.
Hope this helps someone going through this. It is not pleasant and it takes too long to track down all of this information while you’re living through your own personal nightmare trying to sort this out.
Good post.
I have my wife’s engagement ring insured as well as a Rolex that I bought her for this very reason. It’s also nice knowing I won’t have to make a homeowner’s claim which could bump up my rates if my wife loses some jewelry. However for the little stuff we don’t have separate coverage. I’m really not even sure how this adds up in our policy, and this is a good reminder to look into it.
If you’ve got any jewelry, check out Jeweler’s Mutual which has very reasonable rates and is typically very highly recommended and reviewed.
Would any of this be covered under umbrella insurance?
Umbrella is for liability only. It’s a personal liability policy. So if your tenant drowns in the toilet leak and their dependents sue you, it would cover. I suppose it would cover damage you did to someone else’s property with your crummy toilet.
Does it make sense to make a 15,000 claim? How would that affect rates going forward? I, like some other posters, always thought of home insurance as a fire/sinkhole/catastrophic event insurance – I think our deductible is already 5,000 or more so you’re talking a sub 10,000 payout.
I’ve made claims much lower than $15,000 before. What’s the point of paying for insurance you don’t use. I mean, if you’re only going to get $100 after your deductible, that’s one thing. But I think our water damage claim was something like $5-6K ($1K deductible) and we didn’t think twice about using the insurance.
For me, paying insurance is to guard against loss that would be a serious burden. Though Ive never had need to file a claim, my highly scientific google search found a study showing 9% increase in premiums after a single claim. Assuming a 5 or 10 year cut off and multiplying by your annual premiums would probably be a useful number for determining whether to file.
You always have the option to switch companies if they raise your premiums too much. I think insurance companies want you to fear filing a claim. Home owners insurance is pretty cheap stuff. They’d have to really raise rates a lot to dissuade me from a $10K claim.
I’ve heard it as well that you have to weigh the costs of increased premiums (a lifetime of them possibly, as the CLUE database is used by all) against whatever claim you’re making. I’ve seen 1000+ be the breakeven but it’d have to be decently above that before I risked a claim.
Interesting subject to research further. I have the standing water riders on my properties, though I need to reassess one I just switched.
While I am by no means an expert, I believe that all homeowners claims are submitted on the CLUE report (Comprehensive Loss Underwriting Exchange). Insurers use this report in part to determine the risk associated with the property and I believe it can affect premiums for homeowners insurance. Perhaps someone else more familiar can provide more details but i would worry that submitting claims for small amounts could not only affect future premiums if switching to another company but could lower the home value if the report is checked by a potential buyer – especially a sophisticated one (such as a property investor).
I had my purse stolen from a friend’s car. It had phone, ipad, and keys. My renter’s insurance covered the phone, ipad, and purse (total of about $2000) but I would need to make a separate claim on my car insurance to get the key fob ($250) covered. Despite the fact the items were not stolen from my car, keys to the car are considered covered by the car insurance. I had both car and renter’s insurance from the same company.
While it was not as expensive as above, with the auto deductible of $500 I just ended up paying for the keys out of pocket. It was an education for me in terms of insurance coverage.
The game of who is responsible also becomes expensive for you. I had a family member drive my car into the wall in the back of the garage. The car was covered by auto insurance with a $1,000 deductible. The house was covered by the home owners insurance, another $1,000 deductible. Both cost just over $1,000 to fix. If they were both covered by the car insurance, only one deductible would apply and I would have gotten some coverage. If the car had run into someone else’s house, the auto insurance would have covered it all with one deductible. Since it was my own house, different rules applied. Same company covers both my house and car. The rules are always in their favor.
What is the role of the agent if not to advise you on the riders and endorsements to have? Over the years, I’ve centralized my home/auto/property insurance polices through a single agent. I’ll need to start asking what is not covered.
Are there any recommendations for services that would explain what riders you should request? My company has an online assistant for our benefits that asks you what you want to be covered for and ends up recommending which health insurance policy to use. Is there something like this for insurance? Whether on the provider’s side or a stand-alone service?
I think for someone who is renting their property would appreciate a process of “would you like to be covered for….(tenant clogging toilet),” At least you would have had the opportunity to turn down coverage.
Since I expect that an insurance company price riders to cover the expected losses and provide a profit, they should have an incentive to get buyers to add more riders to the policy. Especially for rental properties, where the owner faces eating the losses or suing their tenant if something is not covered. If you know the price of insurance ahead of time, you will factor these into your asking price for rent.
Good idea. Why not start one? Seems like a good entrepreneurial pursuit.
USAA kind of went down a list like that when I’ve bought insurance from them. I don’t know what other providers do.
Rent isn’t determined by your expenses. Rent is determined by the going rate for rent. Your profit is determined by your expenses and your decision of whether to buy the property or not and at what price should be determined by your expenses, but there isn’t much you can do about rent. Raise it too high and you just get vacancy.
@James, there are really only two people you can ask who will know what is included in the insurance company’s riders and the amount actually recovered. There’s so much variation between insurance policy coverage – and how insurers package their policies (is it a rider, or is it a separate rental protection product).
I help my relatives with their single-home rental property and when we were shopping around. We found the process really challenging because it wasn’t comparing apples to apples. The insurance producers (agents) had a good idea of what additional riders we might want based on what they were seeing other clients do in the area, but they couldn’t answer everything about contingencies and hypothetical scenarios. Keep in mind, the producer gets paid when they make a sale (commission + base salary) and most of their training will be focused on broad-brush product knowledge (to get to the sale) versus the nitty gritty involved in claims.
When it comes to the fine print – who’s going to know what item is covered, the legal definition of the item (e.g. “carpeting” might be defined as 80% coverage + recoverable depreciation from date of installation in the definitions section of your policy) is going to be the people with a job title “Claims Analyst” or “Claims Team.” I found talking to the state claims managers useful because they oversee the overall metrics of each insurer’s states claims. They’ll know what types of damages occur at what levels of occurrence in each county. Getting to that person can be a challenge, but if you’re willing to put in 30 minutes to get through the phone trees you can eventually get to the right person.
A paper alternative to a person working for the company is getting a sample copy of the issued coverage terms and read through the 100+ pages before you sign with the producer/agent (they might refuse or say that’s an unusual request – but it’s the surest way of knowing *exactly* what is covered or not).
Like WCI said, it might be a good idea to start a product that would let you compare. But you’d need the cooperation of the insurers to get that legally drafted policies document to really know.
When I set rent prices, I follow (1) the market rental prices using Zumper, and (2) make sure I charge something high enough that will at least allow me to save for a contingency fund to cover things insurance might not. Also, make that *deposit* something you can actually use to cover losses. Some people ask for 1 month, others ask for 1st and last. Asking for more means you hold more leverage in case something goes south and the costs of repair exceed what you have on hand. Check state landlord tenant laws (your revised statutes) to double check there’s no regulations on deposits, and then set according to what will work for you.
It can be really hard to anticipate some of the things that happen during a tenancy. For example, I had a tenant dig up the entire garden and take every tulip, iris, dahlia, and peony that had been planted to beautify the property. Never saw that coming and haven’t seen that since. Assuming it were an insurable loss under some type of theft – it might not have been worth it to insure for the increase in premium. It would cost me time and probably about $200 to replace with the exact varieties originally planted. Might be more to insure over time.
The tenant stole the flowers? Bizarre.
Good tip on talking to the claims folks instead of the sales folks.
I hate expensive lessons. Thank you for sharing yours so we can benefit from your “tuition payment.”
I’ve raised the deductible on our home insurance to $10,000, being only interested in protection from major damage or total loss. Saves me money on the premium, and if something relatively minor happens, I have saved myself from having a fight with the insurance company (that I would probably lose, anyway).
I am also reminded by the “code brown” story of one more reason I’m grateful to no longer be a landlord. VTSAX never flushes twice.
Cheers!
-PoF
Sorry for your troubles. That being said, I have to say, this is easily the funniest WCI blog post I have ever read.
2 extra riders I got in the past 5 years….Thankfully prior to any damage.
1. Solar panels – When I got solar panels put on our roof, I needed an supplemental for that. This needs to include if there is hail damage and the panels need to be removed to re-shingle the house. This can be a very expensive venture (on the lines of 20-50k depending on the amount of damage)
2. When I upgraded my wife’s engagement diamond last year. Similar to what was in the blog post, jewelry was only covered up to a limited amount (I think 3-5K). To get the new ring/diamond covered I needed to add in a an extra rider. Thankfully I haven’t had to use the coverage on either of these things yet!
Property owners of the world: get Toto toilets. Best insurance ever! No more double flushes!
+1,000,000
Googled toto toilets, they have a lot. Is there some model that is recommended?
As an aside, one of the google ad bot first results to the query guided me to “blowout” sale on toto toilets. Good stuff.
Firearms are another category that often has low coverage limits with traditional homeowner’s insurance. When I called my insurance company about purchasing a rider, the sales rep informed me that the expense was high and recommended that I insure through the NRA instead, which is what I ended up doing for a reasonable fee.
Insurance companies suck. They try to weasel out of paying in every way they can. I mean like thieves are going to steal the god**** couch so sure they will cover that. But jewelry which is highly valuable and portable? Of course you will think you have coverage until time comes to claim. They know people are not reading the endless pages of gotchas.
A great reason to only insure against losses you cannot afford to self-insure. Fewer claims, fewer gotchas, lower premiums etc.
These are both very common exclusions to a basic homeowners’ policy. If readers aren’t aware of these and other common exclusions, then it is possible your agent/broker is not properly educating you. Also, if your policy was purchased purely on price-point then these riders may not be included. My insurance company sends me a declarations page every year with these riders – both ones I have and ones I do not have.
I believe the homeowners’ policy generally only covers a smaller set of specific causes of loss for jewelry, silver, firearms, electronics, fine art, expensive rugs, etc. These items are best covered by Personal Articles insurance, that offers very broad coverage for losses. One example that comes to mind: a woman takes off her $27,000 wedding ring while driving. She then sneezes, uses a tissue, and for some reason throws the tissue out the window. Well, that tissue had her wedding ring, and the insurance company paid the claim.
We just had a run in with a similar insurance gap. Just paid cash for an older model luxury sports car with ultra low miles, it had been garaged by grandma and when she passed the daughter sold it for a steal. Less than two weeks later a lady hit me when I was going through a green light, and the assumption was full coverage means full coverage for a fair market priced vehicle. We were shocked to get an offer (from a great insurance co) for about half what we paid cash… penalized for paying cash? Or for buying older model luxury with 20K miles? If we’d had a note on it we would have been paid out right? The classics dept is looking into getting us what we paid. Obviously car was appreciating, and even if it wasn’t it didn’t depreciate in the two weeks between purchase and being totaled. We had all the paperwork, contract, photos, discussions with buyer re value… didn’t matter. Apparently we should have had a special appraisal and pay a premium for our full coverage to cover replacement on a set amount. Since we plan to replace it with the same vehicle this is something to consider for all you who are replacing a “dream car” from a decade or two back. It actually works against you to find one in stunningly good condition.
Update: the appraisal ordered (should be an easy step with a good insurance carrier) resulted in a fair price; I was contacted by a competent veteran who stated the choice for a set policy amount generally is limited to vehicles with restricted annual mileage. He agreed condition and low mileage change everything, and suggests if you have a rare car you plan to drive regularly to keep everything documented and keep current detailed photos for a post accident appraisal if necessary, essentially the route we took. Apparently having quality insurance who uses a straight shooting appraisal company is key.
I’m of the view of only buying insurance for the really big things (homeowners, liability, malpractice, etc). We’ve had a jewelry policy since we were married 17 years ago. No claims. Just last week the renewal showed up in the mail and we decided to drop it. It was only on our wedding rings. I’ve bought other pieces of jewelry for my wife over the years, but none are worth over $1,000 apiece. The policy only covers individual items, and we never bothered to add any of those on. It would stink if they were all stolen, but it wouldn’t be a disaster. The diamond earrings I bought her for our 10 year anniversary cost just a little more than her iphone 7 does now. That phone is way more likely to be broken, lost, or stolen, and we don’t insure it.
When I read this article, I figured the comments would be laden with people saying they have all dropped these kind of individual rider policies. Perhaps my view would be different if her ring was worth a lot more. That’s another advantage of getting married before med school when neither of us had any money. If we became engaged after I finished fellowship, I probably would have been talked into buying her a Kim Kardashian sized diamond that only Lloyd’s of London would insure.
I have to second the comments by Steve. I have never worried about insuring things like jewelry. Our most expensive item is my wife’s engagement ring, which is probably 5k or so. Not an amount of money that I’d be happy to lose, but also not worth paying a few hundred per year to insure, given that replacing it would not be a hardship in any way. She’s a surgeon so she never wears it anyway…might have to take a look and upensure we haven’t lost it! I think, in general, the idea of having to insure against loss is one of things that pushes me to avoid owning expensive items. I agree with WCI completely…only insure against losses that you cannot afford to self-insure against. Obviously liability is a totally different animal and I don’t skimp there. The sheer complexity of insurance policies is one strong reason to limit insurance to only essential circumstances. Plus, the incessant upward pressure on rates generally means you need to shop around every couple of years…too many rules to read and contracts to review. Oh well.
I went for an “open peril” (HO-5) homeowner’s policy instead of the more common named “named peril” (HO-3), with endorsements for replacement cost coverage and for sewer backup. Still full of coverage limits and exclusions but allegedly easier to collect when something goes wrong. I haven’t had occasion to use it (knock on wood) — any thoughts on whether open/named is a meaningful difference?
Great question. I’d also like to know the answer.
It’s interesting to read about some different situations where the insurance didn’t cover certain damages or theft. It makes sense that getting enough insurance would be important to make sure you don’t have to deal with anything yourself. I’ll have to remember to get a good appraisal to make sure I can get each type of homeowner insurance effectively in order to cover most if not all damages.
I found out electronics coverage was mere $2500 – that isn’t much these days. So I bumped up the coverage to 8500 for a small monthly increase and added a rider where I listed my wife’s jewelry and camera equipment item by item. It’s a bit pricey – $300 a year but 100% replacement and no deductible – covers theft and even loss anywhere – even on vacation!
So just add an insurance rider (add-on provision) where you can schedule (list) items to cover
Dont forget to update it to reflect new purchases –
Also worth noting – most home insurance companies have cellphone insurance that rivals insurance from big carriers – mine is $25 a year to cover 2 cell phones @ 100% replacement and NO DEDUCTIBLE – replaced with NEW phone not a refurbished one!