I received a revealing email from a listener whose dreadful experience serves as a wonderful lesson for the rest of us. When was the last time you filed a claim against your homeowner’s insurance policy? For what amount was your claim?

        It is important to remember that insurance is intended to protect you against catastrophic losses. You need homeowner’s insurance in case the house burns to the ground, or to repair the house when a car slams into your house. But many homeowners’ policies enable you to seek reimbursement for damages of as little as $300. In many cases that’s the amount of the deductible. In other words, you pay the first $300 of any loss, and the insurance company will pay the rest.

        So, if your house incurs minor damage, you file a claim. Have you done that? You shouldn’t have!
Keep in mind that insurance companies do not sell insurance to people who need it. (This is one of the reasons that consumers hate insurance companies.) The insurers are in business to make money, so they want you to buy insurance but never file a claim. And to help them maintain profitability, the insurance industry has learned over many years of experience that consumers fall into one of two broad groups: Those who file claims and those who don’t.

        Insurance claims data show that a customer who files a claim is more likely to file additional claims than a person who never files a claim. This means that if you file too many claims, you risk losing your coverage.
That’s what happened to my emailer. She told me that she had filed three claims: One claim, for $1,200, was due to hail damage to their deck. Another $300 claim covered items stolen from their car, and a third claim was for water damage. That third claim was denied – not covered by the policy, the insurer said – but a claim is a claim, even if it’s denied.

        Soon after their third claim, my correspondent got a letter informing her that her coverage was being canceled. Apparently, her insurer has a practice of canceling policies after three claims are filed – regardless of the amounts sought or paid. Thus, this writer got $1,500 in reimbursements – and subsequently lost protection on a $400,000 house.

        I am not defending the insurance industry’s practice. Rather, I am merely pointing it out to you. For if you don’t understand the rules of the game, you are certain to lose when playing it.

        Thus, the point is clear. You should not file claims for trivial reimbursements. Remember that you need insurance to protect you against catastrophic financial loss, not to reimburse you for mere inconveniences that you may suffer. If you file small claims, you can expect to have your insurance canceled or, at the very least, your premiums raised.

        So, let’s turn the rules of the game to your advantage. Since you don’t want to file small claims, there’s no reason to maintain a low deductible on your insurance policy. After all, policies with low deductibles cost more than policies with higher deductibles. Therefore, you should tell the agent handling your homeowner’s policy to set your deductible to $5,000 or $10,000 or even higher. This will lower the cost of your policy. In many cases, in fact, the premiums will be so much lower that the money you’ll save will be more than the money you’d get back from filing a small claim.

        So save yourself money while maintaining the insurance protection you really need – protection against catastrophic events.