“Take risks. If you win, you’ll be happy; if you lose, you’ll be wise.”
– Anonymous
MY INSURANCE NIGHTMARE–HOW I BECAME WISE
When I opened the door, I was in shock. The place had flooded. Someone else’s drainpipes had burst—and water was everywhere.
The property is a place I own but do not occupy.
There was something else new and disturbing since I had visited last. There was junk—paper and hoarded items, feet deep in places on the floor. It was all a soaked and soggy mess.
I had been there a few years before, and it was fine. There was no junk, and the maintenance was ok.
But now the place was a shambles, and the maintenance nonexistent.
We worked for four days, bagged all the damaged junk, and threw it out along with some damaged furniture.
Once done, we still had to deal with the water damage to the walls. To fix it, we would hire a professional company to tear out the bottom wet part of the drywall and restore it with new drywall. The cabinets were old, but other parts were salvageable, and some value was retained for insurance purposes. Or at least I thought.
It was clear that the expense would be considerable, but insurance might pick up about half the cost or even more, right?
Wrong.
At present, we have received nothing and don’t expect anything. This post is a cautionary tale and a guide to avoiding problems.
FIRST, I AM GUILTY: YOU HAVE TO VISIT YOUR REAL ESTATE PERIODICALLY
When you buy real estate, you must visit it at least once a year. And I did not. I trusted the person occupying it to do the maintenance. After all, they had always done fine before, and there was no reason to be concerned.
I got complacent and underestimated what could happen. A messy place does not seem like a big deal. A mess is just a mess and can be cleaned up at any time. Deferred maintenance can also be corrected. However, if there is a water leak and damage, the cost to clean messes up can explode.
But, you might say, an owner can’t be responsible for others’ drains, acts of God, or bad luck, right?
Readers should know my hard lesson: as a landlord or owner, you are potentially responsible for everything, whether it is your fault or not.
Don’t expect help from your homeowner’s association or insurance company. You may get it, but don’t expect it.
LIKE IT OR NOT, INSURANCE COMPANIES ARE YOUR PARTNERS—PARTNERS WHO DO NOT ALWAYS PROTECT YOU
The idea of insurance is simple: you pay an insurance company so that if your property suffers damage, the company can pay for part of the cost. And since only a tiny fraction of insured people suffer damage in any given year, the total premiums are usually enough to keep the insurance company solvent. That is a win-win.
On the surface, this kind of partnership should work and be mutually beneficial. However, after using the same company for over 30 years, I had never tested it or filed a claim. So, I did not fully realize that the company’s clever comic ads were propaganda in an extremely hard-nosed business.
Nonetheless, my company is known for being good to do business with and prompt to pay claims.
INSURANCE TRIPWIRES
If there is one thing I would suggest, it is to ensure you fully understand your insurance policy provisions before disaster strikes.
That sounds easy, but it is not. You can read company summaries, note all the bland language, and not realize what it means in practice. So, here are some things to look out for and to quiz your insurance agent about. Look out for these provisions:
- If you are guilty of one violation, you are guilty of all—our company’s denial was predicated on one provision: maintenance. Because of the rapid decline in maintenance since my last visit, they decided to decline all claims. You may say that water damage happened to the walls, so the cost of patching and repainting the walls should be covered, right? Nope. Guilty of one, guilty of all—at least in the eyes of the insurance adjuster.
- Depreciation can kill you—besides the ruling above, the company decided that the kitchen cabinets had no value. They would pay the depreciated value per the policy, not the replacement value. And since the cabinets were poorly made and manufactured during the Carter administration, they had no value. I disagreed with the insurance company’s conclusion. For instance, I argued that, in the case of a totaled old but serviceable car, the car had value before an accident. They disagreed and said auto insurance was an entirely different thing. Apparently, unlike us, they do not have 18-year-old vehicles. And they are not fans of universal principles.
- Sometimes, it does not matter if you are not at fault. Bad luck is not always insured. Check your policy provisions.
- Beware of deductibles. Know what they cost. Sometimes, making a claim is not worth it.
THE RESPONSE TO INSURANCE THAT DOES NOT SERVE YOU
Here are a few coping strategies if you run into a situation like mine:
- Minimalism can work. One ancient sage said, “The more meat, the more worms.” That is not an elegant sentiment, but it is often true. We ultimately decided to install fewer appliances, simplify things during reconstruction, and save some money.
- Do it yourself—We were able to save the floor, assemble cabinets, do some of the paint prep work, and save in other ways, including clearing the place.
- Get multiple bids to save money. For several items, there was a twenty percent cost savings between bidders. Your insurance company has people who regularly do business with them, but you do not always have to use them. Check with your agent or lawyer about alternatives, especially if your insurance is not paying for reconstruction.
- Decide whether a fight is worthwhile and who you should take it to. We are still pondering that one, but we have lost every contest so far. We can quit, try the regular process, or go directly to state insurance regulatory agencies.
- If you have a homeowner’s association, see what they cover. Ours celebrated our leak by passing new regulations that ensured future obligations rested entirely on owners, even if the Association was at fault. Given that policy, we are considering whether a future sale is in order. In the meantime, they claim they have no liability, although it is unclear how the leak happened and where it originated.
Not all associations take that attitude, so check with yours if that happens.
SOME STRATEGIES FOR THE FUTURE—THE LESSONS I LEARNED
It may be that those with ANY insurance are fortunate.
For instance, insurance is difficult to obtain in Florida, California, and other states due to climate change, wildfires, and the regulatory environment. So, maybe I am lucky I can get coverage at all.
Here are the main lessons to protect yourself if you have coverage:
- Visit your tangible assets regularly—this is true of renters or family members you trust to look after your property. Sometimes, their attitudes and psyche can change quickly, and it may not be obvious. If their actions affect your property, and you don’t know about it, that can have far-reaching consequences.
- Recognize that insurance may not reimburse anything depreciated, even if what was destroyed was fully useable.
- Know that knowledge can help you—know your policy provisions, especially up front.
- Revisit deductibles. If you conclude that your policy won’t cover much after reading the provisions, you might as well reduce the carrying cost by considering higher deductibles.
- Realize that insurance is a cost of doing business, not always a hedge against disaster. For instance, lenders want insurance and specific policy provisions. What they require protects their loan. It may or may not protect you, but you must have it anyway.
THE AFTERMATH
It is not all bad. After rehab, the property is more valuable and attractive. We also corrected some problems I was unaware of and prevented significant future damage from failing plumbing. In that way, we were lucky. You never know if issues are hidden.
Still, the rehab cost a great deal. And the feeling that everyone involved in the situation, including the Association, my insurer, and the people behind the unnamed water leak, failed to take or claim responsibility stinks. I had to, and it should be that way for everyone involved.
YOUR STORIES
Do you have an insurance company story? What happened? What did you do? How did you cope? Please leave a comment. I would like to know if this kind of mishap is a widely shared experience. But if you comment, don’t name names or specific carriers.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Photo: Chris Gallagher
License: Unsplash
An important topic. I know someone in a condo building /San Diego and the building’s fire prevention ‘sprinklers’ went off – this unit was being rented ‘weekly’ and was on the top of a 6-floor building. The sprinklers flooded the entire building down the interior of the walls to the bottom floor. No one took responsibility – If it did any damage to anyone else’s unit – tough – that homeowner was responsible. The building HOA said it was not their problem and the folks who owned the rental unit who caused the problem took no responsibility. The only solution was to sue that homeowner which would cost thousands and take years to solve – and that is even assuming they would win. Everyone just had to suck it up and pay for the damage although they did not cause it. And, turning in an insurance claim was also not helpful. For what was paid by the insurance company after the deductible, it hardly covered the costs of the repairs. And, the insurance company then retaliated and skyrocketed this homeowners insurance policy.
On another issue I encountered with a car insurance claim in CA, it appears appealing to the insurance commissioner for unfair treatment (insurance company not acting in good faith) is an exercise in futility.
Thus, it is a mixed bag….you have to have insurance but are penalized if you use it. It appears to be a broken system with limited oversight.
I have concluded that insurance is a cost of doing business. If you are fortunate it pays off when you need it; but I think that outcome is less certain than ever.