5 of the Most Common Problems with Home Insurance Claims

Your home was damaged in a fire or a flood, and now you’re negotiating with the insurance company. If you are reading this article, you might just be starting the process and wondering what to expect and how to reduce your stress; or you may be further into the process and are dissatisfied with the offer the insurance company has made.

There are many aspects to managing a fire insurance claim. This article will focus on five of the most common problems policyholders encounter with their home insurance claims.

There are resources out there to help you navigate your interactions with the insurance company, but understanding these common problems can help you avoid issues from the start.

#1 Communicating with Your Insurance Company

Soon after the fire, once your family is safe, you need to contact your insurance company. Failure to alert your insurance company of a house fire or a flood resulting in damages may affect your eligibility for compensation under your policy. A house fire is a shocking event and will demand a lot of your attention, but it is in your best interest to contact your home insurance company quickly.

In addition to alerting the insurance company of the loss, you should know what to do after a house fire to ensure the home insurance claim goes smoothly. This includes filing your claim in writing, requesting your long-form policy, documenting the damage yourself when it’s safe to do so, and keeping track of your expenses.

Soon after you notify the insurance company, they will assign a claims adjuster to your file. All subsequent communications will be with this adjuster, who is charged with assessing the extent of the damage on behalf of the insurer. Make sure you are at the site of your home when the claims adjuster arrives. Walk them through your home and show them the full extent of the damage. They make recommendations to the insurance company based on the damage they view and assess.

You will also want to communicate with your insurance company about the steps that need to be taken to secure the site. If the site isn’t adequately protected against the elements and secured against trespassers, more can go wrong. It will only complicate things when fire leads to further loss, such as water damage from a burst pipe, looters, or squatters. Steps should be taken such as shutting off utilities, fencing and locking the site, and protecting it from the elements if part of the structure remains intact.

#2 Additional Living Expenses

The Additional Living Expenses portion of your home insurance policy is meant to reimburse you for the extra costs you will incur to simply maintain a comparable standard of living while your home is unlivable. These include costs such as:

• Hotel stays or long-term rentals;
• Food costs above your usual expenditure;
• The cost of moving; and
• Travel and storage.

Disagreements may arise over issues such as what constitutes your family’s usual expenditure. The average Canadian household spends about $495 per month on groceries, though this will vary depending on the size of your household. If you do not have access to a kitchen, you may have to spend much more than that on takeout or ready-made food. The amount covered by your Additional Living Expense coverage is only the amount above and beyond your usual average household expenditure. For example, if your family spent $495 per month on average for groceries before the fire, and while you’re out of the home, you spend $1000 per month on average for takeout and ready-made meals, your claim would be for the $505 increase.

There may also be disagreements about your standard of living. On one hand, home insurance claims should provide enough compensation for you to enjoy a comparable standard of living that you’re used to. On the other hand, you also have to be mindful of your ALEs coverage limits when you’re choosing a place to stay during the rebuilding process.

The big challenge with ALE coverage is how long it takes to rebuild your home. Sometimes unforeseen factors beyond either your control or the insurer’s control can impact construction time, stretching out fire insurance claims longer than they may have been in the past. For example, a combination of labour and material shortages during the COVID-19 pandemic has stretched out construction timelines. That means families are hitting their ALE coverage limits before their homes are ready.

Another source of disagreement may be the insurance company’s determination of the date on which your home is rendered livable after the repairs are completed. For example, if repairs to your home are completed during your children’s exams, you might not want to move while they’re studying, and you may delay your move-in. Once the home is considered livable, your Additional Living Expense coverage terminates (with some minor exceptions such as moving costs), so if you choose to delay moving back into a repaired home, any additional costs incurred will not be covered.

#3 Personal Property and Depreciation

The Personal Property and Contents coverage of your home insurance policy is meant to cover the costs of replacing the personal property damaged by a fire or flood. This includes items like furniture, electronics, clothing and linens, artwork, as well as wet, dry, and frozen food.

An itemized list of everything damaged will be required on any claim. The insurance adjuster will inform you as to whether it is your responsibility to create the list, or the insurer will have the list created. Whether you create the original list or you review the one presented by the insurance company, it is in your best interest to ensure that it is as detailed and accurate as possible. Enlist the help of family and friends, and jog your memory with the help of photos.

Another common source of contention comes from the type of Personal Property and Contents coverage available. The two most common types of Personal Property and Contents insurance coverage are Actual Cash Value and Replacement Cost.

Replacement Cost coverage should give you enough money to replace the items that you lost. A good example is a laptop that cost you $1,000 to purchase five years ago. The same laptop today may only cost $500 to buy, and that is what the insurance company should offer you.

Actual Cash Value coverage takes into consideration depreciation. Using the laptop example above, after factoring in depreciation, the value of the laptop may only be $200. That is the number the insurance company will offer.

Issues can arise when you and the insurer disagree about the Replacement Cost or Actual Cash Value of certain belongings. For example, in some cases, the adjuster may claim that a belonging has depreciated when its value has actually gone up. There are separate limits for luxury items like fine art and jewellery that are likely to appreciate, but it may still apply to other heirlooms, antiques, or collectible items that don’t need their own special coverage.

When it comes to Replacement Cost, you may disagree with the insurer over how much it would actually cost to replace the belonging. If you have receipts and can confirm where you purchased the item, you can look up its cost today (or the cost of an available equivalent). The best way to contest the adjuster’s estimates is by providing proof of purchase. You can also demonstrate the current price of a comparable item through quotes or links to a retailer’s website.

Keep in mind that the money you receive from a fire damage claim won’t provide you with the funds to buy the latest models or upgrades. You can’t expect to receive a dollar amount equal to what you originally spent. If you would prefer to buy newer versions of lost belongings, you may be able to negotiate a lump-sum payment and gain the freedom to use it to purchase what you like. Otherwise, you often have to replace the belongings first and then receive compensation through your fire insurance coverage after making the purchase.

#4 Structural Damage and Repair Costs

Structural Damage is the third and potentially largest part of your home insurance policy. It covers the costs associated with repairing or rebuilding your home after a loss.

The claims adjuster first puts together a Scope of Work, detailing the repairs and replacements that need to be made. The insurance company will solicit bids or quotes from several contractors, and they will most likely base their next decisions on the lowest bid. Once the lowest bid is set, the insurance company may offer to cash you out based on that figure and allow you to make arrangements to repair or rebuild the home yourself. More often, they suggest that the lowest bidding contractor follow through and complete the work they bid on.

There are several reasons this leads to disagreements. First, you may disagree with the accuracy of the Scope of Work. Because the contractors’ bids are based around the Scope of Work, your first step is to review it and communicate with the adjuster if you see something missing or you believe that more needs to be done than what’s been listed. If you approve of a Scope of Work that’s missing essential repairs, you could be responsible for paying the difference yourself.

Secondly, you may be sidelined by surprise costs. If there are budget overruns, you are responsible for paying for them. There are several reasons costs might be higher than the insurance company compensates for. In areas hit by wildfires, numerous homes are affected at once. This puts a strain on the local construction industry, so labour and material costs go up.

Even in the case of an individual house fire, costs can be more expensive than anticipated in your home insurance claim. By January 2021, lumber prices were more than 20% higher year-over-year, raising lumber-related costs on new construction by as much as $30,000. In a total loss fire damage claim, homeowners faced with higher lumber costs could have wound up on the hook for those unanticipated expenses if costs exceeded their policy limits. While most policies include inflation protection, so that home insurance claims keep up with real costs, price rises on that scale far exceed the general rate of inflation.

Problems can also arise when it comes to actually receiving payments for structural repairs. To begin with, if you are still paying your mortgage, the mortgage lender is often made co-payable on the funds. They can hold your insurance payment for structural repairs up to the amount remaining on your mortgage. This isn’t the choice of your insurer, but usually due to a clause in your mortgage making your mortgage lender co-payable on home insurance claims. However, the insurer does not know what’s left on your mortgage, and you may have a hard time getting overpayments back from your lender.

The mortgage company has a vested interest in making sure your home is rebuilt. They don’t want to run the risk of you taking your insurance payment and walking out on the mortgage. The mortgage company releases staggered payments based on completion, typically with one third paid at the beginning, another third when 50% completion has been verified, and the rest when full completion has been verified. Though it may seem frustrating for the homeowner, builders familiar with fire restoration should understand the process.

#5 Underinsurance

If your home was underinsured, recouping the full costs associated with a rebuild can be complicated. Underinsurance means that your policy limits were inadequate to cover the full costs associated with the physical damage, property loss, and/or additional living expenses.

When the cost to rebuild exceeds policy limits, it may result in substantial out-of-pocket costs and economic loss for the policyholder. Homeowners may be tempted into policies that leave them underinsured by lower premiums than they would be paying for proper coverage.

Keep in mind that a lower-than-expected offer from your insurance company does not mean that you were underinsured. Insurance companies often make low offers in an attempt to minimize their compensation. You may be able to negotiate your home insurance or mass evacuation insurance claim.

If you feel that your insurance company has not made a fair offer, visit our resource centre for more information about what we do and how we can help. Our own experience motivates us to assist families who are struggling to recover and rebuild their lives. Insurance is meant to help you rebuild.