Think twice about filing small claims.

When I was reading The New York Times, 4/26/2015 Sunday version, I came across an article which really caught my attention.  The topic of the article is “Spurned by an Insurer After Filing Small Claims” by David Segal, under the Banner of The Haggler.

In the article, Mr. Segal was answering a write in question regarding a reader who is living in Forest Hills, N.Y. complaining about his homeowner insurance carrier- State Farm - non-renewed his homeowner insurance policy – because he filed two claims in the span of 2 years.  The claims are for 1) A ceiling fan that dropped off the ceiling and 2) A stolen bike. The reader was puzzled why State Farm non renewed his policy as he has been a loyal customer of State Farm since 2010 and State Farm did not pay out a dime for the two claims.

This brings out an unspoken rule in insurance: insurance companies put more weights on frequency than severity.  Severity means big or severe loss.  The rationale behind such rule is if the insured is experiencing frequent losses; even they are small losses, then this insured is considered as careless and disinterested in risk management.  A severe loss is bound to happen soon.  Insurance companies either cut the tie with this insured or raise the premium to sky high to compensate the assumed increase risk factor. The insurance mechanism is designed to protect you from large or catastrophic loss not the minor loss that you can sustain easily. 

Christoph Hitz, New York Times Company

This rule also applies to Workers Compensation Insurance Coverage.  If your workers compensation insurance premium reaches a certain level, you would be assigned an experience modification factor calculated by the Workers Compensation Rating Bureau according to your loss experience.  The base factor is 100 and if you get 125, you would have to pay at least a 25% surcharge on your premium; but if your factor is less than 100, say 88, then you would enjoy a 12% credit on your premium. High experience modification factor would also bring forth non-renewal.

Be careful! Make just a couple of small claims – nonrenewal. Is it fair? Think of it this way.  If every insurance policy holder files a claim, even for a tiny compensation; then no insurance company can survive financially.