In the aftermath of a loss, policyholders and insurers face a quandary. When confronting the devastation wrought by fire or flood, they have to decide what happens next.
Policyholders are often under the mistaken impression that they will be allowed to replace all of their possessions after a loss. However, the duty of the insurer is to indemnify the insured, within the limits of the coverage provided by their policy. In most cases replacement would be prohibitively expensive, leaving a serious gap between the expectations of the insured, policy limits and the reality they are faced with at the end of the claim.
The first responsibility of the insurer is to restore an item. If it cannot be restored, it must be replaced. It is not always a straightforward matter to separate salvage from non-salvage — who makes that call? Homeowners are not in a position to make the decision, as they do not have the technical expertise to determine what can be saved. Adjusters can utilize their professional experience to some degree. However, even the most qualified adjuster will find keeping up with the pace of technological advancement in restoration challenging. In many cases, the opinion of a specialist is required, and it may only be by attempting to restore an item that a final decision can be made.
Many items once considered beyond repair can now be restored to near perfect condition, but this may not be cost effective or desirable. Certain low-value items should automatically be classified as non-salvage. It is simply more cost-effective to replace rather than restore. However, it is vital that the homeowner is part of this conversation. There may be items (such as clothes that no longer fit) which could be cleaned but are a lower priority.
In contrast, there may be some low-value items with significant sentimental value for which cleaning and restoring is a high priority. For example, restoring sentimental soft toys with little intrinsic value is likely to be a top priority for a family with young children. Yet, restoring a large number of collectibles of low value (Beanie Babies for example), could conceivably use up a portion of the settlement that could have been used to restore or replace furniture, electronics or clothing. The homeowner may ask for restoration at the outset without realizing the impact this will have later on in the process.
Open and frank communication between the insured, insurer and restoration specialists will ensure that expectations are managed and there are no unpleasant surprises down the line.
There is another option, which can seem very tempting to the homeowner and the adjuster at the beginning of the process. The adjuster can estimate the cleaning cost of the damaged goods and offer to “cash-out” the claim with a sizeable check. This option may seem tempting to insurers looking to settle claims quickly and efficiently, but it has its own pitfalls.
It is a commonly held misconception that people will generally opt for new goods to replace their damaged possessions. People do like to buy new things, but to “add to,” not to replace.
In reality, people are often attached to their possessions and there is an important balance to be struck between restore and cash-out. Homeowners may initially be delighted to see the size of the payout they are offered for their goods and jump at the chance to go on a spending spree.
Yet, all too often they soon find that replacing all of their worldly goods costs a great deal more than anticipated. Studies show that the cost of restoration, the cash-out amount, is 15-25% of replacement. Previously happy customers become disgruntled when the funds run out and they have only replaced a portion of their possessions. This often leads to “buyer’s remorse,” blame goes to the insurer and their business goes elsewhere.
Cashing out certainly has a place in settling a claim, but it is important to manage the expectations of the insured and ensure that all parties enter into this agreement with their eyes open. If the policyholder is given all of the facts up front and understands how far the settlement is likely to stretch, they can decide whether a payout is still their preferred option.
The advice of expert specialists can be invaluable at all stages of the claim cycle in ensuring that both the insurer and insured are armed with the information to come to an equitable agreement. An open and honest assessment of the potential for cleaning and repair along with a realistic expectation of the costs involved is just what the insurer needs to enable them to be the hero that their customers deserve in their hour of need.
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