Why You Shouldn't Get Your Financial Advice From Journalists
Halloween kicks off the holiday season with a celebration of all things scary and spooky. Ghouls and ghosts roam the streets demanding candy, and graveyards and haunted houses seem to pop up throughout the neighborhood. But the scariest things I saw this year was a litany of bad financial advice coming from the media about using your insurance to pay for cleaning up Halloween-inspired practical jokes.
One article making its way around the internet gave a list of ways you could use your insurance to pay for what mostly amount to small nuisances. Seemingly started at Nerd Wallet, dozens of journalists were repeating the bad advice like good little lemmings--including an article in USA Today.
Apparently, none of the journalists ever thought to check if the advice they were so dutifully doling out would actually financially help or harm the readers. Spoiler alert: following most of their advice will harm you.
The Problem With Calling Insurance
While everything in the article is true, the advice they give is rotten. You can call your insurance company for the pranks listed in the article and you may get a payout from the company. Unfortunately, the cost to you in the long run will far outweigh the benefit for most of the advice.
Using Insurance for Small Things is Expensive
For most of the pranks, the damage amounts to little more than nuisance and inconvenience, costing no more than a few hundred dollars to repair.
While many insurance products are designed to pay for small things, this type of insurance is extremely expensive for the consumer and extremely profitable for the insurance company. Insurance works best when you are insuring against a catastrophic loss which is highly unlikely to happen. The costs are lower, and the potential benefit to you is much higher.
The Deductible Means You Won't Get Much Money
Your insurance has a deductible, a small amount you have to pay before your insurance kicks in. For small claims, it is likely you won't get any money from the insurance company when you file your claim.
Say the cost of the prank is $750 and you have a $500 deductible on your insurance. The most you will get is $250, and an insurance adjuster may further reduce the payout based on a number of factors.
Your Premiums Will Increase
Your insurance premiums are charged based on how much of a risk you represent to the insurance company. You are placed within a pool of other customers who behave similarly to you. Groups which cost the insurance company more are charged more for their individual insurance policies. Being put in a low risk pool, a group which costs the insurance company less, means your insurance premiums will be lower.
Making small claims, like the example above, will put you into a higher risk pool, which will increase the cost you pay for insurance (even if you don't get any money from the insurance). What's worse, your insurance company may put you into a different risk pool simply because you called to ask about a claim. People who constantly call their insurance company for every little problem tend to cost insurance companies more over time.
Your Insurance Could Be Cancelled
If your risk profile gets too risky, you could find yourself uninsured because the insurance company doesn't want to have you as a customer. Insurance companies are in the business to make money, but they also have a responsibility to keep premiums down for all of their customers. (They are heavily regulated by the state government). A customer who drives up the cost of insurance too much will be seen as bad for business and bad for the other insurance customers. (This is why drivers with a DUI often have to get special auto insurance through a state program).
The Specific Advice
The article(s) gave five examples of bad things which can happen on Halloween (or any other night). In each case, the article fails to provide the costs, benefits, and potential risks associated with making an insurance claim.
1. Your car gets egged
Vehicle vandalism is a common threat during Halloween, but most vandalism can be repaired for less than a thousand dollars. And a car egging might only cost $250 to repair the paint. While these nuisance crimes are covered by insurance, it's a bad idea to make the claim. Suck it up, pay the minor bill, and park your car in the garage next year.
2. Goblins toilet-paper your yard
Homeowners insurance generally will cover damage to your yard from TP-ing and other pranks, but the cost to you is going to be high. Even with damage to trees or landscaping, it is unlikely the cost will rise to the level of catastrophic. Because trees and other plants grow back, you'll likely not get a lot from the insurance company. On the other hand, just calling your insurance company could bump up your premiums, especially if they incur the cost to send an adjuster out to document the "damage."
3. Yard decorations disappear
Again, homeowners insurance covers theft of property, but there are specific limitations on the amount you can be reimbursed for. An adjuster will also reduce the value of the items stolen based on how old they are. Unless you have one of those ridiculously elaborate (and expensive) yard displays, it is unlikely the benefit will outweigh the costs.
4. The jack-o’-lantern starts a fire
Finally we get to the part of the advice which is not completely batty. Assuming your house literally catches on fire, making a claim against your insurance could be the right move. A major fire can cause tens of thousands of dollars in damage to your home, destroy property, and possibly leave you homeless for the reconstruction period.
While your premiums will increase in the future, the amount of increase will be insignificant when compared to the multiple tens of thousands of dollars in losses the insurance company will reimburse you for.
Unfortunately, the article makes no mention of the distinction between a massive house blaze and a small fire which singes the window pane.
5. Pedestrians act unpredictably
The article rounds out with the wise advice of making an auto insurance claim if you injure or kill a pedestrian with your car. The article doesn't, however, mention the extreme seriousness of this particular situation. Whenever a car accident causes a serious medical injury or death, you absolutely must file a claim with your insurance company. Your insurance company is required to hire lawyers to defend you in court for any personal liability, but only if they had the opportunity to defend you from the beginning.
If you wait to notify your insurance company until the injured party files a lawsuit, you may find yourself without any insurance protection whatsoever.
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career also includes having been a VP at a credit union leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at email@example.com