Many homeowners live in high-risk areas such as earthquake zones, areas prone to wildfires, and coastal states that sustain hurricane damages. Homeowners in high-risk areas should be particularly attentive to their home insurance policies, especially concerning how insurance carriers interpret certain terms. One such term that often causes confusion is “incurred.”
Typically, policyholders believe when they “incur” a loss, the word means that they have suffered or sustained damage to a covered item. However, insurers usually interpret the word incur to mean that the policyholder has not only suffered damage to a covered item, but also the policyholder has become responsible for the expense to repair the damage. In plain English, the carrier believes the policyholder has not incurred damage until you have paid the expenses to have the damaged item repaired. This distinction, while seemingly minor, can significantly impact when and how you receive insurance payouts.
Pete Pig and Mother Goose Mutual Insurance Co.
Pete Pig, the eldest sibling from “Three Little Pigs,” constructed his straw home and insured it with Mother Goose Mutual Insurance Co. When the “big bad wolf,” aka a hurricane, demolished his home, Pete faced the daunting task of rebuilding.
The adjuster, Begonia Gemforest, writes an estimate of damages, cuts a check, and instructs Pete to contact her when he has ‘incurred’ the expense of debris removal and the increased costs of bringing the straw house up to code.
What Does “Incur” Really Mean?
The term “incur” appears several times in a policy and plays a pivotal role in how claims are processed. Unfortunately, the policy does not define the word. Pete has a typical homeowner policy with open perils. There are no endorsements which would change the meaning of the base language. This is important as carriers have begun changing wording of the insurance contracts due to misunderstandings.
Pete reviewed Begonia’s estimate of damages with his contractor who will perform the repairs. The contractor pointed out that Begonia has not paid Pete for the cost to remove the debris left after the storm. The contractor insinuated that Mother Goose Mutual Insurance Co. attempted to underpay Pete’s claim since debris removal is covered through the policy.
The contractor believes that damage to Pete’s house—and an invoice Pete will be required to pay in the future—qualifies as an “incurred” cost; thus, this cost should appear in Begonia’s estimate of damages. After all, Pete is subject to the expenses it takes to repair the loss to his house because he currently has physical damage that he has sustained to the covered property.
Begonia and Pete discussed the policy, and she clarified that the carrier believes that “incur” means that Pete must respond to the actual expense associated with the loss; in other words, the policy does not pay for expenses that may or may not occur in the future, even if the contractor says this expense will be forthcoming. Mother Goose Mutual Insurance Co.’s intention is that Pete must first pay for (incur) the debris removal expenses out of pocket and then submit receipts for reimbursement.
Why Clear Definitions Matter
The above scenario highlights a critical issue: the lack of clear definitions in insurance policies can lead to misunderstandings about coverage and leaving Pete paying more out-of-pocket than he initially wanted. Recognizing this confusion, many carriers, including Mother Goose Mutual Insurance Co., are now incorporating specific language in the insurance contract to clarify their intent by updating the policy through an endorsement which states the policyholders must suffer the damage, pay for the loss, and complete the repairs prior to payment being issued.
To illustrate this point, in December 2023, the Florida State Appeals Court weighed in on what “incurred cost” means in an insurance policy. In the case of State Farm Ins. Co. v Joretha M. James, the DCA specifically stated, “we begin by noting … the policy was drafted by State Farm, which failed to include a definition of the meaning of the word ‘incur,’ thereby leaving it open to potentially different meanings.” The Florida Supreme Court has held that “‘to incur’ means to become liable for the expense, but not necessarily to have actually expended it,” and the DCA agreed. In other words, under Florida law, an insured does not actually have to spend money in order to “incur” a cost.
Many homeowners may think, “What is the difference if the carrier pre-pays the expense now or as a reimbursement if it is truly owed?” In short, premiums. By paying only actual, physical, tangible expenses, carriers can keep premiums to a manageable level.
Actionable Tips for Homeowners
- Review Your Policy Thoroughly: In particular, if you live in a hurricane-prone locale, before hurricane season, revisit your insurance policy, focusing on terms like “incur.” If definitions are vague or missing, contact your insurer for clarification.
- Prepare to Pay First: In the absence of clear language, assume that you’ll need to pay for repairs before receiving reimbursement. Set aside an emergency fund for these potential upfront costs.
- Keep Detailed Records: Save all receipts and document any correspondence with contractors and your insurance company. These records are crucial for substantiating your claims and being paid timely.
- Understand Limitations on Upgrades: If you decide to upgrade your home during repairs, be aware that your policy may not cover the extra costs. Discuss any planned upgrades with your adjuster beforehand. Failure to do so may delay the processing of future payments as the adjuster attempts to distinguish the upgrades from what you had at the time of the loss. Then, afterwards, review your policy limits with your agent to ensure they are adequate.
- Seek Professional Advice: If you’re unsure about your policy’s terms, consider consulting with an insurance agent, broker, or a lawyer specializing in property insurance. They can offer insights and help you navigate the complexities of your coverage.
In the End
Understanding the nuances of your home insurance policy, especially how terms like “incur” are interpreted, can significantly affect your finances and recovery after a disaster. In most cases, carriers maintain the policyholder’s obligation to the expense must be a tangible reality, not a theoretical or future event. By taking proactive steps to clarify these terms and prepare accordingly, you can protect your home and avoid unexpected financial challenges posed by claims. Remember, like Pete Pig, it’s better to know the specifics of your coverage before the “winds” start blowing.
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