Experience Files

"My plumber screwed up and caused a major water damage! There's no way I'm filing an insurance claim—it wasn't my fault!"  This is a common, and understandable, outcry from homeowners facing property damage caused by a third party error. They fear premium increases and see it as an unfair burden.

But, why should anyone advise a homeowner to file a claim against their own policy in such a scenario? The answer is a powerful concept: Subrogation.

Understanding Subrogation

Simply put, subrogation in this situation is when your client's insurance company steps into their shoes, legally taking on the right to pursue the individual or organization responsible for the damages. It works like this:

1. The Insurer Pays You: Your client files a claim with their homeowner's insurance carrier and receives payment for the covered losses.

2. The Insurer Pursues the At-Fault Party: Your insurance company then identifies and pursues the party that caused the damages (in this case, the plumber) to recover the money they paid out. Essentially, your insurer champions your client's interests in seeking reimbursement from the responsible party.

Most insurance policies include a section detailing the insurer's legal right to use subrogation in appropriate scenarios.

The Critical Difference: ACV vs. RCV and Your Client's Deductible

It's also essential to understand how General Liability (GL) insurance policies differ from most homeowners' policies, especially when it comes to compensation:

• General Liability (GL) policies are almost always written as Actual Cash Value (ACV) policies. This means the adjuster assigned to the plumber's GL claim will apply depreciation to the damaged items. If a homeowner's carpet is 10 years old with a 15-year life expectancy, the GL policy might only pay 25% of the replacement cost. The same applies to paint, drywall, and other construction materials affected.

• Most Homeowners Insurance policies, conversely, are written as Replacement Cost Value (RCV) policies. This is a significant advantage for your client, as the depreciated amount initially withheld will be reimbursed to them upon completion of the repair work.

Here's the best part for the homeowner: If subrogation is successful – meaning the client's insurer successfully recovers the money from the contractor's GL insurance – the insurer will refund the deductible paid by the homeowner. Furthermore, at least in my experience, there's typically no penalty to their homeowners' premiums. Insurers are often more willing to expedite compensation when they know they will ultimately recover the funds from the 3rd parties insurance company.

Our goal as restorers is to make bad situations better, right? Explaining the benefits of subrogating a claim, including the potential for a full recovery of their deductible and no premium impact, empowers the client. By adding that the insured typically doesn't have to do much beyond potentially safeguarding the source of the issue, you become a trusted advisor, turning a stressful situation into a manageable one.