COVERAGE CONCERNS
Carefully designed homeowners coverage is not enough--
insureds' understanding of coverage also carries weight
By Roy C. McCormick
A compilation of homeowners policy claimants' comments (reported in newspapers and on TV and radio) underscores the importance of sound property coverage and limits of insurance. These home owners had suffered total or near total windstorm damage to their property from tornadoes and hurricanes. Their comments also point up that it is equally important that insureds understand the scope of their protection.
Monster tornadoes roared across the Midwest in the spring of 1999 and, a year earlier, in central Florida. Hundreds of homes were destroyed or severely damaged on both occasions. The experiences described by two families illustrate how both sound insurance protection or insufficient coverage can apply in the same circumstances.
Interviewed months after she pulled her badly injured husband from the debris that had been their dwelling, a woman expressed gratitude not only for her husband's complete recovery but also for their insurance company's payment of all expenses associated with the rebuilding and replacement of
their property.
This woman's story was in sharp contrast to one told by another insured who was a victim of the same tornado. A contractor selected by the insured to rebuild his house was paid the full $80,000 limit provided by the applicable policy's dwelling coverage; however, the property owner was left with an incomplete structure that he described as only a frame. Fourteen months later, he was still engaged in supervising and participating in the remaining construction work, making monthly payments on the existing mortgage, and paying $1,200 each month for housing for his family.
Last autumn, tornadoes devastated sections of communities in several central and southeastern states, where recollections of recent storm damage were still fresh. That damage had resulted from tornadoes, as well as from powerful winds associated with hurricanes.
The insurance industry proved to be of vital "importance" in all of these cases. Most of those who were insured and who lost their homes and personal possessions were made whole--or nearly so--by their insurers. On the other hand, owing to inadequate insurance limits or coverage provisions, some were not restored to the condition they were in prior to the storms, even though their insurers adjusted their losses in full compliance with their homeowners policies.
These cases point up that actual loss experience itself can provide significant guidelines.
Insurers and all who arrange property insurance for home owners/occupants have a compelling interest in decreasing the numbers of policyholders who incur substantial out-of-pocket expenses brought about by windstorm and fire. By paying careful attention to the arrangement of sound coverage for individual dwelling and personal property exposures, insurers and producers can forestall unfavorable publicity.
The dwelling exposure and Coverage A applicable to it warrant careful attention to limits of insurance and coverage provisions in light of how individual policies have responded.
* Dwelling Coverage A. The problem of insufficient insurance dollars to repair or replace a structure can be alleviated in two ways: (1) by exercising professional care in the writing and renewal of policies, and (2) by overcoming resistance or downright apathy on the part of some insureds to recommendations that insurance limits be fixed at substantially higher levels.
By citing experience with numerous total losses, a producer can convince the unconcerned insurance buyer of the need for proper limits. The importance of insurance to value is clear. A major factor contributing to underinsurance is the willingness of some insurance buyers to purchase dwelling coverage with limits corresponding to the amount of a mortgage loan--the minimum required by the lender. Without well-conceived adjustments, the consequences are predictable.
In the aftermath of the widespread tornado damage in the spring of 1999, a law school professor addressed the problem on a national news program. He pointed out that many people eager to close a mortgage loan purchased dwelling coverage in the amount of the loan. Although his comments could have been seen as an assist for the insurance industry, insurance professionals must have cringed at what possibly could have been construed as negative publicity.
* Personal Property Coverage C. Applicable to unscheduled personal property, insurance is provided on an actual cash value basis (replacement cost less depreciation). Optional personal property replacement cost endorsements are available from most insurers. These endorsements will eliminate depreciation factors in loss adjustment under Coverage C. All eligible insureds who do not have the stepped-up protection should be told that it is available and also should be informed of the difference between replacement cost adjustment and actual cash value adjustment.
If adjusters have to explain basic actual cash value coverage provisions to unhappy insureds, insurance company personnel or producers may have to face the possibility that these unhappy insureds will air their dissatisfaction publicly.
* Scheduled Personal Property Endorsement. Certain items of personal property, subject to "special limits" under Coverage C and of particularly high value, should be scheduled. They include but are not limited to jewelry, paintings, oriental rugs, stamp and coin collections and may be covered for stated amounts of insurance based on bills of sale or appraisals. Loss from any peril, including flood, is covered subject to a few reasonable exclusions. This scheduling procedure results in more insurance being applicable to unscheduled personal property under Coverage C.
Insurance professionals should encourage their clients to inventory their possessions. At a time of great stress, an insured will feel more secure if he or she can produce a personal property inventory booklet, a photo or videotaped inventory of rooms and their contents, as well as receipts and appraisals. This also will help adjusters make prompt adjustments.
The Internal Revenue Service also can be a lifesaver! Substantial portions of some home owners' losses from windstorm, fire, etc., are not covered. Tax deductions can serve as a significant supplement to insurance and can prove to be vital when catastrophic losses occur. Agents, adjusters and insurers can cite them to concerned claimants who may not be familiar with their application to portions of losses that are not insured.
Insufficient limits of insurance and absence of certain optional coverages in homeowners policies can result in claim settlements that lead to unfavorable publicity for the insurance industry. Agents should know what needs to be done regarding limits and coverage. In addition, if reluctant insureds hear examples of the consequences of underinsurance, they usually can be persuaded to accept the agent's recommendations. *