COVERAGE CONCERNS
Four powerful hurricanes confirm importance of
insurance review and coverage adjustments
By Roy McCormick
|
Damage done by Hurricanes Charley, Frances, Ivan and Jeanne has highlighted deficiencies in property insurance protection—both personal and commercial. These conclusions also relate in equal fashion to other catastrophes such as tornadoes, earthquakes, flooding and out-of-control fires in dry areas.
Agents can ensure the best possible protection for insureds by conducting a periodic review of coverage included in individual accounts. (This also will also enhance the image of the property insurance industry!)
Personal insurance
We will focus on personal insurance first because of the great number of buyers and their need for good advice and care.
The destruction caused by the four hurricanes in a relatively short period served to emphasize the “insurance to value” problem. The escalating cost of building materials, skyrocketing property values throughout much of the country, and strengthened building codes have contributed to the problem. An insured who has lost a home may be faced with serious financial problems when rebuilding if he or she is underinsured. On the other hand, a neighbor who has incurred similar damage but who has participated in regular coverage reviews and adjustments will have a far different outlook.
The billions of dollars of insured and uninsured losses to dwelling property caused by the recent hurricanes underscores the continuing need for keeping homeowners policies abreast of exposures. Dwelling coverage under homeowners policies provides for replacement cost of serious losses if the limit of insurance has been fixed at, generally, 80% or more of the replacement cost of the damaged building. Otherwise adjustment will be made on an actual cash value basis. The importance of periodically increasing the limit is evident.
In addition, “ordinance or law coverage” is an important option that provides coverage for the increased cost of rebuilding with materials and procedures required by the governing building code. It further minimizes out-of-pocket rebuilding expenses.
Personal property coverage under a homeowners policy is an additional amount of insurance, on an actual cash value basis, that is generally fixed at 50% of the dwelling coverage limit. It may be adjusted to suit individual needs. Optional personal property replacement cost endorsements are available from most insurers.
Certain items of personal property subject to “special limits” under Coverage C (personal property coverage) and of particularly high value should be scheduled. They include but are not limited to jewelry, furs, paintings, oriental rugs, or 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 limitations.
Despite concerted efforts by insurance agents and companies in recent years, far too many renters do not have insurance for loss to their personal property, a fact once again made clear by the powerful wide-ranging hurricanes. A renters package policy—a homeowners policy adaptation—provides coverage for personal property on a named peril basis comparable to that under Coverage C in broad form and special form homeowners policies.
Because of the high cost of new furniture and clothing, there are options to replace the basic actual cash value protection with coverage for the full replacement cost of property. Homeowners 4, the designation for a renters policy, does not include dwelling coverage but does cover building additions and alterations which are owned or have been made by the insured.
Maintaining good records that identify household contents and substantiate values is essential for the satisfactory settlement of personal property claims under homeowners policies. The insured will be in a favorable position if a personal property inventory has been prepared in a personal property inventory booklet, as advised by the insurance provider. A room-by-room photo or video inventory provides significant additional documentation that will help to establish loss with the greatest possible accuracy. Keeping bills of sale and appraisals of items of special value aids greatly in the adjustment process.
The value of the unheralded homeowners policy coverage known as “Loss of Use” insurance—Coverage D in most policies—also was underscored by the recent hurricanes. The limit under Coverage D is an additional amount of insurance that is fixed at 20% of dwelling coverage in widely used broad and special forms. It is generally 20% of Personal Property Coverage C under forms designed for renters, and 40% of Coverage C under forms issued to condominium unit owners. The limit of insurance for Coverage D, computed accordingly, is stated in the policy declarations.
Loss of use coverage applies when loss to property covered under the policy or the building containing it causes the residence premises to be unlivable. The special value of the coverage in the wake of a catastrophic situation is found in the part identified as “additional living expense” defined as “any necessary increase in living expense incurred by you so your household can maintain its normal standard of living.” Rental or hotel arrangements, food, clothing and transportation are major expenses that are within the scope of coverage when all is lost.
A homeowners policy will cover water damage from rain when a roof is blown off or badly damaged or windows are blown in. But flooding caused by rising groundwater is not covered. The serious consequences may be the result of storm surge from the large body of water over which the hurricane passes, the overflowing of a river, or a large accumulation of water from heavy rain on already saturated ground. Insurance protection from such loss to dwellings and personal property is available under the National Flood Insurance Program. The new NFIP Preferred Risk Policy, with lower cost options, will attract people in less flood-prone areas who have not previously carried flood insurance.
Business insurance
Business insurance buyers are subject to virtually the same exposure and coverage considerations as home owners and renters, with several important options. After the destruction caused by Hurricane Charley, the senior economist of Wachovia Corporation, one of the country’s top banking firms, said: “Many retail stores and restaurants that are not chain related are unlikely to have business interruption insurance and may not make it. I see a lot of bankruptcies.”
Accounts receivable insurance ensures survivability for those who do extensive business on a credit basis. Valuable papers coverage can make a big difference to many professionals such as pharmacists, attorneys, accountants, physicians and hospitals. The protection includes the expense of reconstructing records as well as financial loss.
This year’s massive hurricanes, occurring in quick succession, have uncovered gaps in property insurance that must be addressed in the future in order to minimize problems for insureds. In many cases, of course, the lack of needed protection resulted from insureds rejecting recommendations. This brought to light the need for property owners and their insurance providers to conduct coverage reviews and make adjustments for the future. Such adjustments can become crucial if a policyholder suffers a loss, whether it is from a weather-related catastrophe or a more isolated disaster such as a residence fire. *
The author
Roy C. McCormick is a contributing editor with The Rough Notes Company.