Coverage Concerns Nature's havoc points up necessity of reviewing coverage Underinsurance and lack of coverage are ongoing problems By Roy C. McCormick The first five years of the 21st century have been marred by enormous amounts of property damage from natural causes—tornadoes in the Midwest; hurricanes in the Southeast; fires, landslides and earthquake rumblings in the West; and drenching rain and flooding in the Northeast. A U.S. Department of Commerce estimate of damage caused solely by Hurricane Katrina underscored the magnitude of these financial losses. The report stated that insurance payments would be in many billions of dollars; property losses not covered by insurance were estimated to be more than those insured. The clear message to insurance providers, including agents, brokers and customer service representatives, is that they have both the opportunity and the responsibility to remedy the gaps that many insurance buyers have in their protection. Mother Nature has jolted us into recognizing a distressing lack of needed coverage, as well as underinsurance, which is causing financial problems for many people. Underinsurance has been confirmed as a major problem for owners of both commercial buildings and dwellings in the wake of recent hurricanes, tornadoes, earthquakes, out-of-control fires in dry areas, and flooding. Although coverage requirements by banks and other lenders assure the existence of property coverage, it does not always assure replacement cost limits. When a mortgage is paid off, the need for ongoing attention to appropriate insurance becomes even more significant. The adjustment process has revealed dwelling coverage limits below the usual 80% requirement for replacement cost and commercial building limits not written to meet the applicable coinsurance limit. Rebuilding costs following future storms and other catastrophes will reflect sharp increases in the price of building materials, labor, and new construction standards required by strengthened building codes. Insurance limits must keep pace with these costs of rebuilding. Dwelling coverage 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 structure. Otherwise, adjustment will be made on an actual cash value basis. If the amount of dwelling coverage was fixed at the approximate replacement cost when the dwelling was acquired and occupied by the insured, the attachment of an inflation guard (or automatic increase in limits) endorsement will contribute to keeping coverage in line with construction costs. However, in light of rising costs, limits should be reviewed at renewal time. Personal property coverage under a homeowners policy (Coverage C) is an additional amount of insurance, on an actual cash value basis, generally fixed at 50% of the dwelling coverage limit. Recent personal property losses have led to dissatisfaction because many insureds did not have the benefit of replacement cost coverage under widely available replacement cost endorsements for personal property. It is important to discuss this option with eligible insureds, and, if the option is declined, a record of the refusal should be maintained. This will help minimize undeserved criticism of insurers. Encourage clients to complete personal property inventory forms. They are priceless in the adjustment of major losses. In addition, encourage clients to take a photo or video inventory of the home and its contents. Advise that bills of sale and receipts be preserved, and that up-to-date appraisals for items of special value be secured. Stress the importance of keeping these records in a safe deposit box or in a protected place away from the residence premises. Commercial coverage Commercial buildings and contents are subject to virtually the same exposures and coverage considerations as dwelling buildings and their contents, with several important options. Recent catastrophes have made it clear that many small businesses have not carried loss of earnings (business interruption) insurance. Without continuing income, they are unable to survive. Employees are lost when the downtime appears to have no end. Rebuilding is delayed when a small number of contractors are sought by the many who need them. A businessowners policy is the answer for many eligible small businesses because it includes coverage for loss of earnings due to an insured hazard on an “actual loss sustained” basis. Accounts receivable insurance has proved to be of great value for those who do extensive business on a credit basis. Valuable papers coverage is of equal importance. It can make a big difference to many professionals such as pharmacists, accountants, attorneys, physicians and hospitals. The protection includes the expense of reconstructing records as well as covering financial loss. Many crop growers and grove owners carry crop insurance. But recent storms, especially in Florida and the Gulf area, have made it clear that only a few have coverage limits sufficient to cover total or near total losses. Many of these insureds require coverage adjustments to cope with future exposures. Despite continuous public advertising efforts by the National Flood Insurance Program and coverage explanation by insurers, agents and brokers, many people who needed flood insurance did not have it when their property was damaged or destroyed by flooding. Flooding caused by rising groundwater is not covered by the homeowners policies and commercial property policies carried by most insureds. The serious consequences may be the result of storm surge from a large body of water over which a hurricane passes, the overflowing of a river, or a large accumulation of water from heavy rain on already saturated ground. Insurance protection for dwellings and their personal property, commercial buildings and their contents is available under the National Flood Insurance Program. The relatively new NFIP Preferred Risk Policy, with lower cost options, is available for homeowners and occupants in less flood-prone areas who have not previously carried flood insurance. * The author |
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