Wrecks & Fires
Chapter 6
Home Sweet Home
Although it is generally advisable for people to buy their own homes, that is not always possible, at least initially. Therefore, many people rent their living quarters for a period of time.
Renter's Insurance
Most insurance specialists recommend that a tenant insure their possessions. If the landlord has insurance, it will only be on the structure and not the tenant's possessions. The tenant will also want liability insurance, in case a visitor hurts themselves while on the premises. Depending upon the circumstances, the landlord might be responsible for injuries relating to the structure itself, but injuries relating to the actions of the tenant may not be covered by the landlord's policy. For example, if one of the children left their roller skates on the sidewalk, causing a fall, the liability would rest with the tenant rather than the landlord.
A tenant's policy is similar to a homeowner's coverage, but without coverage for the structure itself. It is important to purchase enough insurance to cover at least the cash value of the contents. Many renters prefer to purchase replacement value, so that their belongings could be replaced at today's costs. Cash value is the current retail price less depreciation. Replacement value is the actual cost of replacement at current retail prices.
Homeowner's Insurance
Few people are able to simply walk into home ownership. For most, it is a difficult journey of saving and doing without. It would be most foolish to leave such an acquirement uninsured.
Property Insurance covers damage to or theft of the insured's possessions. Casualty insurance (also called Liability insurance) pays for the insureds legal responsibility to other people for property damage or bodily injury losses. Automobile and homeowner's policies typically cover BOTH property and liability coverage.
Homeowner policies are designed to protect owners and tenants from loss or damage to their property and also to provide protection against liability claims. The point of homeowner insurance is to protect an individual's home and the contents within it. Some people are natural gamblers willing to play the odds that their home will never be damaged or destroyed and that their belongings will never experience a loss. The problem is should they lose that bet, it could wipe out everything they own. It makes more sense to spend a few dollars for the sake of safety.
The policies generally have two sections:
1. Property exposures and
2. Liability exposures.
Floaters and Endorsements
Often consumers believe that an item mentioned in their policy receives complete coverage. This is not necessarily the case. For example, if a diamond ring is covered against theft in a homeowner’s policy, that does not necessarily mean it will also be covered should the diamond drop out of its setting and become lost. These are the types of things which need to be fully explained to the insured. A "floater" may possibly be added to the homeowner's policy to include the loss of the stone. A floater is a separate policy or addition which may be added to the original policy. It is often called an "endorsement." Floaters may also be used to raise the dollar limits in policies. Many homeowner policies would cover the theft of a ring only up to $1,000 or $2,000. An endorsement or floater could increase the amount of coverage.
Often floaters or endorsements provide "all-risk" coverage. In other words, they insure against all risks, except for specific exclusions which are listed in the policy.
Section #1 - Property Exposures
The first section, property exposures, may cover such things as the structure or dwelling itself, other structures on the property, personal property and loss of their use during repair. In addition, there may be coverage for such things as debris removal, fire department charges, trees, shrubs and other plants, theft of credit cards, property removal and reasonable repairs following a loss.
Replacement Cost
Replacement cost means the amount it would cost to have the house repaired or rebuilt; it does not refer to market value. In some situations, replacement cost might actually equal the market value, but this is not always the case. In fact, older homes often require more money to rebuild than the market value would have been. It is important that the insurance agent consider this when insuring an older home whose market value is below replacement costs.
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The term, replacement cost, has nothing to do with market value. |
As building costs rise, it is important that a property/casualty agent maintain a relationship with his clients and continue to update their policies. A policy should never fall below 80 percent of the replacement cost.
As agents, we know that consumers often hesitate to increase the premium amount of their policies (even when it makes sense). However, when the simple concept of replacement value is explained, most consumers prefer to be covered adequately. Placing a higher deductible on the policy might be an option that allows adequate coverage while keeping premiums reasonable. With higher deductibles, the consumer will be responsible for more of the smaller losses, but the major loss (the house itself) will still be covered by insurance.
Section #2 - Liability Exposures
The second section, liability exposures, covers personal liability and medical payments to others. It may also include coverage for claim expenses, damage to the property of others and first-aid expenses.
Homeowner's insurance is often the broadest coverage most people will ever buy. It literally covers the roof over their heads and the shirts on their backs. In addition, it covers their legal liability to others. Even so, the average consumer generally never even attempts to understand what they are buying.
A standard homeowners’ policy does not cover many types of natural disasters. Separate coverage is needed for floods and earthquakes. In many cases, a separate policy will also be needed for those who wish to be covered for hurricane damage.
For the consumer to keep up with changing times and values, it is necessary to constantly update their coverage. It is generally considered unnecessary to insure the actual value of the land since it cannot be stolen or damaged in the same way that the structures upon it may be.
Most professionals recommend that "replacement value" be the determining factor in the amount of coverage needed. Replacement value is often different than "market value". Market value is the amount the homeowner could sell their home for. Replacement value is the amount of money it would take to rebuild the home should that be necessary. In areas where the housing market is depressed, for example, a home may only sell for $150,000 but rebuilding it could easily cost $200,000. Determining the cost of rebuilding often requires an appraisal.
Some insurance companies calculate replacement cost by multiplying the square footage of a house by the square foot construction costs for new homes in the homeowner's area. By doing so, an appraisal probably would not be necessary. The construction cost is often supplied by the local builders association. Most property and casualty agents can supply this information.
Once the replacement cost is known, the policy should cover no less than 80 percent of the total replacement value.
As A Recap:
Replacement Value is what it would cost to replace a structure with a building of like kind and quality.
Actual Cash Value is replacement value less depreciation for its use and age.
Market Value is the dollar amount that the homeowners could sell their home for.
While the standard homeowner’s policy may automatically put replacement value on the structure, it is not unusual for it to put only actual cash value on its contents. Therefore, your clients will appreciate an exact explanation of which they have in advance of a claim.
Insurance companies typically will not pay replacement value on claims unless coverage for at least 80 percent of the total replacement value of the home is carried. If 80 percent of the total replacement value is in place, that usually qualifies as full replacement value. The reason that 80 percent would be considered full replacement is simply because few homes totally burn down. Generally, 80 percent would be more than enough to rebuild the home.
When a homeowner carries less than 80 percent of the total replacement value on their home, this will affect other claims. When a loss occurs the insurer will likely give the greater of two amounts:
1. A percentage of the total loss based on the percentage amount of coverage carried. For example, if 60 percent of replacement value is in place, then 60 percent of the loss would be covered for things such as storm damage, theft and so forth.
2. The actual cash value, which would be its replacement value minus depreciation for age and wear.
Either way the actual replacement value will not be paid, if less than 80 percent of the total replacement value is carried.
Inflation is part of our lives and this is also true when it comes to our homes. As inflation rises, so should the amount of coverage carried on our homes. Labor costs are often one of the largest factors to be considered. A homeowner’s policy should be reviewed yearly and updated, if necessary.
Many insurers now offer policies which include an inflation guard clause. These policies automatically increase their coverage by a specified percentage amount at specified time intervals. Of course, the premiums increase as well.
Even if an inflation guard is included in the policy, it still should be reviewed yearly. The percentage increase in the inflation guard may not equal the percentage rate of inflation. In other words, inflation may be taking away more than the inflation guard is adding. The opposite could also happen, of course. The inflation guard could be adding more than inflation is taking away. In that case, the homeowner would be paying for more coverage than is actually needed.
Another thing to remember is that an inflation guard will not reflect any improvements made. The only way to make sure that the amount of insurance carried reflects current values is to have yearly reviews.
The amount of insurance the lien holder (usually a bank) requires is not an accurate indicator of current values. The institution that holds the mortgage is only concerned with protecting their own interests (the loan). Therefore, as the mortgage is paid down, the bank’s interest decreases and the homeowner’s interest increases. Eventually, the mortgage would be paid off. At that point, the loaning institution has no further interest at all, but the homeowner has a very large stake in continuing to keep the property insured.
Fire and Allied Coverage
The mortgage lender usually requires that the home be covered by “fire and allied coverage’s” insurance. This means that the structures would be insured against just about anything that might damage it. That might include such risks as windstorms, tornadoes and even riots.
Homeowners’ insurance is a combination or package policy. What it contains depends upon the needs and desires of the homeowner.
Each insurance company may have slightly different policies, but they all follow the same broad outline.
The homeowner’s series consists of several forms which are numbered in sequence.
There are different types of homeowner's policies. The consumer can buy separate coverage for fire, wind, miscellaneous hazards, theft and personal liability, or they can simply buy a policy that covers all of these in one package. Homeowner's insurance comes in three basic types. Each type is progressively more expensive.
1. Basic Form: this protects one's home against fire, lightning, windstorm, hail, explosions, riots, aircraft, vehicles, smoke, vandalism, theft and broken glass (windows).
2. Broad Form: This is the most widely purchased form of homeowner policy. This type covers everything covered in the basic form, plus damage caused from falling objects, the weight of snow or ice, building collapses, broken steam or hot water heating systems, heaters, plumbing, frozen pipes, heating or air conditioning systems or appliances and injury from faulty electrical wiring. It will not cover damage to pavements (such as sidewalks or driveways), fences, patios or damage to pools from freezing, thawing or water. It is important to note that even though the broad form covers damage caused from broken steam pipes, it does not cover the cost of actually replacing the pipes themselves.
3. Comprehensive form: this form covers all conceivable perils, except flood, earthquake, war, nuclear attack and anything specifically excluded in the policy. It is very, very important to read the policy and know what is specifically excluded.
Any one of the three forms will cover one's house, although they generally do not apply to structures which have been built for occupancy by more than two families (such as fourplexes) or farm buildings and related structures. Farmers usually get a farm owner's policy that is specially designed for their purposes. Homeowner's insurance generally will also cover detached garages, sheds or other structures as long as they are not leased out to other individuals. A homeowner's policy generally has limitations on buildings used for business (sometimes not covering them at all). Therefore, a person who uses their home as the location for their business (as is often true for independent agents) should be sure to purchase insurance that does specifically cover an in-home business.
Section 1 of Form #1 (HO-1)
This type is called HO-1, Form 1, or the "basic form." This coverage is the cheapest to buy.
The basic policy is usually called an HO-1. It generally covers the house and its contents against eleven different perils which range from fire to broken glass. Since there are so many flaws in such limited coverage, many companies have quit offering the HO-1 as a "stand-alone" policy.
The basic form lists four coverages:
· Coverage A - the dwelling
· Coverage B - all other structures, such as garages
· Coverage C - unscheduled personal property
· Coverage D - additional living expense.
The basic form also lists four supplementary coverages which includes coverage for debris removal and fire department service charges.
The HO-1 insures against direct loss to the property and interests covered if caused by any of the groups of listed perils.
Covered perils may vary, but the eleven common ones include:
1. fire and lightning,
2. removal,
3. windstorm or hail,
4. explosion,
5. riot or civil commotion,
6. vehicles,
7. aircraft,
8. smoke,
9. vandalism or malicious mischief,
10. breakage of glass, and
11. theft.
It is sometimes possible to have as little as eight or nine risks covered (rather than eleven). Generally, such things as vandalism or glass breakage are left out.
The form will also list the exclusions and conditions which apply to Form #1.
Section II of Form #1 consists of:
1. Coverage E which is personal liability and
2. Coverage F which is medical payments to others.
Also, in Section II of Form #1 will be exclusions which apply only to this section along with five supplementary coverages including damage to property of others.
Form #2 (HO-2)
This type of coverage is called HO-2, Form 2, or the "broad form." This coverage costs a little more than the HO-1 plan because it gives more benefits.
The broad homeowner’s policy is typically called an HO-2. It covers the house and its contents against specific losses. Coverage often included in the HO-2 includes freezing of plumbing, heating and air-conditioning systems and domestic appliances.
Section I of HO-2 contains the basic coverages, supplementary coverages, additional exclusions and conditions that are identical to those found in Section I of HO-1. The difference between HO-1 and HO-2 lies in the perils listed. HO-2 insures against loss resulting from 18 listed perils rather than 11 listed perils as in HO-1. The first 11 of the 18 are the same as in HO-1. The additional perils include:
12. Falling objects;
13. Weight of ice, snow or sleet;
14. Collapse of buildings;
15. Damage resulting from steam or hot water heating systems;
16. Accidental discharge or overflow of water or steam;
17. Freezing of plumbing, heating and air-conditioning systems and domestic appliances; and
18. Accidental injury from electrical currents artificially generated to electrical appliances.
Section II OF HO-2 is identical to Section II of HO-1.
Form #3 (HO-3)
Called the HO-3, Form 3, or the "Special Form," this plan offers still more coverage than either the HO-1 or the HO-2 does.
The special homeowner's policy is called an HO-3. It covers the house for all perils except those explicitly excluded by the policy. On personal property such, as clothing and household furniture, it covers loss or damage from the same risks as listed in HO-2.
On the house itself, however, the policy owner is protected from all risks except, as mentioned, those which are specifically excluded. Some companies do offer similar coverage for specified personal property. The HO-3 is identical to the HO-2 except that coverages A, B and D are insured against all risks or perils. Coverage C, which is unscheduled personal property, is insured against all 18 listed perils in HO-2 with the exception of breakage of glass.
Under HO-2, in order to receive compensation for loss under coverages A, B and D, the insured (policyholder) must prove that the loss was the result of a listed peril. Under HO-3, the insurer (insurance company) must prove that a certain peril is specifically excluded in order to deny payment.
HO-3 also provides the insured with coverage against a wider variety of perils than does HO-2. In other words, if something causes damage, the policy will cover unless the peril is specifically excluded. If a homeowner spills paint in their house, the HO-3 would cover the loss (if not specifically excluded), but the loss would not be covered under the HO-2 because it is not one of the listed perils. Of course, the HO-3 is more expensive than the HO-2. A person pays more if more benefits are received.
Different insurance companies may have different conditions, so it is always important for the insurance agent to fully understand the policy he or she is writing. It is equally important for the consumer to do so. Some points for both the consumer and the agent to look for include:
1. Detached buildings, including garages, tool sheds or guest houses, are often covered only up to a specified limit, such as ten percent of the policy's face value. If the buildings would cost more than that to replace, it may be necessary to increase that portion of the policy.
2. If the home is left empty for 30 or more consecutive days before the loss occurs, one's protection against vandalism and broken glass may not apply. This becomes an important point for retired individuals who winter elsewhere.
3. Due diligence is required in some areas. Damages resulting from freezing pipes, heating systems and air-conditioning systems which occur while the homeowner is away may not be covered if due diligence was not exercised in the maintenance of heating sources or the draining of unused pipes.
4. Income loss from a home business during a disaster is not likely to be covered.
5. Should the homeowner rent out his or her home to another person, the insurance company may refuse to renew the policy.
6. While the homeowner's home is being repaired, there may be coverage for motel bills and restaurants for amounts that exceed normal living expenses. Of course, the policy will pay only up to the limits within the contract.
7. Depending upon the contract, there may be coverage for debris removal. Usually the policy will cover up to 5 percent of the total coverage.
8. There is usually a limit on coverage for plants, trees and other landscaping. The homeowner will need to check her particular policy, but a limit $250 to $500 is normal. Many policies offer no coverage at all; especially if they were run over by anyone who lives in the home.
9. Seldom is there any coverage for TV antennas, gutters, fences or awnings unless the house collapses.
Rates for fire insurance within the policy will vary depending upon the amount of fireproof materials in the home and the efficiency rating of the local fire department. Such things as sprinklers, fire alarms and fire extinguishers often help lower the cost of coverage.
As is true with so many types of insurance, rates are often lower if the premiums are paid annually rather than quarterly. Some insurance companies offer an additional savings if the premiums are paid for three years at a time.
Water damage caused by sewer backups, rain, ground water, or flood is typically excluded. Rain damage may be covered if the house was first damaged by wind or hail, which allowed the rain to enter. The water damage caused by firemen fighting a blaze is generally covered. For those homes located in areas where floods are a danger, flood insurance is available through the government as long as the community has met the conditions for coverage. Earthquake insurance is available as a rider through the company that insures the home.
People are finding homes in high-risk urban areas have been made available to them at very low interest rates, in an attempt to upgrade some communities. This can sometimes pose an insurance problem if companies are not willing to insure homes in those areas. There is help through the federally backed Fair Access to Insurance Requirements (FAIR) plan. An inspector will visit the house or apartment to see if it meets minimal safety standards and is structurally sound. If the structure meets the requirements, coverage is provided from an insurance pool. Coverage may also be available if repairs are in progress to bring the building up to required levels.
Form #4 (HO-4)
Called HO-4, Form 4, or "renters insurance," this type generally covers around 17 or 18 risks to personal property.
The HO-4 may be known as renters or tenants coverage. It may also be called the Contents Broad Form. It applies only to the contents of the house. It is identical to the HO-2 except that losses to the structure itself are not covered. The perils would include fire and lightning, windstorm or hail, explosion, riot or civil commotion, vehicles, aircraft, smoke, vandalism or malicious mischief, glass breakage that is part of a building, storm doors or windows and theft.
Form #5 (HO-5)
Form #5 is The Comprehensive Form or the HO-5. The HO-5 is identical to the HO-3 except that all risk protection is extended to coverage C (unscheduled personal property). This form provides broader coverage than does the HO-3 and, therefore, is more expensive than the HO-3.
Form #6 (HO-6)
This form is usually referred to simply as The Condominium Unit Owners Form.
The HO-6 was introduced in 1974 expressly for the unique needs of condominium unit owners who were exposed to risks similar to those of renters. HO-6 is a reproduction of HO-4 except for two changes which were necessary for the policies to be appropriate for condominium owners.
1. One change allows $1,000 of coverage for damage to additions and alterations made by the unit owners within the unit.
2. The other change provides that the addition and alterations coverage will be excess insurance over any insurance owned by the condominium association that covers the same property.
The HO-6 may also have coverage for additional losses by use of endorsements.
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Inflation guard endorsements increase coverage amounts systematically to guard against increasing replacement costs. |
Various endorsements are generally available (for an added cost, of course) which will extend the coverage of homeowner’s policies. For example, the "Inflation Guard Endorsement" increases on a quarterly basis the limits of liability of Section I of HO-1, HO-2, HO-3 and HO-5 by a fixed percentage amount. The idea is to guard against inflation.
Some types of insurance offer an inflation guard. This automatically increases the homeowner's coverage (generally by 1 percent or more) every three months. Of course, the premium rate will be higher, but it is often worthwhile since it guards against inflation. Agents often prefer adding inflation guards because it takes away some of the trouble of constantly rechecking policies that are already in effect. It is important to understand, however, that inflation guards may not always reflect the actual increases in building costs, allowing the amount insured to drop below the 80 percent mark. Even with an inflation guard, the wise agent will still check back with his or her clients at least every two years and preferably every year.
Endorsements are also used to cover valuable personal property for higher amounts than provided for in the basic policy. An endorsement may be used to increase limits of recovery for money and securities. There is a credit card endorsement which protects the insured from losses resulting from stolen or lost credit cards. Such endorsements give flexibility to the homeowner forms and, as stated, may also be attached to the HO-6.
Form #8 (HO-8)
Coverage designed for older homes is called HO-8. It is identical to the HO-1 except losses under the 10 perils (fire and lightning, windstorm or hail, explosion, riot or civil commotion, vehicles, aircraft, smoke, vandalism or malicious mischief, breakage of glass) are settled on an ACV (Actual Cash Value) basis in contrast to a replacement cost basis.
Exceptions
There are exceptions in the homeowner policy. Policies will vary from company to company and from state to state. However, there do tend to be similar types of non-covered or limited coverage clauses:
1. A separate structure on the property that is used for business purposes or that is rented out.
2. Losses due to a power failure from a source outside of the home.
3. Water damage, including floods, tides, sewer back-ups and seepage from ground water. However, water damage from firefighter's hoses or due to a leaking roof (which allows rain in) would generally be covered.
4. Losses due to neglect.
5. Damage deliberately caused by the owner(s).
6. Earthquake, except by special rider.
7. Ice or snow damage to such things as awnings, fences, patios and swimming pools.
8. Vandalism to houses left empty more than 30 days.
9. Frozen or burst pipes in a house left unoccupied without maintaining the heat or draining the pipes.
10. Damage from settling or cracking structures.
11. War.
12. Normal wear and tear.
13. Damage done by birds, rodents, insects or the owner's pets. However, some types of damage may be covered to porches or other minor collapses.
14. Smoke damage from nearby factories or agricultural smudging.
15. Claims containing fraud or misrepresentation of the facts are never covered.
16. A continuous leak from plumbing, heating or air conditioning systems. Only sudden leaks would be covered.
17. Nuclear explosions are not generally covered. It is hard to imagine anyone trying to put in a homeowner's claim following a nuclear explosion.
While liability coverage is recommended, it is important to understand what would not be covered:
1. Employees and clients if the homeowner is running a home-based business. This is true for child care services also. Any type of a business ran out of the home needs separate business insurance to be fully protected.
2. Aircraft.
3. Injuries from boats and motor vehicles. Some types of small boats, golf carts or dirt bikes might be covered. The homeowner should specifically check their individual policy to be sure.
4. Claims by one family member against another.
5. Damage against the policy owner’s own property.
6. Any disease that someone catches from the policy owner or covered members.
7. Damage done by a leaking waterbed to rented property (unless a special rider was obtained to specifically cover it).
Homeowner's insurance insures against the loss of the home. It is important to buy coverage that will replace at least 80 percent of the home's current replacement cost. Realize that the policy will only pay up to the limits imposed within the contract. If the cost of repairs or replacement is less than the limits imposed by the policy, the homeowner will receive only up to the costs incurred; no more. If the cost of repairs or replacement is more than the limits imposed by the policy, the homeowner will be responsible for the balance.
Natural Disasters
A standard homeowner’s policy does not cover many types of natural disasters. Separate coverage is needed for floods and earthquakes. In many cases, a separate policy will also be needed for those who wish to be covered for hurricane damage.
Under flooding come many forms of water damage exclusions. Generally, it applies to tidal waves as well as such things as sewer water back-ups outside of the home. Water damage inside the home would be covered if it were due to a burst pipe or water tank.
Since most people do not need flood damage, it would be unnecessary to include the premiums for it in the standard policy. Since most people do not need such coverage, it stands to reason that only those who live in a high-risk area will choose to buy the benefits. The result is what is called "adverse selection." In other words, only a small number of policyholders will be sharing a large risk. Both the private and government insurance coverages are part of the National Flood Insurance Program which is administered by the Federal Emergency Management Agency (FEMA).
When a disaster occurs, typical behavior follows. When the earthquake occurred in California in 1989, insurance adjusters were en route almost immediately. They came equipped with cellular phones (since most lines were damaged and, therefore, not operating), laptop computers and blank checks. Mobile homes and recreational vehicles were used as makeshift claims processing centers. Checks were issued on the spot to policyholders to cover immediate necessities such as food, shelter and clothing. Of course, additional checks were written later on as damages were assessed.
Insurance companies that sell earthquake coverage have specialized teams with years of claims experience for responding to disasters. They take great pride in bringing immediate assistance to their policyholders.
Those Californians who did have earthquake insurance had bought it in addition to their standard homeowner policies. For most, it was in the form of an endorsement. As stated, an endorsement is an addition to the regular policy.
In California, each company located there must offer to sell earthquake insurance to its homeowner policyholders. The key word here is "offer." It is up to the individual whether or not to purchase it.
Immediately following an earthquake, it is impossible to buy earthquake insurance. Generally, there is a moratorium on selling such coverage (ranging from 48 hours to 60 days) following the last aftershock that measures 5 points or more on the Richter Scale which is the standard measure of an earthquake's severity. A moratorium is the legal permission to delay action; in this case, the selling of a specific type of insurance.
There are a couple of reasons for this moratorium:
1. To allow insurance companies time to determine their exact losses before assuming new risks;
2. To acknowledge the possibility of damaging aftershocks.
In addition, it is felt that by delaying the availability of earthquake insurance following an earthquake, panic buying may be avoided. Usually disaster-type policies (bought in panic) do not stay on the books well. Panic buying is costly for insurance companies if the policies are dropped soon after purchase. Premium refunds generally do not cover the cost of underwriting and issuing the policy as well as the costs associated in processing a cancellation.
Earthquake insurance tends to be expensive. There are variables involved. Frame houses withstand an earthquake better than brick structures do. As a result, frame houses are much cheaper to insure. The location of the homeowner also has a great deal to do with the cost of the policy. In California, where risk is relatively high, premium costs are much greater than in New York where risk is relatively low.
Deductibles for earthquake insurance are often expressed as a percentage rather than a dollar amount. For instance, instead of a $250 deductible, such a policy may have a deductible of 10 percent on the total policy value.
The high premium costs and deductible amounts simply reflect the risk involved. Consumers must realize that a major earthquake could bankrupt some insurance companies. It has been estimated by industry experts that a major earthquake in a populated area could run up to $60-billion or more in damages. The cost is high because, even though only a small number of people carry earthquake insurance, the disaster affects nearly all types of insurances. Claims affect auto, fire, business interruption, worker's compensation, life, health and disability.
For insurance companies to meet all the claims that would occur, they would need to sell hundreds of millions of dollars’ worth of stocks, bonds, real estate and a multitude of other investments immediately. As a result, the financial markets would also be heavily affected. It would also leave the insurance industry without the capital necessary to meet future claims.
Another reason that earthquake insurance is high will not surprise you: relatively few people buy it. Since a low number of policyholders are sharing the risk, the cost is high. If the cost were to be shared by many, then premiums would be lower. One of the underlying principles of insurance is the spreading out of risk among many.
Volcanoes
Washington State created a specified area of concern on May 18th, 1980 when Mt. St. Helen erupted with a series of explosions. Previously, neither insurance companies nor consumers thought much about volcano insurance. Because nobody considered such coverage to be necessary in the United States, there was much confusion as to whether or not the disaster was covered in Washington resident's policies.
Traditional homeowner policies had specifically excluded "volcanic eruptions," but simplified versions of the homeowner policy did not list that exclusion. In the end, about $27 million was paid in claims for damage caused by the eruption of Mt. St. Helen. The claims were covered under “explosions” in most cases. Generally, standard policies now list volcanic eruptions as a covered peril.
Hurricanes and Tornadoes
Luckily, most people do not need to contend with hurricanes and tornadoes. Windstorms are covered in standard insurance contracts which are the only peril likely to hit the majority of homeowners. If, however, one lives in an area of the United States that is vulnerable to hurricanes or tornadoes, extra protection may be necessary.
Standard coverage is mostly unavailable to homeowners who live in high-risk areas. There are special coverages for people who are at risk for such hazards as floods and hurricanes. There are beach and windstorm insurance plans in seven states along the Atlantic and Gulf Coasts.
There have been many costly hurricanes and tornados. In fact, the majority of the costliest Atlantic hurricanes in history have peaked as major events. Several tropical storms have caused over a billion dollars in damage. It is common for the names given hurricanes causing over a billion dollars to be retired although that does not always happen.
One of the costliest hurricanes was Hurricane Harvey hitting in 2017. Harvey caused in excess of $200 billion in damages (totals were still being estimated at this printing). In 2017, damage was caused by a trio that included Harvey, Irma and Maria. The damage caused by all three are tremendous. Harvey flooded Houston with over four feet of rainfall as it hit land in August. Irma hit the Caribbean before coming ashore in Florida in September. Maria destroyed homes and infrastructure in Puerto Rico, devastating the island, in September 2017.
The first hurricane to cause more than $1 billion in damages was Hurricane Betsy in 1965, which also hit Louisiana. Many feel we are seeing rising damages because of our increased population. When there are more people in the way of hurricanes and other disasters, it is understandable that damages will be higher.
Due to such occurrences, the insurance industry has pushed for stringent federal standards to protect property against hazards. The model is usually the National Flood Insurance Program.
Personal Property
Homeowners are generally aware that their belongings are covered under most homeowner policies. What they often do not understand is just how they are covered. Usually belongings are insured for up to 50 percent of the coverage of the house. In other words, if the house is insured for $100,000, the contents would be covered for up to $50,000. For additional premium, it is usually possible to increase the coverage on personal property to 75 percent of the amount covering the home.
Belongings (called personal property) may be insured for either their "actual cash value" or for their "replacement value." As we know, actual cash value is the replacement cost of an item less depreciation for its age or use. Replacement value covers the current cost of replacing the item or items.
Policies which pay "replacement value" do cost more. Usually they run about 10 to 15 percent more than those which pay only "actual cash value." Should claims occur, however, replacement value more than pays for itself. Even when replacement value is in the policy, most insurers (insurance companies) usually have the option of either repairing the item or replacing it, rather than paying the insured the money (for the insured to replace it themselves).
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Replacement Value policies cost more than Actual Cash Value policies because it is likely that they will pay out more when claims arise. |
When a home's contents are destroyed or stolen, one of the most difficult jobs can be making an inventory of what is missing or destroyed. Most insurance companies provide, upon request, inventory forms to their policyholders. It is not really necessary to use specific forms. Any type of list will be useful when claims occur. The list or inventory should be listed by rooms (of the house) and include each article and its description, when it was purchased and what the purchase price was. Certainly, it is wise to also keep receipts of the purchase. Most insurers are going to request some type of proof that the item was owned in order to settle the claim. This list or inventory would also be helpful to the police should a burglary occur.
It is important to realize that such an inventory will be of little use should it be burned up in the fire that also destroyed the house. Therefore, once the list is made, a copy should be given to the insurance agent to be placed in the policyholder's files. Another copy should be placed in the insured's safety deposit box. A third copy may be kept at home for reference. When changes are made, it is important to update all copies.
This type of inventory is an ongoing affair. As items are replaced, sold or added to, changes in the list must be made. Many people make an initial list, but never think to update it as changes occur.
Many professionals recommend that pictures or a video be used rather than making a list. Actually, both are useful. Pictures are certainly better proof of ownership, but do not give price and date information. A combination of the two works well.
The recommended procedures are:
1. photograph each room,
2. take separate pictures of important items within the room,
3. list the items within the room remembering such things as drapes, rugs and wall decorations,
4. list the contents of closets and drawers (12 pairs of slacks, etc.) Clothing can be very expensive to replace. Any item that is unusually expensive should probably be photographed. This might include such things as matched luggage or a designer dress.
5. the serial numbers on appliances should be listed along with the purchase date and price paid.
6. On large items, such as major appliances and pieces of furniture, include any necessary details. A sofa that is an 1800's antique has much more value than a sofa made of pine last year.
7. As stated, when each item was purchased and how much was paid for it is very important. Obviously, this is not necessary for every single item, but certainly for all major items.
8. Keeping the list updated is simply a matter of adding in the receipts for new purchases and removing items no longer owned.
End of Chapter 6