What Type of Insurance Buyer Are You?

I have had some interesting conversations about insurance this past week. I have spoken to several individuals who are buying insurance because they are required to, forced to by government or by a lender. In each case these individuals have told me to only insure for the base requirements and not a penny more. I generally refer these individuals to another insurance agency because they will never be happy with their insurance plan and will definitely be unhappy with their insurance in the event of a claim. I sympathize with these people because I used to be one of them.

 You see, I did not understand that insurance is a financial tool. I thought of it as an unnecessary expense and hated paying the insurance premium which I considered a waste of my hard earned money. And, I didn’t understand how insurance paid in the event of a claim. I just assumed that insurance paid the same regardless what you pay in premium so I figured that you should pay for just the bare minimum. It wasn’t until a trusted insurance agent explained to me that insurance is a contract and you are purchasing a contract that the insurance company will honor but only to the limits of the contract and no more. So, by buying the lowest insurance limits I was ensuring that I would not be fully protected in the event of a loss. The insurance company would pay their contracted limits and I would be stuck paying the balance how fair is that?

 Here is the part that changed my perception and how I view insurance now as a tool. The difference in cost between being insured at the very basic limits and the cost to be insured properly is barely noticeable. The insurance companies don’t give you massive savings for choosing the lowest coverage. They still build in all of the fixed costs of insurance into the lowest limits of liability. So, when you increase the limits to be properly insured the increase in insurance is at a much lower rate. In fact, in some cases increasing your limits doesn’t increase the premium at all! So, why doesn’t everyone carry full limits if the cost to be properly insured is only nominally more?

If you read my previous blog posting you will know how I feel about the insurance industry focusing its entire message on price turning insurance into a commodity. Just like buying 4 rolls of toilet paper verses 12. And this reinforces consumers into believing that if you buy a little, the bare minimum you must be saving money! I know that it is counterintuitive but in insurance that simply isn’t true.

 Insurance is a tool. It helps you protect what you have allowing you to focus on creating wealth for your family. You can never get ahead by being insured poorly and ineffectually and the cost difference by being properly insured is shockingly low. Next time before demanding the bare minimum compare the cost between minimum coverage and proper coverage and you may become a convert like me.

If All Insurance Is The Same, Why Not Pick The Cheapest?

This is a dirty secret that we in the insurance industry created. It is the monster that grew too big and now we have no control over. It all started with price competition which was a good thing. It is important to be competitive and it is important to the consumer (our clients) to receive the best product possible at the best price.

 

And then something happened. In the zeal of the industry to offer the lowest price, to never be undersold we treated insurance like a commodity. The consumer (our clients) have been deluged by advertising for the past 20 years to believe that they are paying too much for their insurance and in just a few moments by quoting online or calling in to the company they can save huge sums of money over what they are paying now.

 

After decades of reinforcing only price the consumer has accepted that insurance is a commodity no different than laundry detergent, paper towel and other consumables. If all insurance is the same why not pick the cheapest?

 

In the early days of price competition insurance companies found ways to offer their products at the lowest price possible and that was healthy and smart for the industry however as more insurance carriers entered the market place featuring direct to the consumer options the message was only price and less about providing comprehensive coverage. Again, the image that was presented to our clients and the consumer was all insurance is the same so just pick the cheapest.

 

In this last decade we have observed even greater pressure to force the price of insurance down convincing the public that they are paying too much through credit scoring in most US states and the advent of picking your insurance by what you are willing to pay. You might be thinking what is the harm in that? The free market is good for everyone, isn’t it? Credit Scoring is a statistically proven concept whereby the consumer with lower credit scores is statistically shown to have higher levels of accidents and violations. Credit scoring has done a remarkable job of lowering insurance costs for those with the highest credit scores. Insurance companies advertise the insurance savings based on the very best credit scores so when they say that you could save $400 on your insurance premium it is based on those with the best credit scores however the vast majority do not enjoy those savings and this is the big lie in insurance.

 

The conversation with the public is all about price and not about the insurance coverage and this is my biggest fear. When price trumps the conversation about being properly insured you end up with the consumers not being protected during a claim. And it reinforces that insurance companies and agents are dirty rotten scoundrels trying to get out of honoring insurance when we trained the consumer (our clients) to base their decision on price alone.

 

Consider this, you are going to need heart surgery and you need a surgeon. Do you shop for the best price or for the best surgeon? You are in a legal fight that could cost you most of your family assets, do you shop for the best price or the best attorney you can afford? Think how important insurance is to the average person. It provides protection for their vehicles and for their home and personal belongings. It may even provide protection for their very lives and health. In the event of a catastrophe insurance has the ability to restore that person, family and their belongings as if it never happened. Literally, that family’s future and the assets of future generations of that family depend on the type of coverage that they have. I can promise you after many years of handling claims that not one of my clients in a serious accident or loss was worried at the time about how much they paid. So, I will continue to make certain that the insurance coverage is the first and most important topic that I have with my clients and then after we agree on proper coverage shop the market place for the best price. All insurance is not the same and price is only part of the conversation.

 

 

Choose your insurance first. Ask the hard questions and challenge preconceived beliefs about insurance to make sure you have the most comprehensive coverage. Make sure that the insurance company or your insurance agent understands what you expect in the event of a claim and settle on your insurance coverage plan first. Only after you have an insurance plan that works for you should you shop the markets for the best price. And keep in mind that your coverage plan changes as you go through life. Take the time to discuss your insurance plan with your agent each year. Be clear that you want your coverage plan to be competitive and you expect your insurance company or your agent to verify that it is. If they are unable or unwilling to do so that is when you should look for another company and/or another agent.

What About Other Types of Replacement Cost Valuation?

Recently we discussed what replacement cost valuation was and how it is calculated. Today I want to discuss extended replacement cost and how it provides for additional coverage in the event of a regional or national emergency. The value is usually represented by a percentage of the building value such as 25% or 50% extended replacement cost which would mean that the insurance carrier would provide and additional 25% or 50% replacement cost value to keep the insurance coverage within the actual cost of replacement. So if your building is insured for $100,000 and you have extended replacement cost of 25% the insurance carrier will provide for an extra $25,000 in replacement cost coverage: $100,000 X 25% = $25,000 + $100,000 = $125,000.

 

Extended replacement cost is not intended as a cure for underinsuring your building. According to the terms of your insurance policy you are obligated to maintain replacement cost on your building to a certain percentage of the actual replacement cost such as 80%, 90% or even 100%. If you recall, this is co-insurance and we discussed this in our last blog.

 

When Hurricane Katrina struck New Orleans the vast amount of rebuilding actually led to shortages of building materials regionally and around the United States. And, depending on your proximity to Louisiana it may have been very difficult to find licensed contractors who were not already on the job rebuilding. If you were unfortunate to have had a loss or a complete loss of your building during that time frame there was a real possibility that the cost to rebuild would have exceeded your replacement cost value. That means that you would have had to pay the difference.

 

Extended replacement cost steps in during crises such as the one described to ensure that there is enough coverage even during a regional catastrophe. Think of the terrible tragedies where an entire community is destroyed by a tornado or multiple communities completely destroyed by a hurricane or fire. There will be shortages of materials and qualified contractors and the cost to repair or replace your home and business will increase dramatically.

 

Discuss the insurance needs of your building with your agent to make certain that you have enough coverage now today and in the future. We hope that you never need to use the coverage but making certain that it is there will allow your family and your business to recover in the event of a crisis.

How Does the Insurance Company Calculate the Insurance Value of My Building or Home? Coinsurance

In our last blog entry we discussed types of valuations for insuring your building. One of the last subjects we covered was something called coinsurance. What is coinsurance and how does it affect my property insurance?

 

All valuation methods have coinsurance clauses in their contracts. Why this is important is the insurance carrier wants to make certain that the building or item they are insuring is insured to full value. If this wasn’t a consideration no one would insure a property item to full value but would expect to be reimbursed in the event of a loss at full value. In another words, a replacement cost valuation indicates that your building is valued at $500,000. You only insure the building to $100,000 but expect that in the event of a loss to be reimbursed for the full cost of $500,000. I know what you are thinking, that doesn’t even make sense! Why would someone insure their property for less than the value and expect to get a settlement at the full value? The truth is this happens all the time. In fact, most lawsuits are over valuation. There are a lot of reasons that owners may not select the full insurance value for their building and property and often it is simply a misunderstanding of valuation. Just like we discussed last week an owner who is convinced that the building isn’t worth any more than the tax assessed value or decides that the building isn’t worth anymore than a value a realtor told them could be shocked to find out that the actual cost to replace the building is far more. And, what happens over time? If you guessed that costs go up you would be right. So if it cost you to $400,000 to build your building twenty years ago does it make sense that it would still cost $400,000 to build it today? Of course not, but in many cases I find when working with clients that they haven’t checked their valuation in years and the coverage that they had stopped being adequate a long time ago. Unless you have inflation guard included in your insurance plan your valuation is static and will remain that way until your request the coverage changed.

 

Coinsurance applies when a building or property item is underinsured. Most insurance companies will require you to insure your building to 80%, 90% or 100% of replacement cost. If the actual cost to replace the building is more than the insurance that you carry by contract the insurance carrier can levee a coinsurance penalty. In the event of a total loss your inability to collect the full amount of replacement for the building can change what type of building that you end up with. However, in the event of a partial loss I believe that the coinsurance penalty is even more meaningful. Say that you had a partial fire loss to your $500,000 building. The damage was $150,000. Unfortunately, you have been insured for $350,000 which is only 70% of the true replacement cost of the building. Your insurance contract requires that you maintain a replacement cost value of at least 90%. Your claim will be subject to a 20% coinsurance penalty and you will not receive the full cost of the insurance settlement for the repairs. So, based on your $150,000 claim the carrier will use a coinsurance penalty of 20% which is $30,000. You will need to cover that plus you’re deductible.

 

This gets even more complicated when you have multiple buildings and values. The best way to make certain that you are adequately insured is to have a replacement cost valuation completed by your agent and company at least every two years. Ultimately, you the owner are responsible for selecting the correct insurance coverage however there are tools available to help you and your insurance agent can be a great resource in helping you to properly insure your building and its contents.

How Does the Insurance Company Calculate the Insurance Value of My Building or Home? Part II

The 2004 Cedar and Pine Ridge fires in California led to numerous homes lost to forest and brush fire. After the cleanup many of the homeowners were shocked to receive claim settlements of only a portion of the total loss to rebuild. The homeowners were under the impression that replacement cost of their home meant that they would get replacement cost at the time the home was destroyed by fire. Unfortunately, this just wasn’t the case. Many of the homeowners had insurance policies for their homes that went back 15, 20 and in some cases more than 30 years and had not made any changes to the replacement value of their homes. If you recall from last week’s blog I indicated that “Replacement Cost Value is a static value that represents the replacement value of the structure at one moment in time.” Over time the cost to rebuild or replace these structures increases however the insurance value did not. In the end there were lawsuits and the process lasted years. What is important to remember from this case is that in the end most of the suits were denied because the responsibility for making sure the structure is fully insured lays with the owner.

 

Insurance carriers use coinsurance clauses in their policy contracts to require the owner of the structure to insure to full replacement cost value. You can avoid a costly mistake in valuation by having your buildings replacement cost value updated at least every two years. You can also elect to have inflation guard set up on your policy to increase the replacement cost value of your building at a set inflationary value each year. And, you should have Extended Replacement Cost or Guaranteed Replacement Cost coverage added to your policy to ensure that spikes in the cost of materials and labor in the event of a national or regional catastrophe don’t increase the cost of rebuilding your building beyond the valuation set by your insurance contract.

 

In the next several blogs I will explain in more detail what coinsurance is and what it does. I will also cover how to get a replacement cost valuation and what the purpose of tools like inflation guard, extended and guaranteed replacement cost is.

How Does the Insurance Company Calculate the Insurance Value of My Building or Home?

I was working with a client this week on setting the replacement cost value for his home. We had an interesting discussion which led me to an idea for a series of blogs on valuation. The information is definitely not exciting but is critical for making sure that you are insured accurately and I will explain what can happen when you are not insured correctly!

 

Case law has developed over the past one hundred years to determine valuation of property such as your home, rental property and commercial buildings. It even extends beyond structures to the value of your diamond ring, your collection of antiques and other personal property. The laws regarding valuation are set by the insurance code of each state. In most states the responsibility for setting the correct valuation for insurance rests with the owner. However, if you don’t know how valuation is calculated how can you make certain you are insuring your property correctly?

 

Most building values are calculated today with Replacement Cost. There are other values available and we will discuss later in the series but we will focus on replacement cost as it is the valuation that is most widely used. Replacement Cost Value (also known as RCV) is simply what it would take to rebuild or replace a structure today with current labor costs and modern building materials. (RCV never includes the value of land).

 

Replacement Cost Value (RCV) is rarely the same as the retail value of the structure (example: the value your home could sell for). Replacement Cost Value is a static value that represents the replacement value of the structure at one moment in time. If a structure falls out of replacement cost value it will be subject to coinsurance penalties that would diminish what the insurance would provide to rebuild the structure or replace in the event of a total loss.

 

A good insurance agent will carefully consider the building characteristics of your structure and will use a replacement cost value formula to arrive at a replacement cost for your structure. This value should always be considered a recommendation as the final decision on value will always lay with the owner of the structure. In next week’s blog I will discuss more on how the insurance carrier calculates replacement cost and introduce a couple of important insurance terms such as coinsurance which can greatly affect the final insurance settlement.

Creating a Wildfire Defensible Space for Your Home

We have seen so many tragedies this past year due to wildfire’s particularly in the western portion of the United States. Taking steps now to protect your home from fire risk is a great way to lower the chance of loss when wildfire threatens the next time. I found an excellent article on the web provided by CalFire. I thought it was so well written and so important that I wanted to share with you. Visit the site at: http://www.readyforwildfire.org/defensible_space

Everyone should consider their wildfire risk regardless if they have faced wildfires in the past. In so many instances, fires have occurred in the past three years where wildfires traditionally had not been a problem. We have noted wildfires in the southeast, Texas, southwest and most all of the western states. In this case, an ounce of fire prevention is worth far more than a pound of cure!