Friday, May 2, 2014

Earthquake & Flood Insurance are not included in Your Homeowners Insurance – Part 2

In our last blog we discussed earthquake insurance and noted that it is not part of your homeowner’s insurance policy. Earthquake insurance is readily available in the marketplace and there are many insurance carriers that provide the coverage. Today we are going to discuss flood insurance which is also not included in your homeowner’s insurance policy. In the United States flood insurance is a separate policy from the homeowners policy either purchased directly through the National Flood Insurance Program (NFIP) or through a write your own program whereby you purchase flood insurance through an agent who works with an insurance company that receives backing from the NFIP. Either way, all flood insurance in these two options is backed by the United States Government. Just recently, private flood insurance has become available in the South Eastern United States. This private insurance is not backed by the United States but is financially strong and has competitive rates. We should see more private flood insurance become available over the next few years as competition for flood insurance becomes more viable.

Every year, the news shows a tragedy from flooding. News crews descend into a community that has experienced flooding and the topic ends up with a homeowner who has just been informed by his insurance company that his homeowners insurance will not cover the flood. This is just terrible not only because of the extreme suffering of this family and others just like them but because we can’t seem to get the word out to everyone that flooding is not covered by homeowners insurance. There are so many myths and distortions that it is important that we get the truth out to the consumer:

1.      Flood is never covered by a homeowners policy.

2.      You must buy flood insurance to be covered for flooding.

3.      “I don’t need flood insurance because the government will buy me out or help me to rebuild.” NOT TRUE! The government may help you with temporary housing, food, clothing and medical assistance and they may assist you with a low interest loan so you can rebuild but they are not going to rebuild for you.

4.      “If my home is damaged or destroyed my mortgage will be forgiven by the lender.” NOT TRUE!

5.      “I don’t need flood insurance because I am not in a flood zone.” NOT TRUE! Everyone everywhere is in a flood zone. The difference among flood zones is the amount of risk for flooding.

6.      “Flood Insurance is too expensive” MAYBE – MAYBE NOT! If your home was built according to standards for flooding within its flood zone the cost can be very reasonable. If your home is located in a “preferred risk flood zone” the government will subsidize your insurance rates. However, if your home was built before flood standards or built without regard to flood rules the cost can be very expensive.

7.      “I’m going to shop around for the best rate” All federally backed flood insurance is the same premium whether you buy direct or through an agent. The NFIP sets the annual premium.

The decision to buy flood insurance should be up to you to decide unless you have a mortgage and your lender requires you to have flood insurance. If you don’t buy flood insurance and your home is destroyed by a flood that was a calculated risk that you took. What is important is that you know that flood insurance is not included in your homeowners insurance. Flood insurance is readily available for purchase. If you have questions about flood insurance you can go directly to the NFIP website at www.floodsmart.govthis is a terrific site with loads of information about flooding. However, if you want real information specific to your home talk to your insurance agent. Your agent can get your exact flood zone and determine the amount of insurance needed and the cost. If you would like more information you can contact me at (805)238-1818.


Friday, April 18, 2014

Earthquake & Flood Insurance are not included in Your Homeowners Insurance – Part 1

In the past two months the west coast of the United States was rattled with several small earthquakes. This reminded me to share with my clients and friends that earthquake insurance and flood insurance is not included in your homeowners insurance policy.

Earthquake insurance can be purchased through private insurance markets either individually or through the same insurance carrier that provides your homeowners insurance. Specifically on the west coast some large insurance companies have gotten out of earthquake insurance all together in the last decade. However, as an insurance agent I find the coverage readily available in the marketplace. In California there is an organization that helps place the consumer with affordable earthquake insurance called the California Earthquake Authority (CEA). The insurance companies that participate in the CEA provide earthquake insurance in partnership with the CEA generally at a reduced premium  compared to coverage offered by carriers that do not participate.

The deductibles are much higher than your homeowner’s insurance policy. This was a result of changes in the industry to keep earthquake private, available to the consumer and relatively affordable. So the deductibles can range from 5% / 10% / 15% / 20% / 25% depending on the carrier. So, if you chose a 10% deductible and the replacement cost value of your home is $354,000 you would be responsible for the first $35,400 before insurance would step in and pay up to the replacement cost value of your home. That may seem like a lot of money for a deductible but if you keep in mind the potential loss to your home it is easier to finance $35,400 than it is $354,000. The lower the deductible the higher the insurance premium and consequently the higher the deductible the lower the insurance premium.

The decision to buy earthquake insurance is a calculated risk. For some it is just not an option because they cannot afford to. For those who can afford the coverage but do not buy it is a strategic decision based on how much equity you have in your home, the likely hood that an earthquake will damage your home and whether you have the resources to make the repairs.

There is a myth that in the event of a disaster the government will step in and pay for you to rebuild. You should not base the value of your investment in your home on the assumption that the government will pay. Using the last four natural disasters as an example the government will help provide you with temporary living arrangements feed and clothe you and provide a low interest loan so you can rebuild.

What is most important regarding earthquake insurance is to have a conversation. Now that you know that your homeowners insurance will not provide coverage for earthquake you can decide whether to buy earthquake insurance or not and if you do buy what deductible to choose. Talk to your insurance agent for examples of coverage and shop the insurance markets for the best premium.

Friday, January 31, 2014

A Health Insurance Horror Story

We can send men to the moon. We can drop rovers on Mars with pinpoint accuracy. We created a national highway system that is the envy of the world. We can send emergency aid around the world immediately when it is needed and we can fight two wars at the same time and our public is barely aware. It is proven that government can do big things successfully so how is it with three years of planning before rolling out that the Affordable Care Act (ACA) also known as Obama Care is such a bungled mess? Seriously, this isn’t some rant against the ACA or how it should have never been placed. That part is over, it is the law of the land and we need to live with it. However, I am responsible for protecting my clients and taking care of them and I do not know how to do that right now. I am ticked off at how poorly this whole plan was put in place and the total lack of follow through.

We have clients that we represent that paid their premium in November and December and still do not have their insurance ID cards! A telephone call to the insurance company is a two to three hour ordeal and if you get through it is generally someone who can’t answer your question and refers you to the website. We have clients who need service but we can’t find doctors who will perform the procedure because contracts with physicians, clinics and hospitals are still not settled!

The insurance carriers in our area of California get a (C) grade point for preparation. They certainly could have done better and the number one issue is staffing. The carriers are way behind in processing new applications and do not have the resources to answer the phones. They knew that there was going to be a huge surge last minute – what were they thinking? However, as hard as it is to believe I am going to defend these insurance carriers because what most people do not know is that right up until the middle of December the government was still changing the requirements of the carriers with regard to the ACA.

I know that my mom would tell me “Son, this too shall pass” (one of her favorite sayings when I was growing up) and I know that she is right. Eventually the insurance carriers will get caught up, they will answer their phone calls, our clients will get their ID cards, find doctors who can help them and I will be able to help my clients.

I hope that when this mess is over that someone creates a business case study that examines the steps that led to this fiasco. The only way forward is to learn from our mistakes and not make the same mistakes again.

Friday, December 27, 2013

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.

Friday, December 13, 2013

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.

Friday, November 15, 2013

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.

Friday, October 25, 2013

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.