Property and Casualty Insurance 101
With so many unfortunate events in the past couple of years (hurricanes, fires, floods, etc.), we felt a review of insurance coverages would be useful. When working with clients, we sometimes find they haven’t reviewed their property and casualty insurance for years or even decades. In many cases, we’ve seen that our clients’ circumstances and insurance needs change dramatically as they acquire wealth or progress through life, sometimes leaving them underinsured or with gaps in coverage. In addition, there are unique situations which may deserve special consideration:
- High value homes, autos, boats, etc.
- Homes in multiple states
- Household employees
- At risk lifestyle activities (e.g., skydiving, private pilot)
This article will provide a basic overview of property and casualty insurance and umbrella policies and explain issues we have seen with our clients’ coverage.
Property insurance protects insurance holders’ physical property (home, auto, boat, jewelry, art, etc.) from loss. These losses can include theft, fire, flood, hurricane, or other natural disasters. Some protections may require insurance through specialized policies. Additionally, insurance often protects the insured from loss of the property’s use, as well as the contents of the property.
- Loss of use – This covers your living expenses at another location if your home is uninhabitable. Be sure to understand the extent of this coverage, especially as it relates to a second home.
- Loss of property – Several types of insurance coverage are available, including “actual cash value,” which pays to replace the property, less depreciation (an estimation of wear and tear), or “replacement cost coverage,” which pays to replace the property at today’s cost with property of comparable material and quality as the original. Replacement cost coverage is more costly but provides full replacement in the event of a loss. This is a very important distinction, especially in homes with high-end appliances, millwork, and finishes. It’s important to keep in mind that some insurance companies cap the amount they’ll pay for replacement coverage.
Certain property insurance policies may include requirements that the property be occupied, or coverage is reduced or eliminated. Insurance companies generally view vacant dwellings as having higher risk, so their policies may require occupancy. Review policies to determine whether vacancies are covered. If they’re not, endorsements that can maintain coverage for an additional premium may be available.
Harder to define, casualty insurance protects a person against legal liability for losses resulting from damage to the property of others or injuries to other people. This insurance may also cover liabilities arising at home or for drivers who are negligent while operating motor vehicles.
Property and casualty insurance plans have coverage amounts (limits for damages) that can vary greatly from one insurance company to the next. Deductibles, which are the amounts you pay out of pocket before the insurance takes effect, can be adjusted to better suit your specific situation. Increasing the deductible reduces the premiums. This can be a good way to self-insure a portion of your insurance coverage.
An umbrella policy is an overlay insurance policy that increases the coverage amounts across all insurance policies. Umbrella insurance is designed to protect against gaps or deficiencies in liability coverage under primary insurance policies. The typical examples are liabilities arising from injuries occurring on a homeowner’s property (someone falling on the sidewalk) or from damage to a neighbor’s property from falling tree limbs. Liability, however, can occur in more unusual ways. We’ve seen umbrella coverage used to defend a lawsuit filed against the parents of a college student involved in an automobile accident, where the car was titled in the parents’ names and the parents lived 1,000 miles from the accident.
We have noted cases where clients have not increased their coverage even though their net worth increased, leaving them underinsured. The amount of insurance should be consistent with the insured’s needs and circumstances. Umbrella coverage amounts generally begin at $1 million, but levels at $5 million and above are very common.
Many of our clients are directors or officers on public or private boards or hold positions at not-for-profit organizations. Certain umbrella policies can be extended to provide coverage for individuals for these activities with a reasonably priced endorsement. Check your umbrella policy to see if your activities can be covered.
Multiple homes can mean multiple insurance carriers. We’ve seen a breakdown in the coordination of these policies, leaving holes in coverage or properties not covered under the umbrella policy. With proper planning and oversight, multiple homes and assets in multiple states can be covered by one insurer, eliminating these gaps.
The key to insurance is having a full understanding of the risks that are covered by insurance and those that are being self-insured. It is crucial to identify gaps before something happens to avoid surprises and unintended assumed liabilities.
Given the fluid nature of our clients’ financial pictures, property and casualty insurance is an area that should be reviewed regularly. In addition, insurance carriers periodically adjust their pricing structures, which may provide an opportunity to review your current policy and find the best insurance company for your circumstances.
Your JMG advisor can assist you in recommending insurance professionals who are qualified to identify risks and insurance gaps and to make recommendations suited to your individual circumstances. We invite you to share this article with others who may also find it helpful.
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