If you own a home or a car, you’re probably familiar with property and casualty insurance. It’s one of the most common forms of insurance available – providing protection against property damage and negligence.
Despite its prevalence, many high net-worth households are underinsured, particularly when it comes to their personal liability.
When reviewing your existing property and casualty policies, here are a few common coverage gaps to look for:
Replacement cost or actual cash value
These are the two primary types of property coverage—replacement cost and cash value. A replacement cost policy insures property for the actual replacement cost. For example, if a pipe bursts and destroys your $10,000 Persian rug, the insurance company will reimburse $10,000.
The alternative, actual cash value, covers the replacement cost less depreciation. Your five-year-old Persian rug may only be worth $5,000 due to depreciation, which is the amount the insurance company will cover.
Unless you have a large surplus of cash to cover the difference, it’s a good idea to carry replacement cost on property and belongings.
Guaranteed or extended replacement cost
These coverages are designed to protect against a major disaster. Suppose a homeowner has a dwelling limit of $1 million and a fire destroys the house with a total loss of $1.5 million. A guaranteed replacement endorsement would provide the full $1.5 million in coverage.
Extended replacement endorsements provide extra protection beyond the dwelling limit, usually 125 – 150 percent of the amount listed on the homeowners’ policy. In the example above, a 125% extended replacement endorsement would cover only $1.25 million in coverage.
It is also a good idea to check with your insurance agent regarding total loss situations and the terms of replacement, as some carriers mandate that you rebuild your home to receive coverage. If a fire destroys your mountain vacation home, as well as all your neighbors’ homes, would you want to rebuild or use the insurance proceeds to buy or build a home in a different location?
Loss of use coverage
If your home becomes uninhabitable due to a covered loss, this coverage provides for temporary housing, moving costs, and temporary storage of property. As an additional coverage option, many carriers list a loss of use limit of 20% of the dwelling amount. Higher-end carriers generally do not cap loss of use benefits. We recommend this coverage, as it is relatively inexpensive and can protect against the financial hardship of having to pay rent while continuing to pay the mortgage on your uninhabitable home.
Uninsured and underinsured motorists
Traditional liability protection is designed to protect others. Uninsured and underinsured coverage protects you. Uninsured motorist coverage protects you if you’re in an accident with another driver who has no insurance. Underinsured motorist coverage protects you when the at-fault driver does not have adequate insurance.
It is estimated that 20% of drivers carry no insurance whatsoever, and an even greater percentage are underinsured. The minimum amount of auto insurance required in many states is very low relative to the potential loss. It’s a good idea to make sure these uninsured and underinsured limits match your auto liability limit to prevent coverage gaps.
An umbrella policy increases your personal liability insurance beyond what your existing insurance policies cover. People are often unaware of how much liability they have in their everyday lives. Simple things like getting into a minor fender bender, owning a dog or trampoline, or serving on a non-profit board can increase your liability.
Auto and personal liability limits rarely exceed $500,000—right where most umbrella polices kick in. For example, if you’re at-fault in an accident exceeding $500,000 in liability, and your existing auto coverage is $250,000 per accident, you might have to pay approximately $250,000 out of pocket. That’s where personal liability umbrella coverage can kick in.
Standard homeowner’s insurance policies do not cover damage caused by earthquakes. Your insurance provider may offer earthquake insurance as an add-on to an existing homeowner’s policy for an additional premium or a stand-alone, third-party policy may be required.
If you live in an area more prone to earthquakes and cannot afford to rebuild your home and replace belongings out of pocket, then earthquake insurance is something to consider. The insurance pays for repairs to a house and garage, personal belongings, and additional living expenses.
Earthquake insurance deductibles are quite high, typically ranging from 10% to 20% percent of the dwelling coverage limit. There also may be separate deductibles for other structures (a fence) and personal property, meaning you could be out of pocket for 10% each of dwelling, other structures, and personal property.
Floods are not covered under an earthquake policy, even if the flood is a byproduct of an earthquake. You’ll need separate flood insurance for this protection.
What is Vista’s take?
We like to think of insurance as protection against unlikely, yet catastrophic occurrences. One way to make sure your policy is serving this purpose is to carry higher deductibles. Maintaining higher deductibles offers premium savings and ensures the policy is used only when it’s really needed.
It is not uncommon for owners of expensive cars and sizeable investment portfolios to have lower deductibles than they can afford. As the chance and frequency of making a claim are low, years of premium savings can more than offset the higher deductible paid should a claim be made.
Working with a qualified, independent insurance broker who can address these common coverage gaps, evaluate your risks, and ensure the appropriate amount of coverage is money well spent. Contact your team at Vista for a referral.