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These bulletins are emailed to clients and friends prior to being posted online. If you would like to be on our mailing list, please send us a request via email. Thank you. HOW’S
THE WEATHER? Insurers Capping Their Limits at Less Than Full Exposure One problem
is with property insurance programs under Portfolio Policies
rather than Dedicated Policies. Under portfolio policies,
there is a great risk of inadequate limits in the event of a catastrophe. In the not-too-distant past, your property insurance deductible may have been $10,000, 25,000, 100,000 -- whatever number could be absorbed reasonably comfortably, recognizing the concept that "trading dollars" with an insurance company is an unprofitable transaction. The purpose of the insurance, rather, was risk transfer. Now, however, insurers are forcing unacceptably high deductibles on owners with any coastal proximity. The most common deductible that is being imposed on insureds is 5% of values at risk. So, if building replacement plus rental income equal $10 million, the deductible is $500,000; $20 million -- $1 million; and so on. There is no logic to this, but until the market settles down and capacity returns, we will be seeing a lot of it. Shop for alternatives. The End of Blanket Limits (for now) Blanket limits have been the cushion against underinsurance. If you had multiple properties, the best approach would have been to insure them under a blanket limit equal to the replacement cost of all the properties in total. Under this structure, the blanket limit is available to cover any loss, rather than each property being limited to the stated value for that single property. This was a cushion for accidental underinsurance, and for other contingencies. As the weather gets more and more unpredictable, we are more and more concerned with two of these contingencies: the cost of debris removal and sudden spikes in localized construction costs. Debris removal does not have a separate limit, but rather is included within the building amount. As a result, in the event of a total loss, the cost of replacing the structure plus the cost of removing and disposing of the debris will exceed the limit of insurance. Total losses from weather events have until now been rare. The other concern is what happens to the cost of construction when the demand for construction services and materials is so great that it overwhelms the supply in a geographic area. Spikes in construction cost on the order of 20-40% and more have been observed in Florida and Louisiana. This does the obvious to the adequacy of a single building's insurance limit. Both of these problems have been well handled by blanket limits. Now that the problems are becoming much more real, the insurance industry has decided blanket limits pose too much risk (for them). Which party to the insurance transaction is in the risk business, again? It becomes harder and harder to tell. Flood Limits are Separate Flood is separate from windstorm. It may be excluded altogether from the property policy, or it may be included, but at a limit much lower than the full replacement cost. Several issues to watch out for: 1) the flood limits are aggregate (per policy term), not per occurrence. Let the limit be high enough to cover more than one occurrence; 2) if the flood is part of the basic property policy, make sure a flood loss triggers the loss of income coverage; 3) if the flood coverage is separate, make sure it includes loss of income, and law and ordinance as well; and 4) purchase flood coverage even if not in a “special flood hazard area.” The special areas are areas where there will be a flood every 100 years on average – 101 years and up, and you are in a different zone. Does that mean no exposure? Certainly not (even if the zones are assigned with absolute accuracy, which they aren’t). Weather catastrophe strategy involves more than insurance --you should have a business continuity plan. But, some risk must be transferred to insurers; make sure you understand how effectively that’s been accomplished. Given the inevitability of losses, you'll be judged not by whether you were the victim of an event, but by how well you planned for it. (C) 2006 Licata Kelleher Risk and Insurance Advisers, Inc. Permission granted for distribution as is (with full attribution). Contact us for risk management strategy and implementation. We stand ready to be your partner in your business ventures. Licata Kelleher is a risk management and insurance advisory firm. The firm does not sell insurance, but does counsel clients on the effectiveness of insurance, on reducing the cost of insurance and on the risk management process. The above is intended to be general information, and should not be construed as specific recommendations. Other Articles: INTERNATIONAL
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