Is your property and casualty insurance protection up to date?
Property and casualty (P&C) insurance policies, like your homeowner’s and auto insurance, should not be a “set it and forget it” purchase. While it would be nice if every P&C agent proactively contacted their customers to review coverage, more often than not, it’s up to you to initiate the conversation. Given the supply chain issues and labor shortages we’ve seen in the past few years, it’s more important than ever for you to review the protections provided by your policies to help ensure they still meet your needs. What’s more, P&C policies can indirectly protect your investment assets. While you can’t buy insurance against a down market, having adequate insurance means you may not have to sell any investments to cover damage, loss or rebuilding expenses.
Homeowner’s Insurance – Coverage A (Dwelling)
This is the amount of coverage provided to rebuild your home if it’s damaged by a covered peril, like wind, fire or falling objects. Keep in mind it’s not the market value of your home (what you could sell it for) or the assessed value (your property tax basis) – just how much it would cost to rebuild. With the rising cost of both building materials and labor, there is a good chance your existing Coverage A is no longer sufficient to completely rebuild your home in the event of a total loss. If you have an older home with materials not commonly used in newer construction (like plaster walls or mahogany wood), you need to factor those in when determining your replacement cost coverage. Your agent should be able to provide you with a “Replacement Cost Analysis” report that shows how they have calculated how much it would cost you to rebuild.
Make sure the details on this report are accurate. For example, the carrier might be using the finished square footage from years ago, perhaps before you finished your basement or added an extension.
TIP: If your home is owned by a trust, the trust would have to be added to the policy as an “Additional Insured.”
Homeowner’s Insurance – Coverage B (Other Structures)
This protects things like a detached garage, workspaces, sheds, gazebos, fences or Accessory Dwelling Units (small living spaces on the same grounds as, or attached to, your home, like an in-law apartment). The same forces mentioned for Coverage A will play a role here. Homeowner’s policies are known as a “packaged” policy, so they automatically include coverage for other structures with the default amount being around 10% of Coverage A, even if you don’t have any such detached structures. You aren’t paying extra for it, and it can’t be removed.
However, you can buy more coverage, if needed. I recently helped a client review his homeowner’s policy. When I asked him to describe any other structures on his property, he went into great detail about his detached garage, which contained his workshop and a bathroom. It became very clear that the standard 10% coverage he had was nowhere near enough to replace what he has.
TIP: If you have significant outbuildings on your property, consider paying an additional premium to increase your Coverage B.
Homeowner’s Insurance – Coverage C (Personal Property)
This helps replace your belongings (everything you would pack up and take with you if you moved) if they are damaged by a covered peril (such as water, wind, fire, theft, etc.). This type of insurance is important because homeowner’s policies won’t cover an item that is lost. However, it is important to understand that some types of personal property have limited coverage – specifically for theft. For example, many homeowner’s policies will only pay a few thousand dollars to replace stolen jewelry and watches (a total of $2,000 is common). If you owned $12,000 worth of jewelry and it was all lost in a fire, the insurance company would replace all of it. But, if all of it was stolen, you’d only receive a few thousand dollars.
Years ago, I advised someone to insure her very expensive diamond tennis bracelet. She explained that she always kept it locked in her safe, so she wasn’t worried about theft, and she only wore it a couple of times per year, “for special occasions.” Though I tried several times, she never bought the insurance. Guess what happened on one of those special occasions? The clasp broke at some point during the evening, and the bracelet was lost. (True story: That someone was my mother-in-law!)
The way to overcome this limitation is “Scheduled Personal Property” (the technical term that the insurance company would use for this coverage is “Inland Marine,” but that’s a story for another day). When you “schedule” your jewelry, you provide details about each piece (for example, the type of diamond, carat weight, cut, color, clarity, setting, etc.) and you will need to provide an appraisal for any item that exceeds a certain value (commonly $2,500). Once all your jewelry is “scheduled,” it will be fully insured against theft. Another important benefit of scheduling your jewelry and watches is that those items will be covered for an additional peril: Mysterious Disappearance. While your home, or your leather sofa, can’t mysteriously disappear, a stone in your wedding band can certainly pop out without your knowledge.
TIP: Scheduling $10,000-$20,000 of personal property shouldn't cost very much - from what I have seen in my experience, it costs about $100-$200 per year.
Auto Insurance – Rental Reimbursement
This is the amount of money a policy will provide for you to rent a car while yours is being repaired, as part of a covered loss/claim. Supply chain issues have led to body shops taking weeks longer to repair vehicles than they did pre-Covid. In addition, the cost of rental cars has risen substantially in recent years. Many auto insurance policies will provide something like $40 per day with a limit of $1,200. But if you need an auto that now costs $80 per day, and it takes the body shop six weeks to repair your vehicle? That adds up fast, and you’d be paying for the rental out of pocket after just 15 days.
TIP: Check with your agent and see whether higher limits of coverage can be purchased.
Personal Umbrella Liability Insurance
This extends the liability limits on your underlying home and auto policies (in addition to policies for motorcycles or boats). This policy can be purchased in increments of $1 million because in today’s litigious society, you don’t have to be a millionaire to be sued like one. Not only will an umbrella policy increase the amount the insurance company will pay in the event you were liable for damages, but in most cases, it will also provide an attorney for your defense.
An important detail about buying a PUL policy is that you have to maintain a minimum level of liability coverage through the “underlying” home and auto insurance. I met with a client last month, who had recently purchased a PUL policy. Unfortunately, his property and casualty agent failed to increase the auto insurance liability limits, as required. The fine print stated that the policy was not valid without the required minimum liability limits. The client was paying for protection that didn’t exist, because of the agent’s error.
You’ve heard this from us before, but we strongly encourage our clients to purchase an umbrella liability policy if you don’t have one already. Having the homeowner’s, auto and umbrella insurance through the same carrier can often provide discounts and helps to avoid the gaps in coverage.
TIP: Talk with your property and casualty insurance agent about these policies and help ensure your coverage is up to date.
Neither Financial Engines Advisors, L.L.C. nor any of its advisors sell insurance products. Edelman Financial Engines affiliates may receive insurance- related compensation for the referral of insurance opportunities to third parties if individuals elect to purchase insurance through those third parties. You are encouraged to review this information with your insurance agent or broker to determine the best options for your particular circumstances.