The Economy and the Homeowners Market

How the Economy Turned Optional Coverages into Mandatory Enhancements

Offering comprehensive homeowners coverage in today’s insurance market is not only good business, but a necessity. Insuring the property for full replacement cost is key. With the current economical impact on the real estate market, and home prices at a low level, more are looking to insure their homes for market value, instead what it would cost to rebuild, in order to keep the premium down.

Homeowners do not want to buy more of an insurance policy for a value higher than the market value. Conversely, when real estate prices skyrocketed in the mid-2000s, policyholders wanted to insure their homes for the price it could fetch if sold, not the lower value to rebuild. It is our job to convince our clients otherwise. Insuring property to full replacement cost insures that in the event of a loss, the home can be rebuilt at current costs for materials and labor, and personal property replaced at today’s value. Underinsuring can result in a co-insurance penalty at the time of a loss, and a very unhappy policyholder.

From a legal standpoint, homeowners are more concerned than ever with potential lawsuits, so liability limits are rising. Some companies offer liability limits up to $2 million.

In conjunction with a personal liability umbrella policy to cover all underlying liability exposures, the comprehensive liability and medical payments on the homeowners policy provides protection for the policyholder’s assets in the event of a lawsuit – including defense costs.

Enhancing the standard policy with optional coverage offers the broadest coverage available, and is an important service for the insurance agent to provide. Doing so protects an insured against losses and protects the agent or broker from potential errors and omissions. While the standard HO3, HO6, HO4 policy forms have become the most widely known, there are exclusions in the policy. These can usually be resolved by including optional policy coverage. Most companies offer these at an additional premium.

Needed Optional Coverages

Optional coverage extensions include everything from personal injury, to sump pump coverage to identity theft coverage.

Personal Injury: Provides coverage for libel and slander, among other exclusions in the liability section of the basic form, as well as defense costs for the added perils.

Extended Replacement Cost: Increases the dwelling coverage in the event of a loss that exceeds the limit shown on the policy. Options include 25 percent, 50 percent or 100 percent increased limit.

Ordinance or Law Increased Limit: Provides additional dwelling coverage of 25 percent in the event of a substantial loss, when rebuilding requires meeting new codes and materials that may cost more than the dwelling limit.

Water Backup, Sewer, and Sump Pump Discharge: Picks up these perils that are excluded from the policy form, covering the damage to property up to the chosen limit, which can be from $5,000 to $25,000, subject to the policy deductible.

Special Form Contents: Changes the personal property including computers, from Broad Form on the HO3, HO6 and HO4, from named perils to named exclusions including wind driven rain. It is automatically included in the HO5 form.

Identity Theft: Pays expenses incurred by the victim of identity theft, up to the chosen limit, typically $15,000 or $25,000. Identity theft is more prevalent now than ever, as people do more business and share personal information on the Internet.

Directors and Officers Coverage: Can protect insureds who serve on their condominium association board with additional liability coverage for errors and omissions.

Special Form Condo Dwelling: Enhances the coverage for additions and alterations to all risk.

Personal Articles Schedule: Scheduling valuables is another type of policy enhancement that provides agreed values for jewelry, watches, furs, guns, collectibles, fine arts, and more. By providing documented values for such items, all risk coverage can be added, usually without a deductible. It provides extended perils and loss settlement above what the homeowners policy provides. Often a credit is applied when the personal article floaters coverage is added to the homeowners policy, as opposed to a monoline policy.

While in the past additional optional coverage were desirable but not always elected, today they have become necessary. In California, extended replacement cost, personal injury and liability limits of $1 million are normal. In coastal areas like Florida, ordinance or law is essential as homes damaged or destroyed may have to be rebuilt with stricter regulations and stronger, resulting in the cost to rebuild exceeding the policy limit.

In the Midwest, on the Pacific coast, and in eastern regions, the demand for earthquake coverage is on the rise. Generally excluded on the homeowners policy, it is offered by many carriers at an additional premium.

Flood insurance is another valuable coverage no matter where the insured lives. Some carriers, particularly in surplus lines, offer excess flood above the primary flood policy. This makes additional limits of property coverage available beyond the National Flood Insurance Program limits of $250,000 for property and $100,000 for contents. Flood insurance can be added to the homeowners policy, with an additional premium credit for packaging them together.

To better determine what exposures will need protecting, aagents should ask clients about their lifestyle, occupations, hobbies, family members, collections and more.

No matter where the property is located, offering the broadest and most enhanced homeowners policy is an important function of the insurance advisor. A home is the largest purchase the average person makes in a lifetime, and ownership of it a big commitment. It is an advisor’s job to make sure it is protected.

Topics Flood Property Homeowners