Homeowners: Are You Properly Insured?

You may have more coverage gaps than you think.

By Robert Pyle

If you’re like many successful people, your home is your largest personal asset. However, nearly two-thirds of American homes are UNDER-insured, according to Nationwide Insurance. Nationwide says the average homeowner is underinsured by about 22 percent. This could mean you are unable to rebuild your home to its previous condition before a major disaster occurred.

Homeowners insurance generally covers your home, the property in your home, as well as the liabilities you incur on your property.

As with auto insurance, some people try to save money on homeowners by having high deductibles or bare minimum coverage. Doing so could save you a few bucks, but it could also cause you to be seriously underinsured. It’s very important to know what your coverage limits are and that they are adequate to cover your potential losses. Ask yourself, “If my house burned down today, would my insurance be enough to rebuild it the way it was before? How about all my belongings, art, furniture, electronics?” 

Underestimating rebuilding costs is a gap we see often. If you’ve recently done significant renovations on your home, you should have your coverage reviewed again. It’s not necessarily that the value of your home has increased, but If you’re like most homeowners in our area—it’s the value of the land that has increased significantly. Be mindful of what it would cost you to rebuild your house now that it’s been newly renovated.

Umbrella policies

There are so many different risks; you want an umbrella liability that rides on top of your homeowners, auto and life insurance policies to provide additional coverage “just in case.” An umbrella insurance policy, at its core, is extra liability insurance coverage that goes beyond the limits of your home, auto or watercraft insurance. It provides an additional layer of security for successful people like you who are at risk of being sued for damages to other people's property or injuries caused to others in an accident.

I always recommend having an umbrella policy that’s equal to your net worth. So if you have a net worth of $3 million, you want an umbrella policy that provides $3 million worth of coverage. Umbrella policies are surprisingly affordable. A $3 million policy might only cost you $500-$800 per year. However, when you need it, you will be happy to have it.

Okay. So, what if you’re the owner of a privately held family business? Chances are the majority of your net worth is tied up in your business. How do you know your net worth, much less how large an umbrella policy you’ll need? 

First, understand, you really shouldn’t go to a normal carrier. It would help if you had a specialized carrier—Chubb, PURE, AIG, etc.--that specializes in high-end insurance. For starters, there’s usually a $5 million limit for umbrella policies and your business may be worth a lot more. It would be best if you had a separate policy for your commercial interests—such as the office building you rent or own—vs. your personal residence or vacation home.

Typically, commercial package and commercial umbrella liability policy that’s separate from the insurance you have on your primary residence or vacation properties. Bottom line, if you’re not sure about your particular situation, don’t be afraid to ask your insurance specialist or financial advisor.

For instance, if you have open houses (with alcohol) to entertain clients at your home or, you definitely want to have a special event rider on top of your regular commercial package.

The idea is that the umbrella policy sits on top of your other liability coverage, i.e., your homeowners and auto policies. The umbrella will step in during catastrophic liability cases to cover you above and beyond what your other insurance provides. It’s not there to cover losses to your property but to cover your liability if you injure another person or their property.

Let’s say you live in an affluent suburban neighborhood where everyone drives nice cars. Suppose your 17-year-old son is smoking pot while driving your luxury car near your home and rear-ends your neighbor, who is a high-profile heart surgeon. Thank goodness the doctor wasn’t killed or permanently injured, but the accident caused a serious injury to the surgeon’s hand, preventing her from working for several months. You could be on the hook for her lost wages (in addition to pain and suffering) as she recuperates from the injury your teenage driver caused. We could be talking about $1 million a year in lost wages.

Your auto liability policy might only pay the first $500,000 of the surgeon’s claim. That’s when your umbrella policy kicks in to make up the difference. Sure, the chances of a catastrophic liability are low, but if you’re not adequately covered, the liability could wipe out a lifetime of savings and hard work.

Other common gaps in homeowners insurance

Rick Baker, of Rick Baker Insurance, outlined several other coverage gaps that successful people often have on their primary residences:

·         Theft, vandalism. These are normally included coverages. According to Baker, however, theft limitations exist on all home insurance policies for items like jewelry, furs, guns, stamp, coin or metal collections, silverware, and cash. Baker said most of these categories could be added to a “valuable articles policy” to cover the theft limitation and give all risk coverage typically covered at no deductible per loss by most companies. When it comes to actual gold and silver bullion, Baker said those assets need to be kept in a safe deposit box as they cannot be added to a home policy. Those assets are also subject to a cash limitation which is very low ($1,500 or less).

·         Damage from neighbor’s tree, vehicle. Baker said that falling trees are typically insured by the party suffering the damage--unless a neighbor was previously warned about a situation involving their overhanging tree and neglected to remedy the situation. Baker said those instances are typically covered by the insurance of the party that suffered the damage (subject to their deductible). Damage from a neighbor’s vehicle is the responsibility of the neighbor’s auto liability policy.

·         Teen drivers, teen parties at your home. All sorts of issues can arise from a teenage party at your home. Typical liability issues addressed under the personal liability of the homeowner's insurance --i.e. teens drinking and then then getting into an accident after leaving your premises--depends on each particular circumstance. If you have teenage kids, check with your carrier if you are unsure. At a minimum, Baker said teen drivers should be added to your auto policy and umbrella coverage as soon as they become licensed drivers.

·         Contractors, maids, nannies having an accident on your property (or while using your car). Any Contractors working on your primary residence should provide you, the homeowner, with a certificate of insurance that verifies they have liability and workers compensation coverage (if they have employees). Baker said the same goes for maid services that come to your home.  If the maids work only for the insured, then a worker’s compensation policy should be taken out by you, the homeowner, since the courts may consider you an employer of the maid’s if she is hurt at your residence. If you employ a nanny, Baker said the nanny should always be added to your personal auto policy as an insured driver. You should also take out a worker’s compensation policy for your nanny, advised Baker.

·         Extreme Weather. We’re no strangers to extreme weather here on the Front Range. Most extreme weather events in our region are covered on a normal homeowners insurance policy, but if you want to be covered for flood or earthquake damage, Baker said you’ll need to add a separate policy or endorsement to your homeowner's policy.

While many people blame global warming for raising our insurance premiums every year, that anger is often misguided. Rising premiums are more often a result of so many people living in areas that used to be considered too risky to build upon—ocean front and mountain sides. As an alarming BizWest article explained last month, Insurance rates will climb along the front range whether you have claims or not. The reason for the Colorado increase is because more people are moving into the Front Range and there are more cars and more houses that are at risk for hail damage. Bottom line: More people are moving into areas that are prone to hail, and that’s why it seems hailstorm damage is increasingly common.

On the national front, 2017 and 2018 was the highest 2-year period of losses ever. Reinsurers are passing along these costs to the insurance companies who in turn (big surprise) are passing their increases along to policy holders (i.e., you, the consumer).

One of our clients had a hard time trying to sell their recently deceased parents’ house because it wasn’t clear if they were truly in a flood zone. There were three different flood maps covering their property—the county used one map, the city used a second map, and FEMA used a third. You need to be aware that flood maps can change all the time due to recent events. Your house can be annexed from the county to the city, and it’s hard to keep track of the maps. Always err on the side of caution. When it comes to flood insurance, I hate to say it, but make sure you are insured against the flood map showing the worst-case scenario. Further, they had to make the new owners aware of the building restrictions due to the property being in a flood zone. This affected the final selling price.

By the way, insurance companies get pretty uptight when they suspect no one is living in your late parents’ home. It’s not uncommon for homeowners insurance premiums to double, even trip or more. The rationale is that if the home is empty, it’s more likely to get burglarized or vandalized. Many people just pay the increase to avoid the headaches or substantially raise your deductible to say $5,000.

My friend and neighbor Roger Pielke is the author of The Climate Fix: What Scientists and Politicians Won't Tell You About Global Warming. His research found there’s no increase in the intensity of storms on the coasts, but the population density in those areas is increasing, and the value of the homes is dramatically increasing. So, it seems like disasters are worse. 

Conclusion

Bottom Line: Whether or not we’re really in a period of climate change, the rising threat of extreme weather events is what has insurers spooked. As long as insurers are nervous—trust me, they hate risk—you can expect to pay more to protect your home, vacation home, and rental properties.
In Part 2 of this article, we’ll talk more about protecting your vacation and rental properties.

Contact me any time, if you have questions about your coverage gaps and the cost of getting a good night’s sleep.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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