Bermuda Fundamental Financial Review Series (BFFRS) — Property Insurance part 2

It has been a little over ten years since Fabian trashed this tiny island. Many families suffered disasters during this time, some left with lingering painful memories of lost loved ones. “Time heels all wounds,” they say. More often, time only diminishes the importance of a serious catastrophic episode.

Family resources are scarce and family economics are tough these days. Insurance policies cost money. What doesn’t? Policies may have been allowed to lapse, or are inadequate for another major storm. With a new hurricane season just a few short months away, I strongly urge you — now — to review your property and casualty insurance policy coverage.

When you purchase a home insurance policy just exactly what are you getting? For starters, a rather lengthy document that spells out, in specific detail,

1. The coverage.

2. The cost.

3. The policy exclusion conditions.

4. The E and E — these are known as the excess and the endorsements.

5. The claim settlement basis.

6. The owner’s liability.

7. And the responsibilities the owner(s) of the property and the insurance company who are both party to the insurance contract.

1. Home insurance property casualty policy coverage. An executed insurance policy (meaning signed by you and the insurance company) with the consideration paid (premium) is a legal contract between the company and the property owner. Insurance policies in the past were difficult to understand, referring to various coded phrases that almost necessitated using a reference book. Fortunately, today, policies are stated in plain clear English and while still lengthy, they are very explicit and detailed in content.

There are various types of property casualty insurance for protection against perils (meaning exposure to risk of harm or loss — a word that always seems terribly archaic, though it is not). Property protection insures against its loss or its income producing abilities. Casualty insurance protects against legal liability for losses caused by injuries to other people or damage to their property. The most commonly used is a broad coverage policy featuring the most likely general perils for a certain area including: fire, windstorm, flood, riot and civil commotion, thefts and vandalism, debris, collision, loss of rent, earthquake, loss of credit cards / valuables, accidental bodily injury, and related perils.

The Protection coverage constitutes repairing and replacing cost of rebuilding from soup to nuts, architects fees, surveyors, legal fees, building regulations and government statutory costs, demolishing hazards, rent and alternative accommodations (a percentage of the amount insured), replacing contents, damages and other claimants costs and so on. Each policy defines very clearly what the coverage includes, and what it also excludes.

The first major hurdle in understanding your home coverage is a basic question. How much damage does your insurance policy cover? That depends on the sum insured.

First, the policy does not insure the land itself. Your premium covers insuring your building(s) and related items on your property as specified in the policy contract as the sum insured.

Secondly, the most common mistake that property owners make is complacency -assuming that the total purchase price of your property, or what you think your property will sell for today on the open market is the sum insured value.

Three words. It is not.

Three more words. The sum insured means the replacement cost.

I shall quote verbatim from a Bermuda insurance company property casualty policy. “We (the insurance company) will pay the cost of work carried out in repairing or replacing the damaged parts of buildings, including fees and all associated costs. If at any time of any loss or damage the sum insured on the buildings is less than the full rebuilding cost then you (the property owner) shall be considered being your own insurer for the difference in cost and shall bear a proportional share of the loss.”

Simply put, if you have only insured your home for 50% of the replacement cost, then the insurance company is only going to provide the sum insured of 50% of the total replacement cost. It is your responsibility to verify by consulting with your insurance agent to be sure you are adequately covered with current replacement value insurance.

The cost of Bermuda construction has risen dramatically in the last few years. Many homeowners who have been financially responsible may still find out that in today’s construction environment, the replacement value of the home they insured originally is nowhere near the construction cost of a new home today — estimates range from a mere $325 per sq. ft. upwards to $450-500 sq. ft.

The burden of maintaining your home in good repair can also take a toll during disaster damage. You won’t receive the full replacement cost, either, as a deduction for your poor maintenance will be assessed from the gross proceeds.

What to do if you cannot afford the full policy? Going bare* is not a good option. You are playing a high-risk game (with a low-risk cost) where non-participation in an insurance policy can cost you your dreams. Imagine trying to negotiate (in this tough economic environment) a massive further charge on your mortgage to rebuild a severely damaged home.

Insurance is part of financial planning for a secure future. For those of you not able to afford property and contents insurance, please consider working with an insurance agent to plan for minimum disaster coverage. It is better than having none.

What is your insurance company responsible for? Your insurance company collects a premium from you every year, insuring your property against catastrophe. You wonder if a major disaster strikes, will they have the capital reserves to pay all the claims on many properties at once? This is where your insurance company’s responsibility to you as the rebuilder of last resort is critically important. What does the financial statement of a solid insurance company look like? Stay tuned.

(Part 1 — insurance was featured in Moneywise on March 08, 2014 “Paying for insurance is no fun — but you need it.)

•This is an insurance expression meaning no insurance coverage.

Martha Harris Myron CPA PFS CFP JSM, Masters of Law: International Tax and Financial Services, Pondstraddler* Life™ Consultancy

Focused Cross Border Financial Planning, Publications & Integrative Presentations for internationally mobile individuals and businesses.

Contact: martha@pondstraddler.com. This article is the expresses the opinion of the author. Under no circumstances is the general information contained within to be construed as tax advice, recommendations for insurance, investment products, a financial plan or related advisory services. Individuals should seek qualified professional advice for their personal finances.