Reviewing Your Property and Casualty Insurance
Key Points – Reviewing Your Property and Casualty Insurance:
- Property and Casualty Insurance is Risk Management
- Asking a professional questions about Property and Casualty Insurance
- Types of coverage
- A personal case study
- 15 minute read
If you are anything like me, the idea of reviewing your property and casualty insurance ranks right up there with things like a visit to the dentist or prepping for a colonoscopy. It just isn’t something we tend to look forward to, so we put it off, even though we know we should do it.
Property and casualty insurance is an area of our financial lives that gets neglected more than probably any other. Yet, some very negative financial consequences can arise due to that neglect. Today I want to try and give you a new perspective on this and hopefully motivate you to take some action that’s probably long overdue to protect your property, your family, and your money.
Property and Casualty Insurance is Risk Management Too
Though most people think of life insurance when talking about risk management, property and casualty insurance also falls under the risk management pillar of a well-crafted, comprehensive financial plan. Even though property and casualty insurance isn’t really in our wheelhouse, it’s something we know our clients need, and they need it in proper proportion to their exposure to risk.
Too often, we’ve seen clients grossly overinsured or grossly underinsured for various reasons. It’s frustrating to see them taken advantage of or left exposed to losses. So we began looking for a way that we could actually help our clients shore up this part of their plan and a way to monitor it on an ongoing basis. Enter our good friend Darren Newell at Midwest Professional Insurance.
Getting to Know Darren Newell
Several of us here at the office have known Darren for ten years, some longer. He attends the same church as some of us, works out at the same gym as some of us, has similar interests and the same values as us, and has become a great friend to us. What I’m getting at here is that we know him, and we trust him.
When we finally began talking to Darren about what we were seeing happen to our clients, he immediately offered to help us. We were excited that we would finally be able to help our clients with this part of their plans, but we didn’t know what the process would look like. So, we all had Darren do a full review of all our existing property and casualty insurance policies; it was awesome.
All of us were experiencing (unbeknownst to us) some of the same things we saw in our client’s coverages. At that time, most of us were using captive agents at one brand name insurance company or another. We were wholly unaware that we were either; paying too much, had coverage overlaps, coverage gaps, or were on the verge of being dropped by our carrier for filing too many claims. To say that it was eye-opening is an understatement.
Let’s Ask a Professional About Property and Casualty Insurance
So, we thought it would be a good idea to talk to Darren and share his thoughts on when and how often you should review your property and casualty insurance coverage and what you should expect from your agent or broker. We’re going to be talking primarily about home insurance, and the various coverages included today, but these principles can and should be applied to all of your policies.
How Often Should I Review My Policy?
Shane Barber: So, Darren, how often should someone review their home insurance policy?
Darren Newell: You should be reviewing your home insurance every year with your agent. I recommend that you use a broker that has many different carriers to choose from.
There are many benefits to using a broker rather than a captive company like State Farm, American Family, or Farmers. Captive agents typically won’t review with you yearly unless there are savings, which is usually not the case. They don’t want to call you and discuss an increase because they don’t have an alternate solution for you.
Shane Barber: That makes sense. Plus, they probably don’t like getting yelled at when there’s nothing they can do about it. That would be a miserable conversation to have. “Sorry, your cost is going up, and you’re getting nothing in return for the extra money…but please… don’t cancel your policy!”
Darren Newell: The most significant benefit with a broker is, if the premium increases, they have other options to move you to a more competitive company. Insurance companies are obviously in the business of making money. If your current company sustained a lot of loss the previous year, they will increase your premium to make up for the loss.
Regardless if you filed a claim or not. The industry average increase for insurance is anywhere from 3-10% a year. Anything over that, and you should be shopping. I typically recommend starting to shop anything over 7%.
What Types of Coverage for a Home Insurance Policy?
Shane Barber: Because you and I have talked about this, I know there are several different types of coverage in a home insurance policy. There’s coverage A, B, C, and D. What are those, what do they cover, and what should people be aware of?
Darren Newell: Coverage A is your dwelling. It’s important to know that this is the value of your home if it had to be rebuilt. This is not the appraised value of your home. Often, the rebuilding cost is much lower than the appraised value. The reason is that the appraised value factors in location (i.e., great school district) and land. Insurance does not cover land. Rebuilding costs can range from $150 – $250 per square foot, based on the type of finishes used in the home.
Some examples of finishes are builders-grade, semi-custom, and custom. Square footage is based on the main level and anything above that. It does not include the basement. So it’s important to make sure your agent knows if the basement is finished. That cost factors in separately. If your basement is not finished, and the agent is factoring in total square feet of all living space (basement included), you will be paying too much for insurance.
Shane Barber: I definitely don’t want to pay for coverage I don’t need, so that’s an excellent thing to be aware of. Until you did our analysis, I didn’t know that.
What About Rising Material Costs?
What happens when the cost of materials to rebuild goes up? Do they automatically increase the value each year, or do you need to do something to make sure the coverage is keeping up with the actual cost to rebuild?
Darren Newell: Most insurance companies raise the value to rebuild your home by 3% each year. If you stay with the same carrier over an extended period, under normal market conditions, you will most likely be overinsured within 3-5 years. Remember, we want to know what it will cost to rebuild the home, not what it is appraised. When the value increases, so do coverages B, C, and D. I’ll talk about those other coverages in a minute, but I want to make another point here first.
Extended Dwelling Coverage
Make sure your policy also has Extended Dwelling Coverage. This is additional insurance that will cover a total loss that exceeds the coverage listed on the policy. This coverage can be applied from as little as 10% up to 100% of Coverage A.
Let’s say your home is valued at $300,000. With extended dwelling coverage, you are eligible for up to the additional % you picked. If you selected 50% for your extended dwelling coverage, your total coverage is up to $450,000. 25-50% is the most common range. This is a very inexpensive coverage and could be beneficial if something arises in the unforeseen rebuilding cost while keeping coverage B, C, and D where they should be, thereby keeping your rates in line.
What is Coverage B?
Shane Barber: There are those other coverages again. Let’s move on to the next one, Coverage B. What is the purpose of Coverage B, and why should I have it?
Darren Newell: Coverage B covers structures not attached to the home like:
- Retaining walls
- Privacy fences.
10% of Coverage A is standard for most carriers. Some carriers have started giving the option to adjust this amount. I would not recommend going below 5%, though. This option can be beneficial even if you don’t have any other structures on your property. It’s important to note here that driveways are actually considered other structures, and a fire can easily warp concrete.
Shane Barber: That’s pretty important information, especially for those of us who not only have actual additional structures on our property that we don’t think of as other structures but also have long runs of privacy fence or large amounts of concrete or asphalt driveway space. Can the Coverage B limits be higher than the 10% that most carriers have as standard?
Darren Newell: They can. In fact, the limits are generally between 0%, which means you opt-out of Coverage B, although I will repeat that I don’t recommend going below 5%, all the way up to 70% of the Coverage A limits.
Why Coverage B is Important
Let’s go back to that $300,000 home for a moment. Let’s say that home has an outbuilding and fence that cost $50,000 to rebuild. The standard 10% limit on Coverage B would leave you underinsured by about $20,000. You don’t want to find that out after the fact. You want to know now.
Shane Barber: Exactly! This is why having policy reviews is so critical. We’re all always making changes to our property in some form or fashion. We need our coverage to match what’s there now, not what was there a year or two ago.
What is Coverage C?
Speaking of adding stuff, I know what Coverage C is, and I know I’m always adding to that category. Tell everyone what Coverage C is and why it’s so important.
Darren Newell: Coverage C is your personal property, and it covers everything inside your home. Most policies cover 50% of coverage A. If Coverage A is $300,000, Coverage C would be $150,000. You can decrease or increase this coverage. Make sure that your policy has replacement cost coverage versus actual cash value replacement.
Actual cash value applies depreciation to your property. I recommend making a video you can store on the cloud or keep in a safety deposit box of everything in your home once a year. Seriously, please make this a priority and have a little fun with it too. Open every door and every drawer while filming. The reason you need to do this is, in the case of a total loss to your home, you will be hard-pressed to remember everything you have. Having this video catalog of everything you own will help speed up the process of getting a check from your carrier, which in turn speeds up the process of getting your life back to normal.
Shane Barber: That is such great advice! I’ve had a couple of clients who have suffered total losses on their properties due to fires that consumed the main residence, everything in them, and outbuildings and everything in them as well. It’s taken them literally years to get back to normal. And in at least one case for sure, if they had done a video catalog of everything they had, they would have been through the process in way less than half the time it took. Don’t miss this one, folks. It’s critical.
What is Coverage D?
And all this leads us to the next letter in the coverage alphabet; Coverage D. Tell us what Coverage D is and what it does for us.
Darren Newell: Coverage D covers the Loss of Use of your property, such as when you cannot live in your home after a loss while it’s being repaired or rebuilt. Most policies give a value of 20% of Coverage A. This will cover a rental house or hotel room along with many other things. 20% of Coverage A for that $300,000 house we’ve been using as an example means you would have up to $60,000 in Coverage D. This amount may be enough but could be much more based on specific circumstances where you live.
However, it’s important to remember that this coverage does not include expenses you were already responsible for before the loss. So, in the event of a loss where you cannot live in your home, it is essential to keep all of your receipts. If you are displaced, and your commute to work is now 20 miles more each day, you will get a check for the difference it costs you to drive the extra miles. Eating out more than normal is an added expense covered above what your average weekly meal budget was before the loss. You need to talk with your agent to decide if 20% is enough coverage.
Displacement Costs Can Stack Up
Shane Barber: It’s hard to believe that $60,000 wouldn’t be enough to cover living away from your home while it’s being repaired or rebuilt until you consider today’s circumstances. Renting a place that can fit you and your family today can be between $2,000 and $4,000 a month, depending on your location and needs.
If it takes 12 months to get the old structure down and the new structure completed due to material and labor shortages, it’s going to take between $24,000 and $48,000 just for a place to live for 12 months while all that is going on. Not to mention all the other extra expenses you’re going to incur due to the situation. It’s pretty easy to see why 20% may not be enough and why you should take your time to understand all the potential costs involved in the worst-case scenario were to happen.
Darren, thank you! I think you’ve shed some light on this and provided some much-needed education to our readers today, and I truly appreciate your time. But before we go, I want to ask you what other coverages you think we should be considering and reviewing that we haven’t talked about yet?
Other Property and Casualty Coverage to Consider
Darren Newell: There are a few other coverages to consider, but I’ll give you my top three.
Top Three Additional Coverages to Consider
1. Water Sewer Back-Up Protection
The first is Water sewer backup protection. This is coverage I write on almost every home policy. This coverage is inexpensive, and if you have a problem, you’ll be glad you have it. I would not go any lower than $5,000, and I recommend at least $10,000 in coverage. If your sump pump fails, the water clean-up alone will run anywhere from $3-5000. If you have a finished basement, the cost will go up significantly from there.
Shane Barber: Given a choice between buying the coverage or spending quality time with a Wet-Dry Vac and buying a bunch of fans that I’ll never use again, I’ll take the coverage! My house was built in 1965, and it has taught me that the unexpected should be expected!
Darren Newell: That’s a great segue into the next coverage I wanted to tell you about.
2. Buried Utility Line Coverage
Many carriers have added this type of coverage over the past few years, and I highly recommend this coverage in older neighborhoods with older clay pipes and mature trees. It’s just a matter of time before something happens.
Shane Barber: I have all the above. It’s amazing what tree roots can do to underground utilities. I’ve had to have my septic tank and leech field replaced and my waterline and power lines redone. Not that all that was covered, but this is a no-brainer to have, in my opinion.
3. Umbrella Policies
Darren Newell: And then for all the other stuff that we see on the news or in the movies, there are Umbrella Policies. They provide additional protection beyond your existing policy limits, and provide coverage for injuries, property damage, certain lawsuits, or personal liability issues. I highly recommend that you have one in this litigious society, especially if you have many more years of working. In the case you are at fault in an accident at home or in your car, they provide a high level of coverage for a very low cost.
Shane Barber: Plus, they come in handy when storing things like boats and RVs in paid storage facilities where certain insurance coverage is required to store your vehicle. Rather than increasing your liability limits on the vehicle you’re storing, causing your premiums to be higher, you can use the less expensive umbrella policy to meet the storage facility’s coverage requirements. That’s what we did for my boat this last year, with your help.
Thanks again, Darren, for taking the time to share this information with us.
Darren Newell: My pleasure! Thanks for the opportunity to help.
My Experience with my Property and Casualty Review
After that conversation with Darren, I wanted to share my personal experience to give you an idea of why I feel so strongly about this process.
To begin with, my father hated insurance. Many of you who are clients know this because I’ve told the story several times. But when I say he hated insurance, he HATED insurance. He used to say, “Insurance was created in the mind of the devil himself.” And, he would never have any more insurance than was necessary. Often leaving himself vulnerable to a loss that would remain uncovered. So the fact that I talk about insurance at all is kind of a miracle.
What I’ve come to realize as I’ve gotten older is that dad didn’t hate insurance as much as he hated insurance salesmen. He didn’t like being sold a product. And I think in that respect, he has a lot of company, including me and the rest of us here at Barber Financial Group.
You Should Never Be Sold Insurance
We don’t believe insurance should be sold. We think it should be purchased by a well-informed consumer who has been given all the information they need to make a reasoned decision about the amount and type of coverage that best suits their situation and ability to handle risk. That is exactly what Darren did for all of us.
My Property and Casualty Case
In my case, I was not unhappy with the coverage, the company, or the agent that I had before embarking on this little journey. In fact, one of our daughters had gone to work for this agent for some time, and we placed all of our coverage with them.
Not because she worked there necessarily, but because she spoke so highly of how they took care of their policyholders. They were in another city, but it didn’t matter. While we had our coverage with them, they never let us down when we needed them.
The Review and Analysis
So it was with some trepidation that we brought everything to be analyzed. My wife was 100% dead set against changing companies. She knows Darren too, and was very upfront with him that she wasn’t moving our insurance even though our daughter no longer worked at the agency. My wife is fiercely loyal when she feels like she’s being treated well and her business is valued. Darren assured her that he would not try and influence her in any way and would simply report his analysis and recommendations.
When he came back to us with his analysis and recommendations, I was stunned. You hear so much about bundling all your coverage in one place to save money on your insurance, and then someone comes along and blows that notion right out of the water.
We found that our current company had good rates for some things, and not so good rates for other things. We also discovered why. They had experienced a considerable rash of claims due to storm damage across the area in the last couple of years. Just like Darren mentioned in our conversation earlier, they raise the rates for that coverage to recoup their losses. It was simple math that wasn’t in our favor, and our current agent was powerless to do anything about it except offer to adjust coverage limits to lower the premiums. That was not an appealing option.
Savings and Protection
In the end, we were able to save a substantial amount of money on an annual basis by placing our various coverages with the proper companies, based on the current rates. That also included leaving some of our coverage with our present agent. It was an emotional decision to change and one that we didn’t take lightly. But we would have been silly not to do it. It was my fiercely loyal wife who was all in favor of making the change, though she did (jokingly) threaten Darren with physical harm if he screwed up our coverage. To date, no insurance Brokers were harmed in the making of this article.
Take the Time to Review Your Property and Casualty Insurance
I’m confident that many of you reading this have likely done the same thing we did and are now in a good place. I’m also certain there are an equal or greater amount of you in the same situation we were before we started this all. This article is for you. I can’t recommend strongly enough that you take the time to do this.
The worst-case scenario is that you’ll find that nothing needs changing and will have cost you a little bit of time to get the answer. That’s it. The best case is that you’ll potentially save some money, maybe cover yourself for some risks you didn’t know you had, gain a ton of new knowledge about how your coverage works, and a great deal of peace of mind knowing that what you have in coverage is what you need.
Reach out to Darren to review your property and casualty insurance.
Have a wonderful week, and get your property and casualty insurance house in order!
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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.