With the start of Hurricane season approaching, homeowners should once again think about their buildings and contents insurance, determine whether any existing insurance coverage is adequate and what is covered by their insurance and what is not.
Both the structure of the building and its contents are at risk and can be damaged by flooding from excessive rainfall and storm surge, as well as high winds and flying debris.
Nicola Grant-Sewell, manager at BAF General Insurance Brokers (Cayman) Ltd, a broker and insurance provider says all too often the focus is just on the building, because this type of insurance is required for a mortgage.
“We also find that persons don’t pay close attention to whether they are underinsured,” she says. Homeowners might be tempted to just cover the outstanding amount of the mortgage but “not insuring the full replacement value of your property can adversely affect the outcome of your claim,” says Grant-Sewell.
Under-insurance can become a serious problem in the Caribbean where insurance policies effectively penalise policyholders who have not insured the full value of their property, by paying out significantly less in the event of a claim.
Grant-Sewell explains “if you are not insuring the full replacement value of your property you are in effect self-insuring the difference, between the insurance under the policy and the replacement value of the property. So you are sharing in the underinsurance.”
In practice this means when a claim is made the insurance adjustor will assess the replacement value of the property and compare it to the insured value. For example, if a house has a replacement value of $200,000 but is only insured for half the value at $100,000, the insurance will not pay more than 50 per cent on any loss and damages, regardless of whether the damage is minor or total.
Given that the same principle applies to contents insurance trying to save money by not fully insuring the building and property contents will be false economy.
It is also important not to confuse replacement value and market value as they can differ significantly. The replacement value is the cost it would take to reinstate that building with the same types of material, the same size, the same structure and the same roof, should it be totally destroyed, explains Grant-Sewell.
To determine the current replacement value of their property, home owners should get a valuation every year, she recommends. Insurance agents will estimate the replacement value on request and the adjustment of the insurance policy is a straightforward process as the policy will simply be endorsed and increased to the present value of the property.
However, insurance agents are not professionals in that field and their estimation should only serve as a guidance. If the agent’s estimate appears too low it may be necessary to get a professional appraisal.
This can be expensive if a new valuation is required, but if a valuation existed in the past, for example when the mortgage was obtained, it may be cheaper to adjust the value according to the development of market rates.
On average, building rates tend to be between $110 and $137 per square foot depending on the type of construction, advises Grant-Sewell. The valuation of the home contents works slightly differently. Homeowners can generalise some of the contents of their home such as fridge, stove and personal effects in a lump sum but high value items such as electronics and jewellery should be itemised. Insurers will also ask for a valuation of jewellery to ensure that the item really exists and to assess the real value rather than the sentimental value of the piece.
Cost of the premium
The cost of the buildings insurance ranges from 1.66 per cent to 2.1 per cent of the replacement value depending on a range of factors. The location of the property, whether it is seafront, canal front or inland, its elevation, the type of construction and the type of roof, whether there are hurricane shutters or impact resistant glass and even the types of interior walls, concrete or drywalls, will have an effect on the premium.
Check exclusions and limitations
Another important step is to check the insurance policy’s limitations and exclusions. Peripheral structures such as pool sheds, detached garages, pool screens and fences may not be covered at all and the policy may also may limit or exclude coverage for items such as boats, cars, aircraft, cash, guns, silverware, jewellery, furs, antiques, electronics, business equipment and records. Coverage for any items that are excluded has to be purchased separately.
Some policies exclude outside furniture, patio furniture but generally there is enough time when preparing for a hurricane to affix or store these items safely.
Another factor that will affect the outcome of the claim is the size of the deductible, as the insurance will only cover damages exceeding the deductible amount. While 2 to 3 per cent of the insurance value is common, some companies have higher deductibles, often in response to the insured’s desire to reduce the premium to a manageable amount by agreeing to a higher deductible. Some insurers group building and contents insurance together and apply the deductible to the total amount.
Homeowners should draw up a list of all the contents in the home to determine the value of the contents. This list is also a good document to pass on to the adjustor when a claim is made. Photographs of all the belongings, stored in a safe place or online, are another good way to support a claim.
Before a storm homeowners should do everything possible to mitigate potential damage, like having the roof of the house checked to make sure it is secure. Even a small damaged section that is lifting can cause the destruction of the entire roof in a hurricane, warns Grant-Sewell. Lose furniture and other items should be stored safely.
Immediately before a storm homeowners should place important documents and the insurance policies in a watertight plastic container and keep it in an easily accessible location, in case an evacuation becomes necessary.