Insurance Programs – Page 6 – Setnor Byer Insurance & Risk

Health Care Reform: What are SHOPs?

To help small businesses provide health insurance to their employees, the Affordable Care Act created Small Business Health Options Programs, or SHOPs. Starting in 2014, SHOPs will be available to eligible businesses with up to 100 employees—although states can limit participation to businesses with up to 50 employees until 2016.

Once up and running, it is anticipated that SHOPs will help small businesses by:

Simplifying Choices. SHOP plans will provide essential health benefits like those covered by a typical employer health plan. These plans will be placed in four “tiers” depending on the coverage provided. SHOPs will provide side-by-side comparisons of available plans, with information about benefits, premiums, and quality. SHOPs will also enroll employees and consolidate billing.
Expanding Options. SHOPs will allow eligible employers to offer a variety of Qualified Health Plans from several insurers. These employees will then be able to choose a plan that best fits their needs and budget.
Preserving Control. Small businesses will be able to decide whether and when to participate in SHOPs, to choose their own level of employee contribution and to make a single monthly payment to the SHOPs rather than to multiple plans.
Lowering Costs. SHOPs will be designed to save money by spreading insurers’ administrative costs across more businesses. Additionally, small businesses using SHOPs may be eligible for tax credits.

Since SHOPs will be a part of the Affordable Insurance Exchanges, states have flexibility in determining how they will be structured. Until decisions are made and Exchanges are implemented, we will not know if these SHOPs will accomplish everything they are designed to do.

At Setnor Byer Insurance & Risk, we are committed to guiding you through what is sure to be a bumpy ride. Check back with us periodically for future informational updates. If you have specific questions about the Act or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.

Affordable Care Act and its Impact on your Bottom Line

All employers, both large and small, are concerned about the rising cost of healthcare. It is the belief of many that the Affordable Care Act will ultimately resolve both the issue of affordability and availability. Yet, there are others who may very well represent the majority of business owners, who suggest that the Affordable Care Act was designed and implemented in haste, providing broader benefits to a greater population of U.S. residents without, first, driving at the triggers to cost in our American healthcare system.

Fortunately or unfortunately, the debate about the Affordable Care Act will not be resolved for quite some time. In the interim, it is probable that health insurance costs will continue to rise. For this reason, every employer needs to work closely with their professionals to monitor the impact of the Affordable Care Act on their health insurance costs, and remain informed about creative options, including High Deductible Plans and Self-Insurance.

For small employers, the new Health Insurance Exchanges set to be operational by 2014, may present yet another option. These Exchanges remain ill-defined and their ability to improve the group benefits shopping experience is questionable given the complexity of the product(s) and the question of who exactly will be engaged or employed by government to help field inquiries. Fortunately, many insurance professionals have built Healthcare Advocacy teams to assist in the navigation of the new Exchanges.

In the next several years, there will be many changes to our healthcare system, including a laser focus on wellness, primary care delivered by nurse practitioners, reductions in costly screenings for low-risk individuals, new challenges to medical treatments, shifting providers, and more. Human Resources and Benefits Coordinators need to be prepared to communicate these changes and manage the ‘emotionally charged’ aftermath.

With all the changes anticipated, some good, and some bad, the following are particularly noteworthy:

Through 2013, businesses with fewer than 25 full-time equivalent employees, which pay average annual wages below $50,000 and provide health insurance, may qualify for a small business tax credit of up to 35% (up to 25% for non-profits) to offset the cost of insurance.
Starting in 2014, the small business tax credit goes up to 50% (up to 35% for non-profits) for qualifying businesses.
Under the Act, employer-based plans that provide health insurance to retirees ages 55-64 can get financial help through the Early Retiree Reinsurance Program, which is designed to lower the cost of premiums for all employees and reduce employer health costs.
In 2014, small businesses with generally fewer than 100 employees can shop in an Affordable Insurance Exchange. These Exchanges are designed to create a new marketplace where individuals and small businesses are guaranteed health plans regardless of medical history. Health benefit plans must meet certain benefits and cost standards to be available through an Exchange.
Employers with fewer than 50 employees are exempt from the Act’s employer responsibility provisions, which assess a penalty on larger businesses that fail to insure their employees in certain circumstances.
In 2014, businesses with 50 or more full-time employees will generally be required to offer adequate health insurance or pay a penalty assessment.
Businesses with more than 200 full-time employees will have to automatically enroll new employees in their health insurance plan and provide an opportunity to opt out of coverage.

At Setnor Byer Insurance & Risk, we are committed to guiding you through the next several years of change. Check back with us often for updates on the American Healthcare System and the Affordable Care Act by calling us directly at 1-888-253-8498 or by emailing specific questions to HealthAgents@setnorbyer.com

Clearing a High Health Insurance Hurdle: the Pre-Existing Condition Insurance Plan (PCIP) Program

There is a new option for those who are uninsured because of a pre-existing condition—the Pre-Existing Condition Insurance Plan (PCIP) program. Created by the Patient Protection and Affordable Care Act (the health reform law), the PCIP is designed to make health coverage available to those with pre-existing conditions. Importantly, the PCIP does not cost enrollees more just because of their medical condition.

The U.S. Department of Health and Human Services runs the PCIP program in twenty-three states and is contracting with a national insurance plan to administer the program. These states are: Arizona, Alabama, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, Nevada, Nebraska, North Dakota, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, Wyoming, as well as the District of Columbia.

The remaining states are running their own pre-existing condition insurance plan programs. As a result, application procedures, costs and benefits for these state-run programs may differ not only from the federally-run PCIP, but also from other states.

Under the federally-run PCIP program, a broad range of health benefits are covered, including primary and specialty care, hospital care and prescription drugs. Benefits provided by these PCIPs are available even if they are used to treat a pre-existing condition.

To qualify for coverage under the PCIP program, a person:

Must be a United States citizen or legal resident;
Must have been without health coverage for at least the previous six months; and
Must have a pre-existing condition or have been denied coverage because of health a condition.

The PCIP program offers three plan options:

The Standard Plan;
The Extended Plan; and
The HSA Plan.

Each plan has its own premiums, calendar year deductibles, prescription deductibles, and co-payment requirements. However, all three plans pay for preventive care at 100%, with no deductible when a preventive diagnosis is indicated by an in-network doctor. Preventive care includes annual physicals, flu shots, routine mammograms, and cancer screenings. For non-preventive care, insureds staying in-network will pay 20% of their medical costs after satisfying the deductible.

Despite being a federally-run program, PCIP premiums may vary by state. For example, premiums are higher in Texas than they are in Florida.

In Florida, the monthly premiums for people 18 years old or younger are $118 for the Standard Option, $158 for the Extended Option, and $122 for the HSA Option. In Texas, the premiums are $133 for the Standard Option, $179 for the Extended Option, and $138 for the HSA Option. Similarly, those living in Florida ages 35 to 44 years old will pay $211 for the Standard Option, $284 for the Extended Option, and $220 for the HSA Option. In Texas, the monthly premiums are $239 for the Standard Option, $323 for the Extended Option, and $248 for the HSA Option.

Under this program, the first premium payment is due within 30 calendar days from the date an approval letter is received; otherwise the application will be cancelled. The effective date of coverage depends on the date the application and all supporting documents are received by the PCIP. If the documentation is received on or before the 15th of the month, coverage will be effective on the first day of the next month. If documentation is received after the 15th of the month, coverage will be effective on the first day of the second month.

If an application for coverage under the PCIP is denied, the applicant will receive a letter explaining the reasons for such denial. These applicants have 45 days to file an appeal of their denial, if they so desire. Otherwise, they are free to re-apply for PCIP coverage upon meeting the eligibility requirements.

The PCIP program is only available until 2014. This is because in 2014, insurance companies will be prohibited from refusing to sell coverage or renew policies because of a person’s pre-existing condition. Additionally, in 2014, individuals whose employers don’t offer them insurance will be able to buy insurance directly in a health insurance exchange.

For those who have been unable to get health insurance due to a pre-existing condition, the PCIP program may be the solution they have been looking for. However, given the disagreement and uncertainty surrounding health care reform, even after the Supreme Court upheld nearly every provision of the law, only time and experience will tell if the PCIP program is in fact what it was designed to be.

At Setnor Byer Insurance & Risk, we are committed to guiding you through the rapidly changing health care landscape. Be sure to check back with us periodically for future informational updates. In the meantime, if you have specific questions about health care reform or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.

Florida Supreme Court Provides another Reason to Consider the Financial Strength of Your Insurance Company

On numerous occasions, we have discussed the importance of obtaining insurance from a financially secure insurance company. Though there are already many reasons to avoid doing business with financially unstable insurance companies, the Florida Supreme Court recently provided another.

In Petty v. FIGA, the insured had to sue her insurance company to collect payment on a valid hurricane claim. During the lawsuit, the insurance company became insolvent, and the Florida Insurance Guaranty Association, or FIGA, became responsible for handling her claim pursuant to the Florida Insurance Guaranty Association Act.

The FIGA Act was enacted to protect claimants and policyholders from the financial loss and excessive delays that result when an insurance company becomes insolvent. Subject to the FIGA Act’s provisions and limitations, once an insurance company becomes insolvent, FIGA becomes obligated to the extent of an insured’s “covered claim.”

In this case, the Court had to determine whether the insured’s statutory claim for attorney’s fees qualifies as a covered claim that FIGA was obligated to pay. The insured’s claim for attorney’s fees was based on a provision of the Florida Insurance Code providing that an insured will be entitled to an attorney’s fee award when coverage is disputed by the insurance company and the insured ultimately prevails in court.

The purpose of this statute is to discourage insurance companies from contesting valid claims, and to reimburse insureds for their attorney’s fees when they must enforce their contract with their insurance company in court. Since the plaintiff successfully sued her insurance company to get her claim paid, she was entitled to her attorney’s fees under this statute.

However, once FIGA stepped in for the insolvent insurance company, the insured’s entitlement to her attorney’s fees was jeopardized. If her claim fails to qualify as a “covered claim” under the FIGA Act, then the insured will not be able to collect her attorney’s fees.

To determine the insured’s entitlement to her attorney’s fees, the Court focused on the meaning of “covered claim.” The FIGA Act defines a covered claim as “an unpaid claim…which arises out of, and is within the coverage, and not in excess of, the applicable limits of an insurance policy to which this part applies….”

From this definition, the Court concluded that a covered claim must possess two distinct characteristics: 1) it must arise, or originate, from an insurance policy; and 2) it must be within the coverage of, or be included within the risks taken on and losses protected against in, an insurance policy.

The parties conceded that the first characteristic existed since the insured’s claim clearly arose from her underlying insurance policy. However, to recover her attorney’s fees, the insured’s claim for fees must also be within the coverage of her underlying insurance policy.

Since the insured’s underlying insurance policy did not expressly give her the right to collect attorney’s fees through the relevant statute, the Court held that her claim for attorney’s fees was not a covered claim under the FIGA Act.

The Court rejected the insured’s argument that the statutory provision authorizing the award of attorney’s fees is implicitly covered by her insurance policy, noting that, “there is a clear difference between an obligation to pay fees that are imposed by operation of law upon a party due to its behavior under the insurance contract and an obligation imposed upon a party by an express provision for which the party contracted.”

Accordingly, the Court held that because the insured’s otherwise valid entitlement to attorney’s fees does not qualify as a “covered claim,” FIGA is not obligated to pay the insured’s attorney’s fees.

The insured in this case is one of the (too) many who have had the misfortune of suffering the consequences of doing business with financially weak or unstable insurance companies. Rather than consider the financial strength of a prospective insurance company, many insureds focus solely on the premium. However, when an insurance company becomes insolvent, the significance of premiums, deductibles, coverage limits, policy terms, and exclusions virtually vanish.

Suffering a loss is a headache enough, and electing to insure with a financially weak or unstable insurance company can only make matters worse. Though the cost of insurance is often the primary factor in selecting an insurance company, the financial strength of the insurance company should not be too far down on the list of things to consider.

If you would like more information about the financial strength of your current or prospective insurance company, or if you would like to explore the possibility of insuring with a financially secure insurer, please contact us.

The Continued Importance of an Insurer’s Financial Strength

If a coin comes up tails 100 times in a row, is it more likely that the next toss of that same coin will be heads? The answer is no. Since, as they say, “a coin has no memory,” the first 100 tosses do not change the fact that the probability on the 101st toss remains at fifty percent. Though significantly more complex, the insignificance of past events when calculating the probabilities of future events also applies to hurricanes.

In a previous article, we discussed the importance of purchasing insurance from a financially secure insurance company. At that time, the devastating hurricane seasons of the mid-2000’s were fresh in our collective memory, and many homeowners were in a rush to get “their house in order.”

Unfortunately, some homeowners did not properly value the financial strength of their insurance company before purchasing their policy. Rather than consider the financial strength of a prospective insurance company, many homeowners focused on the premium. As a result, many of those who suffered hurricane damage were unable to collect on their insurance policies because their insurance company became insolvent.

Unfortunately, the relative tranquility of the past few hurricane seasons has caused many to drop their guard, particularly in the context of purchasing homeowners’ insurance from financially strong companies. However, as mentioned above, the relative calm of the recent past does not guarantee the absence of hurricane risks in the future. Consequently, as with periods of heightened hurricane activity, insuring with financially strong insurance companies remains critically important.

Although there are no guarantees that a particular insurance company will remain solvent, it is commonly understood that financially strong insurance companies are more likely to meet their ongoing obligations to policyholders than financially weak ones. Unfortunately, for the average consumer, determining financial strength may be difficult. However, there are resources available to assist consumers with this task.

A.M. Best*reg;, a company that evaluates and rates the financial health of insurance companies, conducts independent evaluations to form an opinion regarding an insurance company’s financial strength. Based on an evaluation of an insurance company’s balance sheet, operating performance, and business profile, A.M. Best issues its “Financial Strength Ratings,” which have been recognized as a benchmark for assessing an insurance company’s financial strength. The Financial Strength Ratings assign letters to convey A.M. Best’s opinion for a particular insurance company—from Superior (A++) to In Liquidation (F).

While there are other rating agencies, consumers should understand that each agency may use their own standards, processes, and methods to rate insurance companies. So, it is important to understand that not all “A” ratings are necessarily equal. Consumers should investigate not only the methodology used by their rating agency of choice but also its reputation in the insurance and financial industries. As usual, the more information insurance consumers obtain at this stage of the purchasing process, the better off they will likely be.

Regardless of which system is used, it is important to note that a rating is not intended to be a guarantee of an insurance company’s financial strength. Nevertheless, the wisdom of considering a prospective insurance company’s financial strength should never be dismissed, and at least a cursory review of the insurer’s financial rating should be undertaken.

To understand the significance of an insurance company’s financial strength, one need only note the number of insurer insolvencies over the past few years despite the relative lack of hurricane claims. How would a homeowner have fared with such financially weak insurance companies if there had been a hurricane?

Conceptually, an insurance company’s ability to pay the claims of its policyholders is fundamental to the underlying purpose of insurance. The significance of premiums, deductibles, coverage limits, policy terms, and exclusions virtually vanish when the prospect of insurer insolvency surfaces. After all, what difference does the amount of the deductible make if there is no money to pay a claim?

If you would like more information about the opportunity to insure your home and other property with a financially secure insurance company, please contact us.

But I Don’t Even Live in California! The Case for Earthquake Insurance Coverage

On August 23, 2011, a 5.8 magnitude earthquake centered near Mineral, Virginia was felt from Alabama to Ontario. Many of those affected did not know that earthquakes could happen in places like New York City, Washington D.C., or Philadelphia. These people held the common, but mistaken belief that earthquakes generally occur only on the West coast of the United States, particularly in California. Unfortunately, the reality is that earthquakes pose a national threat.

According to the United States Geological Survey (USGS), the federal agency responsible for nationwide recording and reporting of earthquake activity, earthquakes pose a significant risk in 39 states. This risk affects more people than ever before because a majority of the population lives in seismically active urban areas, including New York City, Boston, St. Louis, Memphis, and Boise. Consequently, the number of people who face some risk of experiencing an earthquake is significantly higher than generally understood.

Those having the misfortune of experiencing an earthquake can expect property damage caused by ground vibration or shaking, landslides, and ground failure, as well as secondary disasters, like fires, dam failures, avalanches and tsunamis. Losses may be direct, such as damage to buildings, contents, machinery, and equipment, or indirect, such as business interruption losses, loss of property value, loss of rental income, and additional living expenses.

Unfortunately, as with most natural disasters, earthquakes vary in terms of severity, so the extent of any property damage is difficult to predict. However, as seen in Haiti, the damage caused by a powerful earthquake can be complete. And, as witnessed in Japan, devastating property damage can result despite the strictest of building codes and retrofitting requirements.

The inability to prevent property damage caused by a powerful earthquake means that rebuilding and replacing property is often the most effective way of dealing with earthquake-related damage. As a result, insurance coverage may be the best way to adequately deal with property losses caused by an earthquake.

Regardless of the importance of earthquake insurance, most standard residential property insurance policies do not cover damage or loss occasioned by an earthquake. Standard commercial/business insurance policies similarly exclude earthquake losses. Those seeking insurance to cover earthquake-related structural damage or losses of personal property must usually purchase it separately.

Earthquake coverage can be purchased as an endorsement to standard residential and commercial policies. Alternatively, earthquake coverage can be purchased as a separate policy. Regardless of the manner in which earthquake insurance obtained, an insured’s particular situation must be evaluated before deciding on specific coverages and limits. In addition to situation-specific considerations, an insured needs to understand various aspects of earthquake insurance policies which could affect or undermine the effectiveness of the policy.

The cost of an earthquake policy is dependent upon various factors, such as the age of the property, the type of construction, such as wood frame or brick, the existence of any earthquake resistant construction or retro-fitting features, the financial strength of the insurance company, and the deductible. Additionally, the location of the property in an area that is particularly prone to earthquakes will significantly increase the cost of the insurance coverage.

As with other types of insurance, earthquake insurance policies carry deductibles which must be paid by the insured before the insurance company is required to respond to a claim. Since earthquake insurance deductibles can range anywhere from 2 percent to 20 percent of the coverage limit, care must be taken to find the appropriate balance between reduced premiums and unaffordable deductibles. Any coinsurance provisions must also be examined to avoid the imposition of a penalty in the event of a claim.

Residential earthquake insurance policies can protect an insured’s dwelling, contents, garages, pools, fences, and various temporary/additional expenses. Additionally, an earthquake policy may cover any increased rebuilding costs necessitated by updated ordinances or laws which govern the manner in which construction must be undertaken.

On the commercial side, insureds can obtain earthquake insurance to cover various risks, including:

risks related to manufactured goods in transit or at permanent locations;
builder’s risks involving damages to property in the course of construction;
earthquake sprinkler leakage coverage;
mortgage insurance for default losses to protect against losses caused by defaulting borrowers who default on their mortgage obligations following property damage; and
consequential loss coverage, which includes coverage for business interruption, extra expense, additional living expenses, rent or rental value, and leasehold interests.

As this list indicates, purchasing earthquake insurance for a business can be significantly more complicated because it requires a comprehensive risk assessment of an insured’s operations to ensure that any possible gaps are covered. Additionally, the failure to consider coverages provided by other standard business insurance policies may result in unnecessary duplication of coverage.

For example, a standard commercial automobile policy would likely cover damage to a work vehicle that is caused by falling debris, even though an earthquake was the cause of the falling debris. Similarly, an employee injured while at work by a collapsing wall would be covered under the employer’s workers’ compensation insurance policy, even though the wall collapsed during an earthquake.

These examples illustrate the benefit of being familiar with the nature, scope, and applicability of various lines of insurance. To enjoy the benefits of such knowledge, insureds should seek the advice of a trusted insurance agent who has experience with the kinds of insurance being sought, and knowledge about the insured’s specific business and industry. In any event, given the seriousness of the risks posed by earthquakes, insureds must be thorough when evaluating and purchasing earthquake insurance.

According to the USGS, 2010 saw 21,545 earthquakes worldwide—8,493 of those were located in the United States. Unfortunately, earthquakes not only have the potential to be the most devastating of all natural disasters, but they are virtually impossible to predict. Cause for concern is only increased by the fact that most states face the risk of earthquakes, and that those at risk of experiencing an earthquake outnumber those who are not. For many, these facts were not fully understood until the Virginia quake in 2011 shook the ground in areas that some believed to be earthquake-free zones. Accordingly, when deciding the need for earthquake planning and preparation, more people are reciting the mantra that is often associated with natural disasters: It’s not if, but when.

If you would like to learn more about earthquake coverage, or if you have any questions regarding your insurance needs, please contact us.

To Tell the Truth: The Consequences of Lying on an Insurance Application

Completing an application for insurance can be time-consuming and tedious. Nevertheless, the application is important because an insurance company will use an applicant’s answers to determine whether to offer insurance and how much to charge. In making these determinations, insurance companies generally have the right to rely on an applicant’s answers without conducting their own investigation. However, insurance companies may be entitled to deny coverage to those who provide false or incorrect information on their application. Since a denial of coverage can be devastating for an insured, it is important to understand what is required of insureds when they are completing their insurance applications.

Pursuant to statute, information provided by an insured in an application for insurance is a representation rather than a warranty. For example, Florida’s statute states that, “any statement or description made by or on behalf of an insured…in an application for an insurance policy…, or in negotiations for a policy…, is a representation and is not a warranty.” Georgia’s statute similarly provides that “all statements and descriptions in any application for an insurance policy…shall be deemed to be representations and not warranties.”

Additional examples of similar statutes can be found in North Carolina’s Insurance Law (statements in application are not warranties) and Pennsylvania’s Insurance Company Law (statements in applications deemed representations, not warranties). Note that each state’s statutes should be reviewed for variations in wording, interpretation, and application.

The purpose of these provisions is to prevent an insurance company from claiming that any misstatement, regardless of significance, constitutes a breach of warranty that would entitle the insurance company to deny coverage. Rather, such statutes typically permit an insurance company to deny coverage only if the misrepresentation, omission, concealment of fact, or incorrect statement, is significant enough to warrant such a harsh result.

Consider Florida’s statute, which states that an insurance company can deny coverage under a policy only if:

the misrepresentation, omission, concealment, or statement is fraudulent or is material either to the acceptance of the risk or to the hazard assumed by the insurer; or
if the true facts had been known to the insurer pursuant to a policy requirement or other requirement, the insurer in good faith 1) would not have issued the policy or contract; 2) would not have issued it at the same premium rate; 3) would not have issued a policy or contract in as large an amount; or 4) would not have provided coverage with respect to the hazard resulting in the loss.

Judicial opinions interpreting this statute note that undisclosed information submitted in a policy application is generally material if the insurer would have altered the terms of the policy had the true facts been known, or if the true facts would have served as a basis for denying the policy application. If an insurer can establish materiality, then the insurance policy will be void ab initio, which means that the policy is rendered null and void from the date of inception as if the policy never had any legal validity. In such cases, there would be no coverage because the insurance company has an absolute defense to enforcement of the policy.

The manner in which an insurance company can establish the materiality of a misrepresentation, omission, concealment, or statement may vary depending on the particular facts. In one case involving the failure to list all residents in a home, a court referenced an insurance underwriter’s statement that “the unknown risk would have resulted in a higher premium.” In another case wherein the insured’s failure to disclose a prior bankruptcy was deemed material, underwriting standards were used to establish the insurance company’s policy of declining applicants who demonstrate a pattern of financial irresponsibility. Alternatively, a court ruled that since the matters relevant to the applicant’s omission were excluded under the policy anyway, the insurance company could not satisfy the materiality requirement. Given the flexibility of the statutory language, there are few hard and fast rules in this context.

It is important to note that under the Florida statute, an insurance company does not need to establish that the applicant’s misrepresentation, omission, concealment, or statement was done intentionally or even with knowledge of correctness or untruth. Rather, the insurance company need only establish materiality. This means that even those making innocent mistakes can be denied coverage under the statute.

If an insurance company is able to establish materiality, then the policy will be considered null and void regardless of whether the insurance company adhered to Florida’s claims administration statute or complied with Florida’s statutory notice of cancellation procedures. Additionally, since Florida law presumes that a person who signs a policy application does so with the intent to authenticate it, an applicant cannot argue that he or she did not read the application in its entirety before signing it.

Upon discovering that an application for insurance was incomplete or inaccurate, an insurance company will likely investigate the application’s deficiencies to determine whether they are sufficiently material to cancel the policy. This possibility of being denied insurance coverage should be incentive enough for insureds to take the time and make the effort to complete an application for insurance truthfully and accurately.

If you would like more information about applying for or obtaining insurance, or if you would like to discuss your specific insurance needs, please, contact us.

Clearing up the Confusion of Coinsurance:How to Avoid the Penalty

It is not uncommon for insureds, even sophisticated ones, to be confused about the precise meaning of the coinsurance clause found in their property insurance policies. In fact, many insureds fail to appreciate the effects of the coinsurance clause until they are endured after a loss. While experience may be the best teacher, it is rarely the cheapest, particularly when the lesson involves the coinsurance clause a/k/a the coinsurance penalty.

Simply stated, a coinsurance clause provides that the insurance company and the insured will each pay a percentage of a claim if the insured fails to insure the property for the limits required by the insurer within their coinsurance clause.

So, let’s consider a hypothetical situation involving two identical warehouses worth $100,000 at the time of the loss. Bill purchases a property insurance policy with coverage equal to the full value of the property ($100,000). Ted purchases an identical policy, but with a limit equal to half the value. A severe thunderstorm causes identical $30,000 losses to both properties. Will the insurance company pay Bill and Ted the same amount for their claims, even though Ted paid significantly less in premiums and insured only half of the value of the property? The answer is ‘no.’

A typical coinsurance clause will establish the minimum amount of insurance that is required to avoid a reduction in the amount the insurer will pay for a loss. This amount is generally expressed as a fixed percentage of the value of the property at the time of the loss, frequently between 80% and 100%. If the property is not insured for at least the required amount, then the insurance company may shift part of the responsibility for the loss to the insured.

A coinsurance clause will also explain how to determine whether a coinsurance penalty will apply, and, if so, how much it will be. This formula considers the amount of insurance actually carried by the insured and divides this amount by the amount of insurance that should have been carried. The resulting percentage is multiplied by the value of the loss.

To better understand the calculation, it is helpful to demonstrate the process by returning to the Bill and Ted hypothetical, only now, an 80% coinsurance requirement has been added.

Ted (Underinsured): Property Value at time of the Loss = $100,000; Limit of Insurance = $50,000; Coinsurance = 80%; Loss = $30,000; Deductible = $500.

Actual Property Value x Coinsurance % $100,000 x .80 = $80,000 2. Policy Limit / # from Step 1 $50,000 / $80,000 = .625 3. Loss x # from Step 2 $30,000 x .625 = $18,750 4. # from Step 3 minus deductible $18,750 – $500 = $18,250

In Ted’s case, the insurance company would pay the lesser of the amount determined in Step 4 ($18,250) or the limit of insurance ($50,000). So, the insurance company will pay Ted $18,250 and Ted will have to absorb a coinsurance “penalty” for the remaining amount ($11,750).

Bill (Insured to Value): Property Value at time of the Loss = $100,000; Limit of Insurance = $100,000; Coinsurance = 80%; Loss = $30,000; Deductible = $500.

Actual Property Value x Coinsurance % $100,000 x .80 = $80,000 2. Policy Limit / # from Step 1 $100,000 / $80,000 = 1.25 STOP! A coinsurance penalty does not apply when the result of step 2 is 1.00 or higher.

Since Bill is not subject to the coinsurance penalty, the insurance company would pay the full amount of the loss (up to the limit of insurance), minus the deductible. So, the insurance company will pay Bill $29,500 for his $30,000 loss.

These illustrations highlight two items worth noting. First, the actual impact of the coinsurance penalty, in terms of dollars paid on a partial claim, can be huge. If a policy’s coinsurance provision is ignored, the results can be devastating to a cash-strapped organization dealing with a partial loss, regardless of whether the coinsurance clause was ignored deliberately or negligently.

Second, Bill’s example highlights the middle ground between insuring to 100% of value and insuring to the minimum percentage required by a coinsurance clause, which is 80% in Bill’s case. Although Bill could have saved on premiums by only insuring the property for the required 80%, he would have been underinsured in the event of a total loss. Bill’s approach is the most risk averse, and the most expensive. Those insureds capable of withstanding a greater risk in the event of a total loss may find some wiggle room when determining the amount of insurance to purchase. Given the increased risk, it is best to go over this option only with an experienced insurance agent.

It is important to remember that the value of the property is established at the time of the loss. If property values increase, insureds must make sure their coverage limits are increased as necessary to maintain the appropriate level of insurance required by the coinsurance clause. Alternatively, there are options that do not require an insured to constantly increase limits to keep pace with increases in property values, such as negotiating an agreed value provision in a policy.

Although navigating the complexities of coinsurance is best done with the assistance of an experienced insurance agent, insureds can benefit from having a basic understanding of their own. For example, understanding coinsurance permits an insured to better judge the competency of a current or prospective insurance agent. An agent who is unable to correctly explain the concept, theoretically and practically, should be dismissed as an option because the consequences of getting coinsurance wrong are simply too great.

Second, understanding coinsurance can protect an insured from being taken advantage of by unscrupulous agents. Since coinsurance can significantly affect actual amounts paid by an insurance company in the event of a partial loss, changing limits and coinsurance percentages can dramatically affect the premium. By tweaking these figures, an agent can submit a proposal for insurance with significantly reduced premiums in order to win the business. Those who understand the concept of coinsurance can avoid falling for this tactic by identifying how the reduction in premium was achieved, and understanding that the true cost of the savings is the assumption of a potentially devastating risk.

Coinsurance involves far too many details, variations, and nuances to be fully discussed in a single article. As is often the case with insurance, just because an option is good for one does not necessarily mean that it will be good for another. An experienced insurance agent will not only help an insured avoid the potentially devastating pitfalls of coinsurance, but will also understand how to use coinsurance as a tool to obtain coverage that is economical and consistent with an insured’s specific risk tolerance.

If you would like more information about coinsurance, or if you would like us to take a look at your insurance coverage’s, please contact us.

But I Don’t Own My Home! The Case for Renter’s Insurance

Renters often believe they have little in common with those who own their homes. While there are some significant differences between renting and owning, the need for insurance is not one of them. Indeed, renters and homeowners have very similar insurance needs. Unfortunately, many renters incorrectly believe that the need to insure their home vanished along with their obligation to maintain the lawn.

Unlike homeowners, renters are typically not required to insure the physical structure of the rental property since landlord’s often assume this responsibility. However, renters have valuable personal property that remains unprotected because it is not covered by the landlord’s policy. Renters also face possible liability if someone is injured on the rented premises. Since these risks are as harmful to renters as they are to homeowners, renters should obtain adequate insurance to protect against potentially devastating losses.

A renter’s insurance policy, also known as an HO-4 policy, covers damage or loss to personal property caused by various perils, including:

Fire, lightning, and smoke;
Windstorm and hail;
Explosion and volcanic eruption;
Riot, civil commotion, vandalism, and malicious mischief;
Damages caused by aircraft and vehicles;
Theft;
Falling objects;
Weight of ice, snow, and sleet;
Accidental discharge or overflow of water or steam from within plumbing, heating, air conditioning, or automatic fire suppression systems, or from household appliances;
Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, an air conditioning system, or an automatic fire suppression system;
Freezing of plumbing, heating, air conditioning, or fire suppression system, or of a household appliance;
Sudden and accidental damage from artificially generated electrical current.

Note that floods, earthquakes, and hurricanes are not included in this list of covered perils. If a renter lives in an area that is exposed to one or more of these perils, additional coverage must be obtained so that any property loss caused by one or more of these events is covered.

A typical renter’s policy also provides personal liability protection against liability claims and lawsuits brought by others for accidental bodily injury or property damage suffered while such person is in the rented property. If, for example, a person is injured from a slip-and-fall while in the rented property, the policy will cover the cost of any judgment and expenses resulting from the claim, up to the policy’s coverage limits.

Since these coverages provide invaluable security for many of the risks associated with renting a home, the decision to obtain renter’s insurance should be an easy one. Nevertheless, there are many factors that must be considered when purchasing renter’s insurance, including:

Amount of Coverage. The amount of coverage needed depends on the value of the personal property that needs to be covered. The amount selected must be enough to cover the value of the property to be covered.
Deductible. Since a higher deductible will decrease the premium, many purchasers are tempted to select the highest deductible available. However, since choosing a very high deductible may undermine the very purpose of the policy, purchasers should set the deductible at a rate that works with their financial situation.
Actual Cash Value (ACV) vs. Replacement Cost. When purchasing a policy, an insured will be given the option of selecting ACV or Replacement Cost coverage. ACV will pay what the item was actually worth at the time of the loss, whereas Replacement Cost will pay what it actually costs to replace the item. To understand the significance of the difference, consider a situation involving the theft of a computer that was purchased for $3,000 two years ago. If Replacement Cost is selected, the insured will receive enough money to purchase a comparable replacement. However, if ACV is selected, the insured will receive the actual value of the two year old computer, which will likely be significantly less than the $3,000 originally paid. As a result, an insured selecting ACV will likely not be able to purchase a replacement computer of similar quality.
Dog Ownership. Owning a dog may result in a premium increase to account for the perceived increase in risk associated with dog ownership. In fact, some companies will not offer coverage at all if certain breeds are owned.
Protective Items. Certain items, such as smoke detectors, monitored burglar alarms, sprinkler systems, fire extinguishers, and deadbolt locks, may either prevent a loss from occurring or limit the extent of the loss suffered during an occurrence. The existence or availability of these items may influence the policy form selected and the cost of the insurance.
Valuables. Some policies either limit or exclude coverage for high-priced items, such as jewelry. Depending on the nature of the personal property owned, separate policies or coverages may be required.

These are just some of the factors that must to be considered when purchasing renter’s insurance. Unfortunately, the general lack of understanding about renter’s insurance makes it increasingly difficult for many consumers to successfully navigate all of the available options and relevant factors. An individualized assessment of risks and circumstances is necessary to ensure that appropriate coverages are put in place.

While knowing the right answers is important when shopping for insurance, the real value lies in knowing the right questions. Without knowing what to look for, consumers may end up paying for unnecessary coverages, or worse yet, overlooking coverages they do need. Thus, a trusted and qualified insurance agent can be a valuable asset when shopping for insurance.

If you would like more information about purchasing renter’s insurance, or if you would like a quote, please contact us. Click here to go

Maximizing Protection by Pairing Ordinance and Law Insurance with Business Interruption Coverage

Building ordinances and laws (building codes) are upgraded regularly to improve a structure’s resistance to windstorm, earthquake, fire, and collapse. Since some of these changes apply to new construction on a go-forward basis, it is not uncommon for older buildings to increasingly depart from current code requirements over time. Since it can be expensive to update an older building to comport with current building codes, building owners must have a plan to cover the cost. Even though ordinance and law insurance may contribute to the cost, the number of owners electing to forego such coverage is surprisingly high.

Ordinance and Law insurance is designed to pay for the extra expense of rebuilding to comply with ordinances or laws, such as building codes, which did not exist at the time the building was originally built. If an owner is required to rebuild pursuant to new codes, the cost is virtually certain to exceed the cost of merely restoring the building back to its pre-loss state.

Unfortunately, it is not uncommon for inexperienced building owners to first learn of this possible expense until after experiencing a property loss, since the loss is often the trigger for the property owner’s obligation to bring the property up to current code. For example, if an older building suffers severe structural damage from a fire, the property owner may be required to implement current building codes in the repair or reconstruction of the property. Since this can be a very expensive proposition, the value of obtaining ordinance and law coverage is obvious.

Although ordinance and law coverage is an important part of a building owner’s insurance program, it does not necessarily protect against all risks associated with bringing a building up to code. What about losses caused by delays in rebuilding the property caused by the need to comply with the current building code?

For example, consider a building damaged by fire. Restoring the building to its pre-fire condition without fixing any code violations would take one month, whereas correcting all of the code violations would extend the restoration by three months. The building owner would be out of business for an additional three months by virtue of complying with new building codes. Even in the best of circumstances, such a suspension of operations can cause severe financial hardship. However, there is a type of insurance coverage designed to protect building owners against such a loss—business interruption coverage, which can be obtained in conjunction with ordinance and law insurance.

Business interruption insurance generally covers reductions in net income and provides a business with the funds needed to pay normal operating expenses during periods of time when a business unable to continue its operations. Such coverage is often critical in the event of a lengthy property closure because expenses do not stop. Indeed, payroll, mortgage/rent payments, money owed to suppliers, taxes, and other continuing expenses must be met, and business interruption insurance may keep badly needed capital flowing when it is needed the most. However, if business interruption coverage is rejected, a property owner will be required to either fund the continued business operations or survive without the income those operations generate.

Although ordinance and law insurance provides valuable protection against potentially debilitating expenses, combining it with business interruption coverage fills a potentially significant gap in a building owner’s insurance portfolio. The combination of the two increases the likelihood of surviving not only the initial property loss, but the protracted suspension of operations resulting from the obligation to rebuild in accordance with current building codes.

While the decision to obtain ordinance and law insurance and business interruption coverage should be easy, understanding specific policy provisions and terms may be more difficult. Since there may be variations among different policy forms, it is important that you consult with an experienced insurance agent to discuss your options.

If you would like more information about ordinance and law insurance and business interruption coverage, please contact us.