Storm Preparation and Understanding Your CoverageJune 01, 2017
Savannah has been very fortunate to avoid the direct impact of several major storms, but this past fall, Hurricane Matthew made it abundantly clear that we are in fact quite vulnerable to Mother Nature’s wrath. After reflecting on the events, damages and recovery, the following items may be helpful in improving your businesses’ ability to manage the next storm:
It is common to generalize the damage around a major weather event like Hurricane Mathew as “hurricane damage.” While in effect, several perils or causes of loss can occur simultaneously and each should be addressed independently. Wind, flood, storm surge and water damages are more obvious sources of direct damage but indirect losses like evacuation, extra expenses, loss of business income and power outages can also create major disruption. Correctly identifying potential perils is the first step in developing a plan to stay safe, operational and profitable.
What is your Deductible?
Deductibles are designed to allow insureds to self-insure claims, reduce the frequency of claims submitted, and mitigate the risk of a catastrophic event in especially hazardous scenarios. All parties maneuver to create deductible options that suit their risk appetites and the collateral result is a large number of deductible options that few consumers truly understand. Considering the following may help clarify what insureds will be expected to contribute:
- Special deductibles (flat or percentage) can apply to specific perils: named storms, wind, earthquake and flood are common
- Percentage deductibles are applied against your policy limits – not the amount of your claim
- Are your percentage deductibles applied per building or to the total insurable value?
- Are funds designated or is financing available for your out-of-pocket expenses?
Limits and Coinsurance
Once perils are identified and a plan is in place, many people turn to risk financing or insurance to manage large portions of potential losses. In order to recover completely, the limits selected should be consistent with the actual cost to rebuild. When dealing with property insurance two factors are common causes of confusion.
Replacement Cost Valuation is the cost of replacing damaged property with similar materials and quality. However, it is common for property limits to be miscalculated as lower market values or reduced mortgage principal amounts. It is important to be proactive with appraisals and estimations to find and maintain correct limits.
In order to ensure that sufficient property limits are purchased, policies often include coinsurance clauses. Coinsurance clauses require properties to be insured within a percentage of the replacement cost and penalizes the property owner at the time of a claim if the requirement is not met. The penalty reduces the claim settlement by the same percentage that the building was underinsured.
Our lives, businesses and the surrounding environment are constantly changing. It is important to stay diligent when reviewing and improving your own risk management programs.
Thomas Odom is a client advisor in Sterling Seacrest Partner’s property-casualty insurance practice. Thomas has more than seven years of experience administering property-casualty insurance programs for middle market and large corporate accounts. He can be reached at 912.544.1928 or firstname.lastname@example.org.