Preparing for the Hurricane Season

As June approaches, newspapers and magazines will run supplements on preparing your property against the threat of hurricanes. Owners of homes and businesses with insurance policies resting in their files, will sit back, secure in the knowledge that, if the worst happens, they will be remunerated for their losses. This article however is aimed at encouraging you to check your covers and to carry out suitable maintenance on your insurances, in much the same way as you would secure loose roof tiles or fix a broken shutter. It may also serve to remind readers who have procrastinated over purchasing cover or, who have allowed their policies to expire to review their exposure while there is still time.

Remember that Insurance Companies normally suspend offering property insurance when a hurricane enters our vicinity.

Hurricane Insurance- is it worth the cost?
We have all experienced the substantial increase in insurance rates over the last two years and some policyholders may have opted to allow their insurances to expire, while others may have accepted policies without hurricane cover or with increased hurricane deductibles. Insurance policies can be endorsed mid term, and this is the time that you should make a decision as to whether you continue to carry this exposure yourself, or dig deep into your pockets to extend your cover. Regrettably, insurance premiums have not reduced over the last 12 months, and the rates charged locally for this cover are basically the same as they were this time last year. Your charge should be pro-rated to the expiry date of your policy, so you will not be forced to find the premium for a full 12 month period, unless of course your policy is due now.

A word of caution here; some people are tempted to restrict their Hurricane Insurance cover to the period of the hurricane season only. The rate charged for Hurricane cover is based on your paying the premium for a 12 month period. Insurers will normally permit you to extend your policy mid term, but they will not accept a strategy of selecting against insurers by adding and chopping covers for short periods in order to save on premiums.

If you believe that the cost of insuring with a standard 2% deductible is too high, you might consider increasing your hurricane deductible for a discounted rate. There is a specific scale of discounts available on island for accepting higher catastrophe deductibles.

Having obtained a cost from your insurance agent, you must then make a decision as to whether the cover is worthwhile, or affordable, but my suggestion is – if you do not have Hurricane cover in place at this time, - get a quotation.

Check your Sums Insured
Hurricanes unleash destructive forces that are capable of causing a great deal of damage to structures and their contents. Even a near miss from a hurricane can be accompanied by strong winds, flooding and sometimes tornados. Now is the time for you to check the adequacy of your sums insured. If you are under insured, your policy imposes a penalty requiring you to be responsible for a ratable proportion of your loss i.e. - if you are 40% under insured, you may only be paid for 60% of your actual damage. Most modern homeowners policies are issued on a ‘Reinstatement’ or ‘New for Old’ basis. This method of settlement is desirable, but it also places you under an obligation to set your sum insured at a sufficient level to cover the rebuilding cost of your structure and everything in it, with no adjustment for wear and tear. The rebuilding cost should include a provision for demolition and removal of debris of your existing structure, and for architects and surveyors fees for the new building.

If you have a commercial policy, you should check to see whether it will pay out on a new for old or indemnity (market value) basis, and establish your sums insured accordingly; alternatively, you can ask you agent to state the basis of settlement to fit your individual requirements. It’s important that you establish how you will be paid in the event of a loss.

When you are considering the sum to be insured under your policy, bear in mind that builders and repairers on island will be severely stretched following a Hurricane, and you will hardly be in a position to negotiate cut rate terms for your building works- so be conservative and realistic in stating your values.

If you want to economize on cost, consider a higher deductible, but do not attempt to save on premium by intentionally under-insuring your property.

Re-Format your existing Policy Schedule.

Here is a strategy for mitigating your hurricane deductible that should cost you nothing apart from a small service charge which may be levied by your agent.

Your hurricane deductible is intended to apply individually to each item insured on your Policy Schedule. If there is only one item, a percentage of that sum insured is accepted to your own account before you are able to claim.

If there are several buildings insured under your policy, or, if you are insuring several locations under a commercial policy, you will mitigate the application of your Hurricane Deductible by stating separate sums insured on your policy schedule for each building and its contents. By doing this, each item will be assessed individually following a claim and you will not be presented with one large percentage deductible applying to the total sum insured.

So, check your policy if you are covering more than one building and discuss the advantage of restating your schedule with your agent.

Consider your position after the Hurricane
If you are a homeowner and your home is severely damaged, you will require temporary accommodation while your home is being repaired. Most homeowners policies cover an amount for temporary accommodation, but check your policy to be sure it’s covered and that the payout is adequate for your purposes.

If you rent out your home, it may be untenable for a period and you could lose the rental. Most homeowner policies cover rent collectable, but check to be sure, and if the amount covered is inadequate, make a provision within your schedule increase the cover.

If you are the owner of a restaurant or some other type of business that could be adversely affected by hurricane damage at your premises, this is the time to start thinking seriously about Business Interruption Insurance. The settlement paid out by Insurers for rebuilding, or replacing your damaged contents will provide no income for covering your mortgage, paying off your staff or providing you with an income. Some businesses are able to recover quickly and can trade from temporary premises, while others may be affected for extended periods. The premium you will pay for this cover is primarily dependent on the period of interruption you choose to be covered for, and of course the Sum Insured, which represents the Gross Profit of your company with or without a provision for your wage roll. I cannot overstate the importance of considering this cover, particularly at this time of the year. It’s not cheap, and you should feel confident that your agent has a thorough grasp of the subject and is capable of explaining to you how a claim would be settled in the event that your trade is affected.

These are some suggestions for your pre-hurricane season policy maintenance plan. Even a few minutes spent now to consider your current exposure, and to prepare for the possibility of a claim, could place you in a more secure position if, or rather when that eventuality occurs.

Tony Lancaster A.C.I.I.

31 July 2008