I fear that consumers of property insurance believe all coverage is the same, which is why there is such a focus on the cost of premiums. The focus on cost seems to drive decision-making when considering an insurance company. I recently heard someone say the reason coverage is not thoughtfully considered is because “the state regulates insurance policies”. That’s only partially true when it comes to the scope of coverage. This article is to help consumers make wise choices when considering property insurance.
State Law Is Greater for Insurance Claims Then Coverage
The first principle to understand is that state law is most interested in regulating fire claims, not wind, hail, or water claims. Most insurers offer property owners all-peril policies that include fire claims. State law regulating fire claims thus applies to other perils, but that is only a function of how an insurer chooses to write its policy. Insurance companies can, and do, create carve-outs for other perils, especially water.
State law does regulate the claims process, but the claims process is not the same thing as coverage. State law offers significant protection for the claims process, including the insurer adjusting (and not ignoring) the claim, the property owner providing a proof of loss, and sitting for an examination under oath. Foremost is the right to resolve scope of loss disputes out-of-court. Yet this is all about the claims process. Actual coverage, meaning the scope of property insured for a given event, is less regulated.
A sophisticated consumer of property insurance will not rely on state law to understand the full scope of coverage. There is very little state law to guarantee the amount of coverage for wind, hail, and water losses. That is why the exclusions for coverage found in the policy are so important.
Building Code and Total Loss Coverage Is Mandated by the State
There is a state law that requires an insurer to cover the cost of items not directly impacted by water, hail, wind, and fire, but which must be replaced due to building codes. Some think of this as mandatory “upgrades”, which is an unfortunate word choice. The scope of this state law is often hotly debated. The line between undamaged items that an insurer must replace and undamaged items far enough from damaged property to be the property owner’s expense is difficult to define.
State law does require full coverage of catastrophic events through total loss or constructive total loss coverage. Yet most insurance claims arising from wind or hail are partial loss claims because a) the above-ground structure has not been annihilated and b) the cost of repair does not exceed the original value of the entire structure. Those are not losses that trigger automatic payment of policy premiums.
Because these state laws do not drive most insurance claims it is unwise for property owners to rely on them when choosing an insurance company. Rely on the four corners of the insurance policy when considering what is covered, not what state law requires be covered.
Working with an Agent or Broker
I recommend property owners think through the coverage they want, and then e-mail their broker/agent and specifically state what they want. If the broker/agent is going to give you advice, be sure that advice is in writing. The law does not assume a broker must be thorough in rendering advice as the law assumes a licensed accountant or doctor must be thorough. Be very clear about the coverage you want and then put that request in writing. If the request is verbal, it is extremely difficult to prove what was requested months or years later when a property owner discovers he, she or it is under insured. Let e-mail be your friend. E-mail with the broker and then archive the e-mails.
Also, I recommend asking for a sample policy when applying for coverage. The best way to understand what is covered is the policy terms themselves, not summaries of what will be covered.
Send me an e-mail if you have any questions.