June 7, 2016

Hatteras Island Real Estate:
Are your insurance coverages adequate


Since the 2016 tropical cyclone season started June 1, the word “hurricane” seems to work its way into conversations and press reports on a regular basis.  As the storms approach the U.S. mainland, residents and property owners can be expected to start scurrying to find their insurance policies to confirm their protection coverages.  After the weather clears, the focal point of attention turns toward policy claims. 

With graphic images still in our minds of the devastation of coastal areas in Louisiana and New Jersey after past storms, this is an opportune time to review some of the issues associated with insurance protection of our properties .

Researchers at the National Oceanic and Atmospheric Administration (NOAA) are suggesting that we may be in a multi-decade period of above-normal hurricane activity.  Even if we don’t have an especially active hurricane or nor’easter season in any given year, just one severe storm can have serious consequences.

Because of material and gasoline shortages associated with the hurricanes, construction and repair costs for homes can be expected to increase after the storms.  These expenses are often higher than the costs when most homes were originally built, and some homeowners could find themselves underinsured in the event of a loss.
As you evaluate your insurance policies, focus on two aspects of your protection – the amount of coverage that you have and the types of risks for which you are insured.  Your insurance agent will have a relatively easy process for helping you calculate the value of your cottage.  Your real estate agent and builder can also be valuable resources. 

Once you are comfortable that you know what your property is worth, your attention can turn to the types of insurance coverages that a cottage owner should consider purchasing.  Insurance coverages fall into four general categories: property, flood, liability and crime.  All of the coverages are available through private insurance carriers, a state-mandated pool of insurance companies (the Beach Plan), the National Flood Insurance Program or a combination of these.

Protection against loss or damage to our homes is the type of coverage that most of us have in mind when we think about property insurance.  These policies normally cover such risks as fire, lightning, wind, hail, smoke and vandalism.  Before you rush out to secure a new policy for your beach cottage, be sure to check with the company that insures your primary home.  In some cases it may be possible to have your beach cottage insured by the same company that provides your homeowners policy.  If available, this is usually your least expensive insurance option because your current company may be able to offer various types of credits.

It is very important that you understand what kind of property coverage policy you  have. There are two basic types. One is called a homeowner's policy. This is known as an open peril policy. It covers anything that is not specifically excluded. Be aware that wind damage is usually excluded for coastal properties. The other type of policy is a named peril or dwelling fire policy. It covers only what is specificially stated as a covered peril, such as damage from fire. Some folks who have dwelling fire policies think that they have broader coverage and do not realize what limited protection they actually have. Your insurance agent can help you to understand the scope of your policy coverage.

The unfortunate reality is that most private insurance companies do not write property insurance policies for homes east of Interstate 95. Despite statistics to the contrary, the companies maintain that the risk is too high for them to insure properties in coastal areas.

To address this situation, the state of North Carolina created a pool of isurance companies to provide insurance protection in areas that private carriers would not write individual policies. The state insurance pool goes by the nickname of the Beach Plan although they now want to be called the Coastal Property Insurance Pool. Its official name is the North Carolina Joint Underwiting Association.This organization primarily provides wind and hail insurance coverages.

Flood insurance always requires a separate policy beyond your basic dwelling coverage.  Flood insurance is available through the National Flood Insurance Program (NFIP) or through private carriers known as Write Your Own (WYO) companies.  There are also companies referred to as special markets that will provide insurance for homes located in areas that are not eligible for NFIP coverage.

There are some private insurance companies that are starting to enter the flood insurance market – but, watch out! If you currently have a grandfathered policy in a more favorable flood zone under the NFIP program and you switch to a private insurer but later decide to return to the NFIP market, you will no longer be eligible for grandfathering. In addition, the NFIP policy is renewable as long as you pay your premiums, but there is no assurance that private companies will stay in this market or that they will guarantee the renewal of your policy.

There are several points about flood insurance that all of us need to keep in mind.  First, if a severe storm is projected to hit in a few days, and you do not already have flood insurance, it may be too late to acquire coverage. As a matter of fact, once a named hurricane enters a designated area of the Atlantic Ocean or the Gulf of Mexico, no new or increased insurance coverage of any type can be bound by insurance agents, and no applications for new or increased coverage will be accepted.

Second, several years ago a change in flood insurance provisions limited coverage for decks, porches, walkways and swimming pools outside the perimeter of the building.  In other words, even if you have a flood insurance policy, you will now be responsible for the cost of rebuilding your decks, porches and walkways, as well as swimming pools.

There are some subtle nuances in flood insurance policies that can have important consequences, and the rules of the game can be different, depending on whether the property is a primary residence or a second home.  For example, flood insurance policies provide “actual cash value” vs. “replacement cost value” coverage for second/vacation homes. This means that the claim payment would be based on the depreciated value of the home vs. what it would cost to rebuild the home. Given that the maximum amount of coverage for policies written through the National Flood Insurance Program is $250,000, there is the potential for a substantial gap to exist between the loss incurred and the amount of the claim payment. Furthermore, be sure to check that you have flood insurance coverage for the contents of your home.

Take your flood insurance needs seriously.  Statistics show that there is a 26 percent chance of experiencing a flood during the period of a 30-year mortgage compared to a 9 percent chance of fire! There is nothing more painful for an insurance representative than to receive a call from a policyholder who thought damage from flooding was covered under their dwelling policy.

Here are three internet sites that you may find useful in understanding your flood risks.  To see the specific flood zone(s) within which your property falls, go to www.darenc.com, and click on GIS at the top of the page.  Enter your street address in the box on the left side of the page, and your property will be displayed; then, select the Flood overlay in the drop down box at the bottom of the page.  Another source for flood zone information is www.ncfloodmaps.com.  For a general overview of flood associated issues and flood insurance, www.floodsmart.com  is a good starting point.

When conversation turns to liability insurance, the topics are sources of coverage and supplemental or secondary layers of coverage.  In some instances, the liability insurance provided through your homeowner’s policy can be extended to include coverage for your beach cottage.  In other situations, you may have to purchase a separate liability policy.  For example, policies issued through the Beach Plan do not contain any liability protection.  Owner Landlord Tenant (OLT) policies or commercial liability policies will usually fill the gap.

There are also some special circumstances that may generate a liability insurance need.  For example, the proliferation of private swimming pools creates a large exposure for loss.  Moreover, if you as a cottage owner are legally liable for a rental tenant who is injured and if the tenant files a lawsuit, chances are good that the company managing the property for you will also be included in the legal action.  The property management agreements of some companies may require that the owner provide liability coverage that extends to the rental agent.  A commercial liability policy or a modification to the OLT policy will meet this need. The cost for an extra million dollars of coverage is currently in the range of $350 per year.

Finally, you may want to consider whether or not you need a crime insurance policy.  Crime policies are relatively inexpensive and provide coverage for losses such as the burglary of portable appliances  -- TVs, VCRs, microwaves, etc. -- damage from break-ins, and damage caused by burglars while inside the premises. Crime/theft and vandalism are usually covered in a homeowner's policy. You may only need a crime insurance policy if the policy that you currently have does not cover theft.

To summarize our survey of insurance, let's review some questions that each of us should ask ourselves at least once a year or anytime that we purchase a new property -- and certainly before we find ourselves faced with a severe storm.  The secret to successfully answering each of these questions is to develop a mindset that answers the core question, "If my cottage is completely destroyed today, where will I find the money to rebuild?" 

The most common answer, of course, is from insurance.  However, to make insurance a viable source, you must have adequate coverage.  The payments for some policies are based on actual cash value, i.e. the value of the property less a factor for depreciation.  Other policies provide replacement cost coverage, i.e. a payment based on what it would cost to rebuild the home without a deduction for depreciation. Your insurance agent should be the primary point of contact to assure that your policies are sufficient to cover potential losses.

The surge in demand following a catastrophe can drive the cost of materials and labor up by 25 to 35 percent.  When possible, be sure that you have enough coverage to rebuild.  Don’t underinsure your property, hoping that your insurance policy will somehow compensate you for the full extent of your loss.

Are you in a position to substantiate your claim of loss?  Under your insurance policy, you will have the responsibility to demonstrate that a loss actually occurred.  It is wise to prepare an inventory of your property -- as well as taking a video or photos of the house and its contents.  Inventory booklets are available from most insurance agents.

Do you have a plan to protect your property after the storm passes?  Insurance policies require property owners to take action to prevent further damage to the premises.  Do you have such things as pre-cut plywood, extra roof shingles and a large tarpaulin, and, do you have an arrangement with your property management company or someone else to secure your home if you are not able to personally travel to the island?

Insurance is in many ways like taxes.  It is unfamiliar territory for most of us, and in one way or another, insurance is a cost that, as homeowners, we generally can't avoid!  At the same time by doing a little homework on your own and working with an agent who is knowledgeable, offers good service and has an excellent reputation, you can go to sleep each night knowing that you have effectively planned for any situation that may arise.  Read your insurance policies, stay in touch with your agent, and ask questions before a claim arises.

Storms like Hurricane Katrina along the Gulf coast and Hurricane Sandy along the New Jersey shore make reviewing our insurance protection a priority for all of us.  I encourage you to take action today to prevent unanticipated surprises in the future!

(Tom Hranicka is a broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Hranicka at P.O. Box 280, Avon, NC  27915 or emailed to [email protected]. Copyright 2016 Tom & Louise Hranicka.  All rights reserved.)

comments powered by Disqus