| June 7, 2016
Hatteras Island Real Estate:
Are your insurance coverages adequate
By TOM HRANICKA
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
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
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
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
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
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
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
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
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!
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.)