Oftentimes the first people we turn to for advice are our neighbors.  While it may be comforting to gather the opinions of our neighbors about earthquake insurance, we must remember the decision to purchase earthquake insurance is a personal decision.  Unlike homeowners, flood or automobile insurance, there are no requirements to purchase earthquake insurance to satisfy a particular legal obligation.  Ultimately, the decision should be based upon the individual characteristics of your unique situation.

Like most financial decisions, we recommend a formal framework be followed to help you decide whether or not to purchase earthquake insurance.  Individuals who purchase earthquake insurance should share one or more of the following characteristics:

1. The physical characteristics of the home warrant coverage.
2. Liquidity is an issue.
3. The cost is attractive relative to the ultimate payout.

Physical Characteristics Warrant Coverage:

• The location of the house is within a few miles of a fault-rupture zone or on poor soil. 
• The home was built prior to 1945 (this would be prior to the enactment of the first California Seismic Building Code. Subsequent codes have been updated in 1973, 1991 and 1994.)
• The home is more than two stories. (One story homes perform the best in an earthquake, while homes with more stories have less favorable outcomes with each story added.)

Liquidity is an Issue:

• Individuals should consider earthquake insurance if their financial liquidity is not such where they could self-insure an earthquake loss.  Similarly, individuals who have heavily concentrated stock positions may wish to purchase Earthquake coverage until their assets are more liquid.  

The Price is Right:

• Does $3,500 – $5,600 sound like a fair price to pay to receive a check for the replacement value of your Dwelling in the event your residence is destroyed in an earthquake?  Some clients justify the expense by considering the capital appreciation of their home’s value each year, and by noting the appreciation each year pays for a cash-out earthquake policy (no requirement to rebuild).  While this is the least scientific component of our recommended framework, this component generally resonates best with our clients.  Put simply, if the cost of insurance is one that can be absorbed comfortably, and the coverage enables you and your family to rest easier at night, buy it.

What is a Course of Construction or Course of Renovation?
By definition, a course of construction is a home building project which begins with the frame of a house, whereas a course of renovation project occurs when a home renovation or update project budget exceeds ten percent of the property’s dwelling replacement cost.  Both types of projects create a high degree of risk for insurance companies which may translate into large surcharges to policies.  It is not uncommon for clients to shy away from disclosing their renovation or construction project to their insurance agent or carrier in order to avoid a large surcharge.  However, failure to notify the insurance carrier about a project may result in large gaps in a homeowner’s coverage.

Understanding Replacement Cost Versus the Project Cost:
When beginning a construction or renovation project, it is important to understand the difference between the project’s budget versus the replacement value of the project.  As many insurance carriers list the anticipated finished replacement cost of the dwelling on the policy, understanding the project’s full replacement cost will help you understand the insurance process.  Many times, homeowners overlook associated building costs such as the property’s foundation, fees associated with the project (building permit fees, design fees, phone lines, electricity, etc.) and the replacement cost of offsite materials.

Potential Coverage Gaps:
As some carriers insure the project for the anticipated replacement cost of the property at the end of the project, and others may stair-step the dwelling coverage based on the current replacement cost of the project, it is important to ask your agent which method of valuation is used by your carrier.  Stair-stepping the coverage may present a potential gap in coverage if all of the necessary information is not conveyed to the agent or carrier.  Most insurance companies will inspect a project every three to six months, and if the project progresses more quickly than anticipated and the client has not conveyed this to their agent, their current dwelling coverage may not be sufficient in the event of a total or large loss.

Most California Homeowners policies insured through Fort Point provide extended replacement cost coverage.  However, the Homeowners contract is amended for course of construction or renovation projects to “conditional replacement cost.” This means the project must be insured for at least eighty percent of the actual replacement cost at the time of the loss otherwise coverage may be denied.  To avoid this potential gap, it is important to be in constant communication with the agent or appraiser of the insurance company to ensure all necessary information has been conveyed to the insurance carrier.

Security Measurements:
Another important consideration for construction or renovation projects is the security measures the insurance carrier may require on the premises.  The extent of the safety precautions typically depend on the anticipated replacement cost of the property at the completion of the project.  Most often fire extinguishers will need to be present at every 1,000 square feet throughout the property.  Centrally Monitored Burglar and Fire Alarms will also be required at the unoccupied residence for the duration of the project.  Other safety measurements which may be required include motion censored lighting, perimeter fencing and temperature alarms.  The company appraiser will convey these expectations to you and your contractor.

Other Areas of Concern:
In addition to potential gaps and necessary security measures, there are several other areas where homeowners may become compromised during construction or renovation projects if they are not cautious:

• Waiver of Subrogation: It’s important to confirm a waiver of subrogation is not included in your contract with the general contractor.  This is critical as the waiver of subrogation would waive your insurance carrier’s right to pursue subrogation, or recoup damages, if a loss occurs due to the contractor’s malpractice or negligence.
• Unlicensed Contractors: It is more common for small home renovation projects to encounter unlicensed contractors, whereas most large projects tend to be conducted by licensed contractors.  However, ensuring your contractor is licensed will minimize your exposure to fraud.
• Workers Compensation: It is important to make sure the contractor has general liability insurance as well as workers compensation insurance.  If a worker is injured on the job and the contractor does not carry insurance, you may be held responsible for the injured worker’s medical bills.

Why is Course of Construction Insurance So Expensive?
The insurance industry’s highest loss exposure results from construction projects.  While under construction, homes may spontaneously combust if oily rags or like materials, are left on site and in a warm environment.  For example, a Chubb appraiser recalled a construction project built on a bluff in San Diego overlooking the ocean.  The workers had gone home for the day, but had accidentally left an oily rag in a bucket in the residence.  The heat and chemicals combined and spontaneous combusted, resulting in a total loss of the property.  Other common losses result from vandalism or arson committed while the property is unoccupied, unguarded, or unlocked.  As such, a hefty construction surcharge in addition to a vacancy surcharge may be applied to the policy to compensate for the increased risk exposure for the property.  Fortunately, the surcharges will be removed once the project is complete and the homeowner occupies the residence.

Helpful Tips:
The process of insuring your construction or renovation project may seem daunting; however, the key to successfully insuring a project is having a clear understanding between the budget for the project versus the actual replacement value of the project.  Moreover, most seamless projects occur when the homeowner and contractor address all of the safety requirements at the beginning of the project.  Finally, maintaining clear and timely communication with the agent and appraiser also alleviates any potential areas for exposure.  

Source: Interview with Susan Wierderin, Senior Chubb Appraiser, April 20, 2011.

The survey identified three main areas where wealthy consumers could easily save money, but are often unaware of these opportunities:

Deductible:
Many consumers choose a small deductible, but seldom turn in a claim when a loss occurs out of fear their rates will increase.  Moreover, many affluent consumers tend to pay for their repairs out of pocket as the cost is relatively affordable.  Given this, consumers should consider how much they are willing to pay out of pocket, and then choose a deductible commensurate to this amount.  Often times, the savings to increase a Homeowners deductible from $2,500 to $10,000 is $600 or more per year (a savings of $6,000 over ten years).

Package Discounts:
Affluent consumers can maximize the benefits of package discounts by choosing a carrier which can cater to a wide range of insurance needs, and a carrier capable of applying these credits to each policy.  Most importantly, consumers who do not combine their insurance under one carrier risk potential gaps in coverage and diminished package discounts.

Loss Prevention Credits:
Wealthy consumers may also miss out on specialized credits if they choose to insure with a mass market carrier.  Many carriers who focus on high net worth personal insurance have developed credits specific to their clients’ needs.  For example many homeowners with multi-million dollar homes typically have centrally monitored burglar and fire alarms.  In addition, electrical back up and lighting protection credits are available and encouraged for secondary residences.  Temperature monitoring and water leak detection are also useful devices for clients with multiple homes or clients who may travel frequently for business.

A second shocking conclusion drawn from ACE’s survey reveals clients are paying high premiums for insurance which does not meet the needs of a growing portfolio of assets.  More specifically, consumers have exposures in their Liability, Dwelling, and Valuable Articles coverage.

Personal and Excess Liability:
Most Homeowners policies cap personal liability coverage at $300,000 or $500,000.  These limits may be insufficient in the event of a law suit.  Affluent consumers’ wealth often represents the proverbial ‘deep pockets’ lawyers are trained to pursue.  For those who already have an Umbrella policy in place, agents noted several deficiencies including an inadequate amount of coverage, a gap between the attachment point from the primary homeowners or automobile policies and the umbrella, or a failure to include company cars on the Umbrella policy.

Other areas where affluent consumers may be unaware of their liability exposure include Employment Practices Liability coverage for their domestic staff.  Homeowners Liability coverage would not apply to law suits arising from wrongful employment practices including discrimination, sexual harassment, wrongful termination and other similar claims.  Instead, the homeowner/employer must purchase Employment Practices Liability Insurance (EPLI) which is available by endorsement to the Homeowners policy, or can be purchased as a separate policy.  Not-For-Profit Directors and Officers Liability insurance is another area of liability which is frequently overlooked by consumers and mass-market insurance carriers.  This insurance would protect affluent customers from some of the more common types of law suits brought against the board or organization. 

Insufficient Dwelling Coverage:
Standard industry tools used by mass-market insurers to estimate the rebuilding cost of properties often overlook unique building materials, superior craftsmanship, and unique architectural features in luxury, custom built, or historic homes.  Further, affluent consumers are likely to have furnished basements, or have expanded their homes- often times forgetting to tell their insurance agent.  Insurers specializing in high value homes provide extended replacement coverage which promises to rebuild the property with ‘like kind and quality materials’ even if the cost is more than the Dwelling limit on the insurance declarations page.

Valuable Articles Coverage- Hidden Savings:
Often times, wealthy consumers may assume their valuables- fine art, jewelry, wine, silverware, etc.- are covered under the personal property coverage limits of the Homeowners policy.  However, these items are subject to the Homeowners policy deductible, and are sometimes limited to a specific amount of coverage.  To ensure valuable items are properly insured, it is recommended these items be insured under a separate Valuables Articles policy (typically with no deductible).  Insuring valuables under a different policy may also reduce the amount of personal property insurance needed and provide package discounts.

ACE’s survey results identify several areas where affluent consumers are misguided or may simply be unaware of premium saving opportunities.  The survey also revealed many consumers have also outgrown their current coverage, or are lacking coverage enhancements specifically designed to protect wealthy clients.  Fort Point strives to present these areas of vulnerability to our clients and tailor an insurance program to both save premium and broaden coverage:

“It’s not rocket science; it’s just good common sense and a proper allocation of resources.  Our typical client carries a $10Million personal umbrella, and the increased home deductible change paid for that increase.  I am constantly stunned that more agents don’t advise their clients accordingly.” (Daniel Glunt, Principal and CEO).

Source: ACE Private Risk Services, Insurance Intelligence White Paper. “Wealth At Risk: How Affluent Consumers Over-Pay to be Under-Insured.” June 2010.

Most Personal Umbrella policies extend liability protection for board liability (as a volunteer, officer, board member and/or advisor) in four specific areas:

1. Personal injury:  Includes mental anguish, false arrest, wrongful entry/eviction, malicious prosecution, libel, slander, defamation of character, invasion of privacy or negligent infliction of emotional distress (some policies may offer restricted coverage)
2. Bodily injury:  Includes physical injury or death (in some jurisdictions, this includes emotional injury)
3. Property damage:  Includes destruction of the property of others, cost of recreation, and loss of use
4. Defense coverage:  Includes groundless, false, and fraudulent suits, loss of earnings, bail bond costs and other reasonable expenses

Although, most Umbrella policies extend the above referenced protection, you should always verify liability protection for your non-profit work with your insurance agent. 

While working for a non-profit organization, there are a few instances where your Personal Umbrella policy would not extend coverage.  These include wrongful termination of non-profit organization employees, allegations of financial mismanagement, and sexual harassment and/or sexual abuse.  To ensure adequate protection, we recommend asking your non-profit organization for a copy of the Employment Practices Liability and the Directors & Officers (D&O) insurance policy declarations.  We also recommend consulting with your insurance agent to ensure coverage is not only present, but adequate, for these instances not covered by your Personal Umbrella policy.  The best defense to a costly settlement or law suit is to make sure your Nonprofit organization is properly protected.

Some specialty personal insurance carriers have a Non-Profit Directors and Officers Insurance (D&O) add-on to their Umbrella policy for about $1,000 per year.  However, there are some downsides to this coverage add-on.  For example, there is some redundancy in coverage already provided under your Personal Umbrella.  Also, many specialty insurers who provide a D&O insurance add-on provide coverage only in excess of $1Million of primary coverage required for the Non-profit’s D&O insurance policy.   As most 501(c)3 organizations may have coverage lapses, may buy less than the required $1Million of coverage, or maintain no coverage at all, a “gap” in coverage may arise.  Lastly, many specialty insurance carriers provide a maximum of $1Million of D&O coverage under the endorsement add-on.  Candidly, if several members on the non-profit organization want a higher limit, the organization would be better served by increasing the coverage limit for everyone – for about the same cost.  Non-profit D&O coverage is relatively inexpensive for most organizations.  For more information regarding Personal Umbrella policies or Not-For-Profit Board or Volunteer liability coverage, please contact info@fpins.com.

Residential fires take a high toll of life and property.  In the United States in 2007, there were more than 400,000 residential fires resulting in 2,895 deaths and more than 14,000 injuries.  Statistics also show that the most common victims of residential fires are children and the elderly.  Most dealths are not a result of flames but rather from inhaling smoke and poisonous gases emitted by the burning combustibles. Fire safety experts agree that many deaths can be avoided with a functioning sprinkler system. 

More than 100 jurisdictions in California already have a local residential fire sprinkler ordinance.  This code brings California in line with the 2009 International Building, Fire, and Residential Code, and makes California the third state to formally adopt the code.  As the most populous state in the United States, this is a huge victory for safety proponents who hope to eliminate hundreds of millions of dollars in property losses. 

For additional information about fire and building codes in your community, contact your local fire department or building department.  Information concerning fire and panic safety can also be obtained by visiting the CAL FIRE website: www.osfm.fire.ca.gov.  To review all new codes that take effect in January 2011, visit www.bsc.ca.gov.

Sources:

1. Home & Garden 2011
2. California Department of Forestry and Fire Protection, Office of the State Fire Marshal. January 13, 2010.
3. MSN.com. October 4, 2010.

Jury Verdicts versus Policy Limits

While this list is sampling of actual jury verdicts, it does not include the multitude of events in which an insurer “settles” and pays the policy limits for an insurable event.  Often the insurer may choose to pay the full policy limits of the automobile policy and umbrella in some serious accidents.  Carriers are extremely reluctant to divulge how often policy limits are paid for auto policies and/or umbrella policies.  Statistically, those cases that involve an actual trial, 16% of all verdicts were in excess of $1M and 8% were in excess of $5M. 

Do I Have Enough Liability Coverage?

While many financial advisors recommend that your umbrella policy limit be equivalent to your net worth, they neglect to consider risk factors that could leave you exposed. An unfavorable judgment may exceed your entire savings; all of your assets are at risk – including your home and future earnings. We recommend clients review the following risk factors as a measurement of probability. Affluent individuals and families having five or more factors should consider an umbrella policy limit of at least $5 million. Those with six or more factors may need a $10 million umbrella limit or more.

Risk Factors:

• Earn a high income, anticipate a significant inheritance, have a net-worth over $250,000
• Own an expensive automobile – accident victims tend to have complicated injuries and are less compassionate when hit by a luxury automobile
• Own a swimming pool, hot tub or spa
• An individual in the public eye – a CEO, senior executive, notable shareholder, government official, celebrity, or sports figure
• Own a rental property (wrongful eviction, unlawful entry, slander, malicious prosecution may be included in umbrella policies)
• Dog owners, especially those with a breed having a high occurrence of attack
• Transport others, particularly children or the elderly
• Have one or more teenagers in the household
• Frequently entertain others at your home (dinner parties, pool parties and cocktail parties)
• Own a motorboat, sailboat, personal watercraft or snowmobile
• Serve on a homeowners association board or a nonprofit board of directors
• Own a vacation home
• Own property on a steep hillside – damage caused by landslides to the property of others is covered under personal liability (however, damage to your property is excluded)
• Own firearms
• Employ domestic help and/or occasional workers

Consider Increasing or Adding Umbrella Coverage

Umbrella coverage can help protect you against personal liabilities that could attack a substantial portion of your assets or future earnings. For a few hundred dollars a year, you may add an umbrella policy or increase your policy limits commensurate with your growing assets and “risk factors.” Talk to your personal insurance agent regarding this important coverage.

Source: www.JuryVerdictResearch.com

For more information contact Info@Fpins.com.

From a definition standpoint, there are three types of distractions: visual- actions that require drivers to take their eyes off the road, manual- actions that require drivers to take their hands off the steering wheel, and cognitive- actions that require drivers to take their minds off of what they are doing.  While most people think about the first two types of distractions, it is the third type, cognitive distraction that is beginning to cause the most concern.  Earlier this year, the National Safety Council (NSC) released a white paper describing how dangerous cognitive distraction can be.  The paper shows the effect of brain distraction during cell phone use while driving, and educates the public as to the dangers of cell phone use, including “hands-free” cell phone use.  It provides references to more than 30 scientific studies describing how using cell phones, either hands free or hand-held requires the brain to multi-task- a situation that it can not do safely while driving.

The overwhelming results from these studies indicate cell phone use not only impairs driving performance, but it also weakens the brain’s ability to capture driving cues.  As a result, drivers who use cell phones have a tendency to “look at,” but not “see,” up to 50% of the information in their driving environment.  This is a form of “inattention blindness,” which can frequently lead to an accident- even without visual or manual distractions.

As a result of many accidents where the primary contributing factor was cell phone use, a number of specific efforts to eliminate the problem have begun over the past year.  One of the most ambitions programs is the “No Phone Zone,” spearheaded by Oprah Winfrey.  The “No Phone Zone” program (www.nophonezone.com) educates the population about the alarming statistics of the consequences of driving while using a cell phone.  It states 16 deaths will occur each day as a direct result of cell phone use while driving.  The program also encourages students, parents, and faculty to post metal “no phone zone” signs within a perimeter of schools to reduce the amount of accidents near schools.  Parents and teens can also take a “pledge” to make their vehicle a “no phone zone.”

In addition to several programs that have developed, there are several cell phone manufacturers who are beginning to develop various ways to limit cell phone use while driving.  Some products have also gone on the market to restrict the use of cell phones while driving.  TextArrest is a software application that can be used on any Smartphone.  It is designed to set and enforce parameters for safe use of mobile phones inside moving vehicles.  TextArrest has the ability to disable text messaging and calling capabilities while a person is moving at a speed greater than 5mph, but can be disabled in cases of emergencies.  TextArrest also has a free application that may be downloaded from their site.  To learn more, visit: www.textarrest.com.

The issue of distracted driving has finally become a concern for the legislative body, law enforcement agencies, and the general population.  But, as 49% of teens admitted to “being extremely distracted” by texting and instant messaging while driving, it is our opinion that as the statistics of deaths caused by texting while driving will continue to grow over the next 5-10 years.  And, these deaths will possibly usurp the teen deaths related to drinking and driving. 

Source: Distracted Driving: A National Disgrace. Rough Notes. August 2010

Many of us are enthralled with social media as a new and fascinating window into other people’s lives, but we may be like toddlers climbing on the counter to get to the cookie jar: all excitement and no sense of danger.  Social media can be a life enriching tool that is fairly safe, if you approach it thoughtfully. Below are some tips about online risks:

• Facebook: Be social…but not too social.  The better you know your audience, the less likely they are to connect with someone who has bad intentions. Choose your friends carefully.  How well do you really know the person who has sent you a friend request?  Not well, or even at all? Did the request come from the salesman who just sold you a new car?  Simply delete the request. Cases of on-line stalking and harassment have been on the rise. Ask your friends not to post photos of you, or “tag” you in photos without your permission.  Adjust your account settings so that “friends only” is chosen for your profile.  This ensures that only people you have accepted as friends will be able to view your private information.
• There may be ulterior motives behind the online quiz or the birthday card app.  The quizzes and interactive apps on social media sites can be a lot of fun, but they also may be collecting private info about you and your friends, even if you have chosen strict privacy settings. At a minimum this could be rich fodder for marketers; at worst an opportunity for identity thieves.
• Venting online can cause your lifestyle to go up in flames. It’s easier than ever to make a hasty comment about an acquaintance, boss or service provider before you’ve had time to cool off. But, be careful: your comments can get you sued for defamation, even if you think you made then anonymously.  Mind what you say online.
• Your children may be your biggest risk.  How much detail are your children providing about your next family trip which will take you out of the country, and away from your home, for three weeks? Is it possible for online predators to obtain photos of all family members and piece together your daily routine?  Remind your children that people online may not be who they seem, and that without the proper security settings, everything they post may be available to all. 

Your insurance policies, of course, provide some coverage for identity theft, libel, slander, defamation of character and may even provide some help should you become the victim of a stalking or harassment crime. Overall, however, what’s the best measure of protection?  Be thoughtful about your online behavior.  This is one area of your life that you truly can control.  We would like thank Chubb Personal Insurance for assisting with content for this article.

Social Networking Facts and Figures: How exposed are you?

www.Facebook.com/press/info.php?statistics
www.digitalbuzzblog.com/facebook-statistics-facts-figures-for-2010
www.twitter.com
www.en.wikipedia.org/wiki/Twitter
www.website-monitoring.com/blog/2010/05/17/youtube

Research from the University of Nevada, Reno predicts an earthquake of magnitude-6 would result in severe damage, whereas a magnitude-7 earthquake can cause “widespread, heavy damage.”  Researchers cautioned that some degree of variability is to be expected. (Source: Insurance Journal-West Region, “Study: Tahoe May be Overdue for Large Earthquake, 06/01/09)