What is Functional Replacement Cost?
How Can Functional Replacement Cost Lower Property Premiums?
Generally speaking, the intent of property insurance is to make you whole after a loss. However, in some unique circumstances, the expectations of being whole can vary rather significantly so there are different policy features to meet different needs.
When Does Functional Replacement Cost Offer a Solution?
Many buildings, whether occupied by businesses or families, are very old. These buildings were likely constructed using techniques and materials that are extremely difficult if not impossible to find in modern construction. While the history and uniqueness is certainly part of the allure of many of these buildings, it adds to the cost and complexity of insuring the property at its full and proper replacement cost. Functional Replacement Cost can be used as a solution in these situations by insuring and, in the event of a loss, rebuilding the property using modern constructions techniques and materials. This will result in the property being fully repaired, however the cost of labor and materials will be substantially less lowering the amount of coverage needed and the premium you pay for the property insurance.
Is Functional Replacement Cost Right for Me?
Whether or not Functional Replacement Costs is the best option for you is really a personal decision. If you would like to pay more to have the increased coverage necessary to pay the additional charges on the rarely available techniques and materials to get your old building back as closely as possible to its pre-loss condition then Replacement Cost is still your best option. However, if repairing your building as closely as possibly to its pre-loss condition using modern construction techniques and materials is completely acceptable to you, Functional Replacement Cost will provide you with this coverage along with potentially substantial savings on your property insurance.
What is GAP Insurance?
Do I Have a Need for GAP Coverage on my Auto Insurance?
There is an unfortunate phenomenon that occurs in conjunction with getting into your new car and driving it off the dealer’s lot: the car is already worth less than you just paid. Now I know that you are too excited at the thought of driving your new car around that you couldn’t care less about the decreased resale value, however it is well worth the time to consider your needs for GAP insurance before you take that first drive.
What Does GAP Insurance Do?
Auto insurance covers cars on an actual cash value bases so this quick depreciation when you drive your car off the lot and in the ensuing months lowers the amount your Comprehensive and Collision coverage will pay in the event of a total loss. However, if you are financing or leasing this vehicle, you have only made a few payments so you may owe more than the depreciated value of the car. GAP insurance provides the extra coverage beyond the actual cash value of the vehicle in order to pay the additional amount owed for the financing of the vehicle in the event of a total loss. This would leave you only responsible for your deductible and not additional financing payments for the car you no longer have.
Do I Need GAP Insurance?
If you owe less than your car is worth then you do not have a need for GAP insurance. However, if you are leasing or financing your car and you owe more than its depreciated value, the additional coverage GAP insurance provides can protect you from underinsuring your obligations. As you pay off the vehicle and the amount you owe becomes less than the depreciated value of the car, this coverage can be removed to meet your changing needs.
Defense Costs Inside vs. Outside
What is the Difference Between Defense Costs Inside vs. Outside The Limit?
When looking at any type of liability coverage there is a tendency to only compare limits. While this is certainly an important consideration, there is another policy feature that will drastically change how quick these limits are reached which is easily overlooked if only the limits are being compared: Whether the defense costs are inside or outside the limits of insurance.
The Difference Between Defense Costs Inside and Outside the Limit.
Anytime there is a large liability claim it is reasonable to assume there is also going to be a substantial amount of attorney fees, arbitrator fees, court costs, etc. that accompany the settlement. These additionally incurred costs are the defense costs and can be substantial. In fact, in many cases the defense costs may actually exceed the settlement. Your insurance policy can handle these defense costs in one of two ways: the costs can either be included inside your limit of coverage which then will reduce the amount of coverage you have left for the potential settlement and increase your chance of running out of coverage, or the costs can be covered outside of your limit of insurance thus leaving your full limit of insurance to be used solely for the potential settlement.
Which is Better?
Anytime you can have the defense costs outside the limit of insurance instead of within you are better off from a coverage standpoint. This makes it possible for the insurance company’s total cost of the claim to exceed your limit as they could potentially pay the entire policy limit for the settlement and also pay all of the defense costs in addition to this amount. There is likely a cost associated with this additional benefit however it is worth strongly considering as it can potentially save your business from financial ruin.
Drive Other Car Coverage
Can My Business Auto Policy Cover a Borrowed Personal Vehicle?
Nowadays is it fairly common for owners and employees to have company cars as an added benefit and many companies have relaxed restrictions which allow for these vehicles to be used for more than just conducting business. In many situations this company vehicle essentially becomes a replacement for a personal vehicle. However, especially in situations when this owner or employee does not personally own any autos, they may not carry personal auto insurance. In turn, the intended benefit of a company vehicle has the potential to leave the owner or employee unknowingly with a very large personal coverage gap.
Where the Problem Comes From
Since the owner or employee does not have another personal vehicle they may not carry personal auto insurance, and since the auto insurance of the business covers the vehicle the business provides them, they never stop to consider situations in which they may drive other vehicles. Without thinking the owner or employee may drive a different vehicle. While personal auto policies extend to provide excess coverage when borrowing a friend’s vehicle or renting a car for personal reasons, the business auto insurance will not automatically extend coverage in the same way and instead the owner or employee has a serious coverage gap.
The Solution for this Coverage Gap
In order to account for these situations, an optional endorsement named Drive Other Car Coverage can be added which will then extend the business auto coverage to borrowed vehicle or rented car for personal use. This coverage can be added on most business auto policies for a small fee and typically the individuals need to be specifically listed in order to be covered. Their resident spouse will usually then be automatically covered, however in order to get coverage for any children they would need to be specifically listed.
Your specific situation may require additional considerations so please consult your insurance partner to make sure your needs are met.
What is Rental Reimbursement Coverage?
What is Rental Reimbursement or Car Rental Coverage?
Rental Reimbursement coverage, sometimes referred to as Car Rental coverage, is an optional coverage that is often misunderstood.
When Does Rental Reimbursement Coverage Activate?
Rental Reimbursement coverage is additional coverage that is activated after a covered Comprehensive or Collision loss. This coverage will then pay up to the limits for a comparable rental car for a reasonable amount of time for the repairs to be made to your vehicle. Depending on the circumstances, this coverage may even come into play to pay the loss of use of a rental car company for the time their vehicle cannot be rented to others if you become legally responsible.
Common Misconceptions About This Coverage.
Often people think this coverage will pay for a rental car while their vehicle is undergoing routine maintenance work or going on vacation however this does not meet the activation requirement of a covered Comprehensive or Collision loss. Others see the name Car Rental coverage and assume that it is referring to Rental Car coverage extensions however these are confusingly similar names that refer to completely different circumstances.
How Do The Coverage Work?
Typically this coverage has both a per day limit and a maximum limit (for example, $40 per day with a $1,200 maximum) and there is no deductible that applies. For most companies this maximum is not actually a 30 day limit; if you are able to obtain a rental car for under the daily limit, the policy can provide coverage for more than 30 days before the maximum is hit. However, the policy may have other limitations for long-term car rentals so it is important to consult with your insurance partner to understand your specific coverages.
What is a Business Owners Policy?
The Basic Components of the Business Owners Policy.
A Business Owners Policy, commonly referred to as a BOP, is the most common and convenient way for small and mid-sized businesses to purchase a variety of important coverages as it allows for many coverages to be packaged into a single policy. Typically these policies start with a minimum of Property and General Liability coverage with the ability to add several other coverages to broaden the package to meet the individual needs of your business.
What Can Be Included?
Most insurance carriers will offer the ability to cover Property (Buildings, Business Personal Property, Personal Property of Others, etc.), General Liability, Business Income and Extra Expense, Equipment Breakdown, Crime, and Hired & Non-Owned Automobile Liability on a Business Owners Policy. Some carriers even have options for Employment Practices Liability, Cyber and Data Breach, Directors & Officers Liability, Liquor Liability, Garagekeepers Liability, and many more coverages that can be added to this single policy.
Not All Policies Are The Same
Business Owners Policies can include a large variety of coverages on a single policy which can offer pricing and convenience benefits. However, it is important to understand that many of these coverages are not automatically included and oftentimes broader coverage may be available on separate policies. This is why it is necessary to take a close look at each coverage that is included in your policy along with any applicable sub-limits to insure you understand exactly what is covered.
How Much Liability Coverage Do I Need?
How Can I Add Enough Liability Insurance For My Business?
It is one of the most common questions we receive: How much liability coverage do I need? The most accurate answer is $1 more than all of your liability claims. However being that there is no way to know this amount ahead of time, it becomes a combination of your risk appetite and how much coverage you can reasonably afford.
How Large is my Liability Exposure?
We all see stories in the news almost daily about tragic accidents, products causing injuries, and huge lawsuits against businesses however there is still a tendency to underestimate the worst case scenario when it comes to our own liability exposures. Obviously risks vary greatly depending on industries, products, company size, location, customer territory, etc. so a personalized assessment is very important in this process. However, even a single employee office will have someone driving on behalf of the business at some point which has the potential to cause a tragic accident with multiple fatalities and multimillion dollar lawsuits against your business.
Umbrella and Excess Liability Policy Solutions.
Umbrella and Excess Liability policies offer the ability to add a tremendous amount of liability coverage to your insurance program at a very reasonable rate. The general intent of these policies is to provide additional liability coverage after your underlying policies are used up. In some cases these policies may even provide broader or narrower coverage as the forms are not standardized so it is important to take the time to make sure you know exactly what you are buying.
Check on Increasing Your Limit.
For most carriers, the price per million dollars of coverage decreases as the total limit increases. This is because the likelihood of a $2 million claim is more likely than a $20 million claim and much more likely than a $200 million claim. Also, large limits are often structured in towers through different carriers which then enables additional pricing benefits. Consult with your insurance partner on increasing your limit as you may be surprised at how much more coverage you can get for a little more premium.
Do I Need Rental Car Insurance?
What Does Rental Car Insurance Cover?
It’s a situation that everyone who has rented a car has been in: You already picked out the car you are going to be leaving with and you think you have the final price and then they ask if you would like to take out their insurance on the vehicle for an additional amount. Most people have their answer prepared in advance, “yes, I definitely want the coverage” or “no, I’m not falling for that” but rarely is this truly an informed decision.
What’s Offered and Where Might It Already Be Covered?
It is important to start with a thorough review of your current insurance program so you know what coverages you may already have and what you might want to add. Typically car rental companies will offer the following four different coverage options and here is where to look in your current program for extended coverage:
- Collision Damage Waiver (sometimes called Loss Damage Waiver) – This covers damage to or theft of the rental car (and often minimizes disputes over minor or preexisting damage). Look at your Comprehensive and Collision coverage on your personal auto insurance policy to make sure you have these coverages and confirm how they extend to your rental car as a possible replacement. The deductibles for these coverages will still apply and most rental companies will also make you liable for the loss of use while the vehicle is being repaired and other additional fees which may not be fully covered. The credit card company you are using to pay for the rental car may offer some rental car coverage however you need to discuss this benefit and their specific terms with them directly.
- Liability Insurance – This covers your personal liability while driving the rental car. Look at your Liability coverage on your personal auto insurance policy to make sure this coverage extends for your specific rental car as a possible replacement.
- Personal Accident Insurance – This covers medical bills for you and your passengers injured in the rental car. Look at your personal health insurance (and your passengers’ health insurance) along with the Medical Payments or Personal Injury Protection coverage on your personal auto insurance policy as a possible replacement.
- Personal Effects Coverage – This covers your personal property items within the rental car. Look at the Personal Property coverage on your homeowners or renters insurance for off premise coverage as a possible replacement.
Some Factors that Eliminate Coverage Extensions
There are several factors which can eliminate the above coverage extensions and make the rental company’s coverage your best option which is all the more reason to contact your insurance partner on your specific rental before waiving the rental company’s coverage. For example, personal auto insurance policies typically have built in coverage territories which eliminate coverage extensions for most international rentals and time limitations which may eliminate coverage for long term rentals. There also may be issues if the rental is for business, if the rental is a moving truck, or if the rental is an exotic vehicle that is not comparable to your personal vehicle. Also, all drivers of the vehicle must be on the rental contract and often their specific coverages will transfer which could present problems if they are rated on a car without Comprehensive and Collision coverage even though a different car on the same policy has those coverages.
What Should You Choose?
This personal choice comes down to fully understanding your specific exposures, your options, and your personal risk appetite. The safest choice is to always take the rental company’s coverage. However, after you confirm your coverage extensions you can make an informed decision about whether or not you are comfortable waiving the rental company’s coverage options and substantially lowering the cost of your rental.
What is Coinsurance?
What Are The Risks of Underinsuring Your Property?
Within all standard property insurance policies is a short clause named Coinsurance. Many agents avoid talking about this clause as Coinsurance can be complex and the effects can be devastating. However, it is for this exact reason Coinsurance is important to understand in order to ensure you are not at risk.
What is the Need for the Coinsurance Clause?
Coinsurance is a clause that helps protect the property insurance rates for people who play by the rules by penalizing those who don’t. You pay your property insurance premium with the expectation that in the event of a catastrophe, you only pay your deductible and your insurance carrier will pay the rest to make you whole again. For this expectation to work properly in the event of a total loss, the property limit needs to be set at 100% of the replacement cost so you do not run out of coverage.
Property insurance can be very expensive and buying less coverage is less expensive. Whether it is intentional or unintentional and whether it is known by you or not, this is where the temptation to cut corners comes from.
Since the likelihood of a total loss is relatively low, especially as you increase the size of the property and the number of buildings, this may seem like an appealing game to play. However, property rates already account for this reduced likelihood and the price is lowered accordingly which enables the people who play by the rules to purchase additional coverage as needed at a lower price. The only way to enable the insurance carriers to protect the rates for the people playing honest is to penalize the people who are not.
How does the Coinsurance Penalty Work?
In the simplest of forms, the Coinsurance clause enables the insurance carrier to short pay the insured by the same amount the insured short paid the insurance carrier. If the property limit of insurance was set at 50% of what it should have been at the time of the loss, the insurance carrier is only liable to pay for 50% of the claim regardless of how small or large the claim is. In the event of a total loss, the insurance carrier will still pay 50% which also happens to be the full limit of insurance.
How to Protect Yourself?
While this may seem scary it is very simple to avoid: make sure that your property is insured at 100% replacement cost. There are some endorsements that can be added in order to waive the coinsurance clause in its entirety however these methods still require the property limit to be set at an amount that is agreed to be full replacement cost before they will be added. Please take the additional time to review your policy and limits with your insurance consultant to make sure that you are not at risk.
What Does Loss of Use Cover?
Does My Insurance Cover Additional Living Expenses After A Loss.
One of the main reasons you buy homeowners insurance is to rebuild your home if there is some kind of a catastrophe that destroys it. However, if this does happen, where will you and your family go for the months of restoration and construction necessary to make you whole again? Fortunately homeowners insurance can offer a solution that can save your family from this unforeseen hardship called Additional Living Expenses or Loss of Use coverage.
What is Loss of Use Coverage?
If there is a covered property loss that makes your residence unfit to live in, Loss of Use coverage will pay for the increase in living expenses that is necessary for you to maintain your normal standard of living while your residence is being restored. Now this isn’t quite a free vacation as there are guidelines set by the insurance carrier that limit your temporary home to be of a similar quality as your permanent home and the restoration of your home needs to progress in a reasonable amount of time depending on the damage. However, this coverage provides the lifeline that your family likely needs to make it through the difficulties of your home becoming unlivable. In addition, some policies offer coverage for loss of rental income from the premise or a civil authority extension so it is important to review your specific plan.
A Real Life Example
Although it may be hard to imagine, sometimes it does not take a tremendous amount of damage to your home to have a potentially devastating effect on your family. One of DCI’s clients recently suffered a large Loss of Use claim in which the neighboring unit in their townhome building had a fire. Our client’s home only had smoke damage, however their unit was deemed unlivable until the neighboring unit was repaired. Fortunately our insurance program helped this family through this difficult situation by covering the additional expenses of their rental for the five months that the insured could not occupy their home. These types of losses can be unavoidable so please closely review your insurance program to make sure your needs are met.