Coverage Gaps

Policyholders at risk



The October 2015 rains and floods that battered South Carolina took 19 lives, caused 36 dam failures, destroyed more than $1 billion in home and property and displaced more than 20,000 residents.

For many homeowners, damage from the flood exposed gaps in their insurance policies. Many policyholders discovered they either weren’t covered — especially in the case of flood insurance — or were inadequately covered for losses to personal property they sustained.

Insurance experts say it is all too common that policyholders think they are covered, but aren’t or don’t have enough coverage, and not just for a natural disaster like a flood. Unfortunately, policyholders also usually don’t find out before they file a claim. Gaps in insurance coverage can expose customers to significant risk. 

Insurance professionals say the key to avoiding unnecessary risk is to know what is in your policies and to review them annually with your agent.

The Insurance Information Institute points out the importance of homeowners knowing what kind of policy they have, discovering the gaps in their coverage and taking corrective action. The III is an industry supported organization whose central function is to provide accurate and timely information on insurance subjects. The organization, which does not lobby, works to help consumers understand what insurance does and how it works. More information can be found at III.org 

The most common homeowners’ policy, a Homeowners-3, provides coverage for direct losses due to fire, lightening, tornadoes, wind, storms, hail, explosions, smoke, vandalism and theft. But policyholders need to be aware of the dollar limits on the coverage in their policy and make sure they have sufficient coverage for specific items.

Homeowners may assume that they are covered for all so-called “Acts of God,” which usually refers to natural disasters like hurricanes, tornadoes, earthquakes and floods. Some natural disasters like damage from windstorms, hail and lightening are covered by basic homeowners insurance. But the standard homeowners’ policy does not cover damage from floods or earthquakes.

The lack of coverage was especially painful for South Carolinians who did not have flood insurance in October 2015. Flood insurance is available through the federal government’s National Flood Insurance Program and from a few private insurers. 

While this past year’s flooding was certainly not expected, homeowners need to be aware that floods are the most common natural disaster in the United States, according to the NFIP. In the past five years all 50 states have experienced floods or flash floods. Almost everyone has some exposure to the possibility of flooding, and just a few inches of water can cause tens of thousands of dollars in damage. The average flood claim is around $30,000, according to the NFIP. 

Just because a home is outside a flood prone area doesn’t mean it is safe. New land development can increase flood risk, especially if construction changes the flow of runoff. Approximately 20 percent of all NFIP claims have come from areas that are outside of Special Flood Hazard Areas or high-risk areas, and 30 percent of all Federal Disaster Assistance for flooding has been received outside of SFHAs.

The NFIP reports that from 2005 to 2014, total flood insurance claims averaged more than $3.5 billion per year. Since 1978, the program has paid nearly $50 billion for flood insurance claims and related costs. Flood insurance is becoming more common in South Carolina. According to the South Carolina Insurance Association, 201,496 NFIP policies were in-force in the Palmetto State at the end of May 2016, up from 198,285 policies-in-force in 2015 and 190,470 policies-in-force in 2014.

South Carolina homeowners need to be concerned about damage from hurricanes just as much or more so than damage from flooding. The III recommends that homeowners be sure they have the right policies. That includes flood insurance to cover damage from a storm surge, which is not covered by a homeowners’ policy. It also includes knowing the hurricane deductible. While a standard homeowners’ policy has a flat-amount deductible — around $500 or $1,000 — a hurricane deductible is calculated as a percentage of the insured value of the home, and typically varies from 1 to 5 percent of the insured value. Damage from wind is usually covered by a homeowners’ policy. But it can be excluded for property that is located in defined hurricane prone areas, especially along the coast. This gap can be addressed with wind and hail insurance available through the South Carolina Wind and Hail Underwriting Association and some private insurers, according to the South Carolina Insurance Association. Homeowners should discuss this with their insurance agent.

Experts also urge homeowners to consider Law and Ordinance coverage for what could be the significantly increased cost of rebuilding a home. A damaged home generally must be repaired or rebuilt to meet existing building codes, not necessarily the way it was built originally. Rebuilding or simply demolishing it could increase costs by up to 50 percent, according to III.

Earthquake damage is also not covered by a standard homeowners’ policy but can be provided as additional coverage. Cost of this coverage can vary significantly depending on the likelihood of a major earthquake. 

If a home is damaged by a fire or other catastrophic event, homeowners should be sure they have enough insurance to cover the loss. Renovations and additions can change the value of a home and create a need to increase insurance coverage. This is another reason to review policies annually. Some homeowners may want to look at what the insurance industry terms an extended or guaranteed replacement policy to provide an amount above the policy limit if building costs go up.

Homeowners insurance covers not only the actual structure but also the contents of the house. But there can be gaps in that coverage as well. It is usually a matter of making sure coverage limits are adequate. Property that homeowners should consider are:

• Jewelry 

• Silver dining services and service pieces like trays, punch bowls and tea sets

• Fine china

• Paintings and other artwork

• Antique furniture, lamps or rugs

• Electronics

• Stamp and coin collections and other collectibles

• Guns

Policies generally only cover between $1,000 to $2,000 for theft of these items. An endorsement can be added to provide higher limits and protection. Items should be appraised every few years and the endorsements updated appropriately.

The good news is that your insured golf clubs are covered, even if they are stolen out of the trunk of your car while you are on vacation. A homeowners’ policy covers personal property no matter where the property is. The bad news is that if the clubs are old, the amount of the claim may not be enough to buy a new set, since the coverage is based on current value. Getting a replacement cost endorsement can avoid this. The endorsement will provide the replacement cost, less the deductible.

Boat owners should also be concerned about their coverage. Whether a small power boat, such as a fishing or ski boat, is covered through a homeowners’ policy usually depends on the size of the boat, the horsepower of the engine and the insurance company, since coverage varies significantly. A boatowners’ policy can close the gap.

One of the lesser common gaps for homeowners to consider is whether they need extra coverage for landscaping. While trees and shrubs are covered for vandalism, fire and theft, they are not covered for wind damage. Extra coverage might cover not only the cost of removing fallen trees lost in a storm, but also cover replacement costs.

Parents of college students should consider if they need additional coverage for their children. While the homeowners’ policy usually provides some coverage for personal items if the student is living in a dorm, it may not be the case if they are living off campus.

Condo owners need to pay particular attention to gaps in coverage in their association’s property insurance. Most association insurance does not cover the owners furniture, electronics, artwork or interior walls and structural improvements to the unit. The American Institute of CPAs recommends that owners review their condo documents, especially the master deed, to determine what the association insurance covers and what the condo owner may need to insure.

Auto insurance, which is one of the most used types of personal insurance according to the South Carolina Department of Insurance, is another area where policyholders need to be aware of potential gaps. 

South Carolina law requires the purchase of liability and uninsured motorist coverage. Auto insurance is divided into two basic coverages: liability and property damage. Auto liability insurance policies contain three major parts under South Carolina law: liability insurance for bodily injury; liability insurance for property damage; and uninsured/underinsured motorists coverage. Property damage coverage may include both collision coverage and comprehensive coverage. But the Department of Insurance points out that collision coverage, which kicks in after an accident, and comprehensive coverage, which covers damage caused by fire, falling objects, storms and vandalism, are not required by law. Drivers should not just assume they have these optional coverages.

As with homeowners insurance, auto insurance should be reviewed annually. Potential gaps, pointed out by The American Institute of CPAs, include coverage for:

• College-age children: While a student living at home or in a dorm is probably covered, a student living in an off-campus apartment may not be.

• Children of divorce: If spouses divorce, which policy covers children who may be living with different parents at different times.

• Damaged batteries, tire and shocks

• Cellphones and other electronic devices stolen out of a vehicle

• Rental cars

Automobile owners also need to understand the difference between uninsured and underinsured coverage. Uninsured coverage pays individuals who are injured by a driver who has no insurance coverage or coverage below state minimum amounts. But insurers point out that uninsured coverage will not pay if state minimum levels are carried by the driver who was at-fault. Drivers may want to consider adding separate underinsured coverage to protect against a motorist with state minimum coverage, who causes damage above the limits of their policy.

In all cases, insurance experts agree that consumers need to first understand what is in their policies and review them annually with their agent to make sure they have the right polices with the right coverages.