October 2010

If you’re currently renting a house or apartment, you should strongly consider an investment in Renters insurance. No one likes to think about the possibility of a fire or a burglary, but these are real possibilities. Burglars can break in while you’re away and steal your computer, entertainment system, jewelry, and other valuable items. Without Renters insurance, you will have thousands of dollars in out-of-pocket costs to replace the stolen items. By contrast, if you have Renters insurance, you will promptly receive a check that covers either the replacement costs for the stolen items or the current value of the items — depending on which type of insurance policy you’ve purchased.

Maybe you believe there is little risk of a burglary in your geographic area, but what about the risk of fire? Fires strike randomly and can begin in electrical wiring over which you have no control. It’s unpleasant to contemplate, but you could come home to find that everything you own has been destroyed. With Renters insurance, you would have a check in hand quite soon to begin refurnishing your life. Yet another scenario for which Renters insurance can be of enormous benefit is personal liability. If a visitor is injured in your home, for example, by falling down the steps, you could be liable for her medical bills. Renters insurance would cover this liability. Some renters are under the impression that their possessions are covered by their landlord’s insurance. This is rarely true. Typically, the landlord’s insurance covers loss or damage to his property, not yours. Your landlord’s insurance also covers his liability in case anyone is injured on the property, though not always injuries inside your apartment.

Most renters can get comprehensive coverage for a few hundred dollars per year, depending on where they live. Considering the risks covered by Renters policies, this is a low cost for the potential benefits. Look around your house or apartment and take an inventory of items you would need to replace in the event of a catastrophe. Take note of high value or difficult to replace items such as antiques, furs, jewelry, or expensive art. Before you get a policy or immediately thereafter, you should record information on all your high value items, including details about the make, model, serial number, age, and costs (both purchase and current replacement). It might also help to have photos of these items for identification purposes.

A basic policy usually pays only for the actual cash value of your items at the time they were lost. In other words, they would be valued not at what you paid for them originally or what it would cost to replace them, but at their actual value as used items. So a 3-year-old computer would be covered for its initial cost minus depreciation. Since computers depreciate quickly, yours might be worth little by the time it’s 3 years old, so your insurance proceeds will be limited.

If you have expensive items like electronics that are subject to depreciation, you should consider replacement cost coverage. With this type of policy, you would be reimbursed for the current cost of buying a new equivalent item. Thus, in our example of the $2,000 computer at 3 years old, you would receive a check that would enable you to buy a new computer. Of course, replacement cost coverage is more expensive. It’s up to you to decide which type of coverage — actual value or replacement cost — best fits your needs and budget. Like most other insurance policies, your Renters policy will have deductibles. A deductible is an amount of loss you will have to absorb yourself before receiving any money from the insurance company. For example, let’s say you have a policy with a $500 deductible. You have cameras you bought for $2,000 several years ago. If you have replacement cost coverage and the cameras are lost in a fire, you would receive a check for $1,500 from the insurance company. Of course, you can lower your insurance premium by accepting a higher deductible, but this means if there is a loss, you must absorb more of it from your own pocket.

Renters insurance usually does not cover damage from floods or earthquakes, but you might be able to get endorsements for these and other “acts of God.” An endorsement extends the perils covered by your policy. Obviously, you must pay an extra premium for the extra coverage. Be sure to discuss any special high value items, such as antiques, furs, and jewelry with our insurance agents, since you might need extra coverage for these. As mentioned, a basic Renters policy includes liability coverage should someone be injured in your rented home or apartment. As with Auto insurance, there is a per-incident limit on this coverage, and you should make sure this is high enough to protect your assets.

Michael and Maureen divorced after 18 years of marriage and agreed to joint custody of their three children. Their 11 year-old son Mikey is riding his bike one afternoon with some friends and not paying full attention to the road in front of him. A five year-old child chasing a ball runs into the road and Mikey strikes her with his bike, causing her to fall and break her arm. The child’s furious parents sue both Michael and Maureen for compensation for her injuries and trauma.

Not long after, their 16 year-old son Mark gets his drivers license. One evening while driving home, he swerves to avoid a deer in the road, loses control, and plows into two parked cars. Both cars are relatively new; the repair bills come to thousands of dollars. Because Michael and Maureen now have separate households, they each have their own Auto and Homeowners insurance policies. Are both parents responsible for the children’s actions? Is only the parent who had custody at the time of the accident responsible? And whose insurance pays for the damages? Will either policy pay? With the increasing prevalence of two-household families and blended families, the question of which parent (and, therefore, which insurance policy) is responsible for a child’s actions has become more common. The answer is not always clear.

A standard Homeowners policy covers the people named on it (the named insureds); household residents who are either relatives of the named insureds or under age 21 and in the care of a named insured or relative; and full-time college students who are either relatives of the named insureds and under age 24 or others in the care of a household resident and under age 21. A standard Auto policy covers the named insureds and “family members” (residents of the household related to the named insureds by blood, marriage, or adoption, including ward or foster children.) Michael and Maureen have joint custody of their children. In which parent’s household are the children residents?

State laws and courts have answered this question in a variety of ways. For example, states such as New York have established “dual residency”; that is, a person can be a legal resident of multiple households at the same time. However, other states such as Montana have laws prohibiting dual residency. Some courts start with the custody awarded in the divorce decree but also consider how the parents are actually handling custody. A New Jersey court found that a child had dual residency, despite the mother having legal custody, because both parents had actual custody at different times. The judge ruled that both parents’ Homeowners policies applied to the child.

Other states have ruled that no one factor determines residency; a court must look at multiple factors. A Georgia court devised an approach that measures custody time and focuses on whether there is in fact more than one household. New Jersey courts look at both measurable factors and qualitative factors, such as whether people in the household function together as family members.

If Michael and Maureen live in a dual residency state, both their Homeowners and Auto policies might cover the accidents their children have. Policy terms explain how they share loss payments for these incidents. In other states, the solution might be more complicated. A court may weigh several factors and assign residency to only one of the households, requiring one parent’s insurance to pay for the loss. Since the outcome in these situations is uncertain, the best thing for divorced parents to do is to make sure they have plenty of insurance provided by financially strong companies.

Most people avoid thinking about scenarios that would cause an insurance claim – our homes damaged by fire or tornado, someone injured on our property, or family members hurt in an auto accident. However, it is necessary to give some thought to these upsetting possibilities to ensure that you are adequately prepared and protected in the event of a catastrophe. Reviewing your insurance coverage will also clarify if there’s a need for an additional Umbrella policy for extra protection. So, let’s try to summarize some of the basics on coverage limits.

Homeowners insurance covers three areas: Damage to the home, damage to the contents of the home (personal property), and your liability for injuries to others. Prior to obtaining Homeowners insurance, it’s a good idea to stop and consider exactly what you want the insurance to cover. You might want coverage just to pay off the mortgage in the event you can no longer occupy your home. It’s more likely you’ll want to continue living in your home after a claim or sell it at market value, so you will want your insurance to pay for repairs caused by wind, fire, or some other covered peril. In most cases, reconstruction means you will need insurance that actually covers more than the home’s market value.

Replacement value, which is the cost to reconstruct a damaged home, is typically higher than the cost of buying a similar home on the market due to the specialized nature of reconstruction as opposed to new construction. For example, in reconstruction there is an initial cost of debris cleanup. New construction starts at the bottom and builds up, but with reconstruction it is often necessary to take off the roof and build down, which is more expensive. Additionally, after a natural disaster, construction costs could rise due to increased demand. Keep in mind that your insurance can cover not only the costs to rebuild, but also the costs for you to live elsewhere, if necessary, while the home reconstruction is completed. Our experienced insurance agents can help you assess your coverage needs as well as determine available coverage based on the age and condition of your home.

Also, you will need to consider whether you want replacement coverage for clothing, furniture, appliances, and other personal property inside your home. Without replacement coverage, your coverage for personal property is depreciated by the age and wear of the items lost. Due to depreciation, the computer you paid $500 for three years ago might be valued at only $150 or $200, which is all the insurance company would pay if you don’t have replacement coverage.Some insureds will need more coverage for personal property (contents) than their policy provides. The amount of personal property coverage is usually limited to 70% of the coverage limit for the structure. For instance, if you have an art collection, antique furniture, jewelry, or other valuable possessions, talk to our agents about supplemental coverages, such as fine arts or scheduled property endorsements, to protect your investment in these items adequately. The cost is modest for the extra protection.

Liability limits generally start at about $100,000; however, some experts recommend that you purchase at least $300,000 worth of protection, which covers personal liability for damage to property or personal injury caused to others. The additional coverage also helps to protect your assets in the event you are found liable in a personal injury lawsuit. Additionally, you might want to consider purchasing a separate Umbrella policy (discussed below).

There are six different types of Auto insurance coverage. Three relate to liability, two for damage to your vehicle, and one provides specific coverage for accidents involving you and an uninsured or underinsured driver. Collision coverage covers the costs of damage to your vehicle caused by collisions with other cars or objects; comprehensive coverage covers theft or damage to the vehicle caused by events other than a collision with another car or object. The amount of coverage you need depends on the value of your vehicle. Auto Liability insurance is required in most, if not all, states, but the liability limits that drivers are required might not be enough to protect your assets. Even one serious injury caused by an accident for which you are liable could cost into the six figures, or more in extreme cases, just for medical expenses. And the amount only increases if there are more injured people. It’s easy to see that the $50,000 of per-accident liability coverage required in many states would not be enough to pay all the costs of property damage and bodily injury. Auto insurance companies recommend that you have $100,000 of bodily injury protection per person and $300,000 per accident. If your personal net worth is more than $300,000, consider buying additional liability auto insurance.

What about an Umbrella Policy? Unfortunately, even with our best intentions and efforts, accidents might happen for which we are legally at fault. Medical costs can skyrocket. If someone were permanently disabled by an accident, the expenses of lifetime care could be astronomical. If someone killed left behind survivors who were depending on that person for support, you could be liable for damages to the survivors. Be aware that any costs not covered by insurance will come out of your pocket. Hence, you could be forced to sell property or to turn over part of your earnings for years to come, perhaps the rest of your working life, to an injured party. There are limits on the amount of liability coverage available as part of your Homeowners and Auto insurance policies. If you have total assets valued at more than these limits – including, say, your vacation home, investments, rental property, boats and vehicles — or if you have a high income, an Umbrella policy offers a great deal of protection for a relatively low premium.

In addition to the assets you want to protect, you might want to consider your risk of being sued. Do you live in a state that is particularly friendly to plaintiffs? Do you have frequent guests on your property? Do you have a swimming pool, trampoline, swing set, or other sports equipment in your yard? Do you have a dog that is overly protective of your property? Are you or any of your household members aggressive, fast, or careless drivers? If so, your risk is greater that someone might be injured, perhaps very seriously, and you would be legally at fault. In fact, any situation that could result in serious injury, long-term physical impairment, psychological damage or death could put your financial well-being at risk.

Once the liability limits are exhausted on your Homeowners or Auto policy, your Umbrella policy takes over and provides another layer of liability protection. Policies typically start at $1 million with coverage available up to $10 million. Premiums start at around $300 a year – less than a dollar a day for a great deal of protection. The best way to determine whether you need an Umbrella policy is to discuss your financial status, lifestyle, and current and future assets with our insurance agents. Ask us to review the liability limits in your current policies and suggest the best strategy to ensure protection of your assets in the event of an injury for which you are legally liable.