Property & Casualty Insurance 101 - Understand the Fundamentals

Ever wondered about your property & casualty insurance? These are things like umbrella coverage, art & jewelry, kids insurance when they start driving, and even vacation & rental home coverages. This video contains the full interview between Nathan Donohue and Sophie Riley. Look for our five short releases highlighting each section.

This video contains the full interview between Nathan Donohue and Sophie Riley. Look for our five short releases highlighting each section.

Transcript:

Nathan: Hello everyone and welcome. My name is Nathan Donohue, partner at Consilio Wealth Advisors, where we specialize in providing financial planning to tech professionals. And today we're going to be discussing an often overlooked component of a financial plan, our insurance portfolios, specifically property and casualty insurance. We've observed that many advisors do a fantastic job helping their clients accumulate wealth, but can sometimes totally dropped the ball at helping them protect it. So today I'm joined by my good friend, Sophie Riley. Sophie is a partner at A.H.T.'s Private Risk Management Department. She works with clients and their advisors to customize insurance portfolios for successful families all across the country. Her expertise is in property and casualty insurance. Specifically, she'll review policies such as homeowners, valuable articles, auto, watercraft, and personal umbrella.

Nathan: Welcome, Sophie.

Sophie: Thank you for having me.

Nathan: Yeah, absolutely. Sophie, one of the first questions I wanted to ask was, and one that we sometimes get with folks is, what is an umbrella policy? And I think as a follow up to that as well, is there a good rule of thumb for how much coverage people should buy?

Sophie: Yes, and I would say that's actually probably the most frequent question that I get. A personal umbrella policy is a policy that sits over and above all of your underlying exposures and provides excess liability should you or a family member be found at fault in a catastrophic accident. So, I'll give you some examples. When you're thinking of your property and casualty insurance, your home, your auto, watercraft, young drivers on your policies, all of these policies are going to have a limit of liability, typically $300,000 or $500,000 is what we commonly see on homeowners or auto policy. Well, what an umbrella policy does is it sits over and above. So actually, think about it as an umbrella going over above all of your exposures, right? And so, if you add a jet ski, that would be extended as well, right? And so any of your personal assets you want to be protected by this umbrella and as a rule of thumb, the more someone is worth, the more they may be sued for in our litigious society. And what we want to be considering when we're looking at the right amount of coverage is really if someone Googles you, what would they potentially find?

Nathan: Interesting.

Sophie: And how much is going to be enough to get a personal injury attorney to settle rather than risking a lengthy court battle where your assets could be exposed. So, I'll give you a few examples. I think it really helps to kind of break it down to some examples and so this umbrella policy is going to come into play after the underlying coverage has been exhausted on a policy. So, I'll give you an example, let's say an auto accident. Let's say you're driving, we're a family member's driving and is considered at fault, is found at fault in a very large accident. Maybe multiple vehicles are totaled, lots of bodily injury and so on. Well, the first step is going to be your auto policy, right? And the liability component on that auto policy is going to pay for damage to others. Well, oftentimes that's not enough to get a claim to settle. Right? So, if you have $500,000 of liability, but one person has a severe injury, let's say they're paralyzed, right? Or there's a brain injury. A couple of high value vehicles are totaled, right? Well, the first limit, typically our clients have about $500,000 of underlying liability on their auto policy. Once that has paid out, the umbrella will pay the remaining amount. And so, what we want to do is we want to have enough to get them to settle. So, we want to somewhat think about your net worth and your assets and your perceived net worth. So, somebody who sells a company might be perceived as even having a higher net worth than they have, right? Or your property is also going to be something that is public record, right?

Nathan: Yeah

Sophie: And so if you own lots of homes, those are other things that you want to protect. So it's just a really great tool to protect your assets and your net worth in the event of a tragic accident. Another example that I like to mention is, you know, auto is a common one that people would think about, but your homeowner's liability actually follows you worldwide. And when I say you, a homeowner's insurance contract defines an insured and that does include all of your family members. Your household members are included for coverage. Okay and so, let's say you and your family are on vacation and you fly to Aspen in your skiing. Well, one of your children decides to go to that country and has an accident. Let's say they injure someone who's maybe a child and they're tragically injured while they're skiing. And it's an accident, but accidents happen. Well, your homeowner's liability would actually pay out in the event that you or a family member accidentally causes harm to another person, even when you're not at your home. All around the world, that's going to make it.

Nathan: Really?

Sophie: It does. Yeah.

Nathan: Interesting.

Sophie: And you don't know that. So sometimes if someone doesn't own a home and they're renting, they're like, oh, I don't care about my contents. I don't need renter's insurance. Well, it's not about the contents that's most important. It's the liability component that is most important.

Nathan: That is interesting.

Sophie: And another one could be like if you're golfing, and you accidentally hit someone in the head with a golf ball and they have a brain injury, any kind of mishap that can happen. We want to make sure you're protected from a lawsuit.

Nathan: Yeah, with my golf swing, that's probably going to happen. So that makes a lot of sense. The car accident example is the one I oftentimes use with clients because it just seems more real and more possible. But I actually was not aware of that with our homeowners insurance policies. That's really, really good to know. OK, so this, to just reiterate, this umbrella policy sits over all of your underlying individual policies to provide supplemental or secondary coverage in the event of I'm held to be liable in certain types of accidents and as a good rule of thumb, I want it to be probably roughly equal to my net worth and as I understand it as well, Sophie, there are some limitations on this as well. Jeff Bezos isn't going to get an umbrella policy for $100 billion, right?

Sophie: Right. Exactly. Yeah. As a rule of thumb, we want to somewhat mirror your net worth up until about that 10 million range. Then you don't need to continue to increase it as your net worth increases over 10 million. There are some benchmarking data that we can look at. We do have some clients that might have a 20 million or a 30 million umbrella. But I would say, Chubb Insurance, for example, they offer up to $100 million in excess liability in some situations. Typically, you can't get higher than that in a personal insurance portfolio. But usually, $10 million is kind of that sweet spot where we want to get a personal injury attorney to settle and somebody who's worth $20 million, for example, the chances of them settling for that $10 are extremely high.

Nathan: That makes sense. That makes sense. What have you observed is the most often overlooked part of a really solid and comprehensive PNC insurance portfolio?

Sophie: That's a good question. I would say the homeowners policy and in regards to that, I would say it's that dwelling replacement value. So many times, you know, as a brokerage firm, we have access to many carriers, and I work as the advocate of the client. I work with all of the premier carriers in the marketplace, which are known for broader contract language, fewer exclusions, higher limits of excess liability, and so on and so oftentimes what I'll do is I'll do a holistic review for a client, and I'll look at their current policies, whether it's common to see State Farm or Allstate, they have a large portion of the market. And when I'm looking at those policies and I'm quoting them with the premier carriers that we represent and creating this nice cost coverage analysis that we do, I oftentimes will be surprised at what the dwelling replacement value is listed at.

Nathan: What does that mean?

Sophie: Yeah. So, on a homeowners policy, there are going to be several different areas of coverage. And then it's going to tell you what that limit is. And so, the number one is the dwelling replacement value and then you'll see things like other structures, personal property, loss of use. There are some standard limits that are on all policies and the dwelling replacement value. What that is, is it accounts for what it would cost to rebuild your home, the like kind and quality in the event of a total loss. Okay.

Nathan: Got it. So, my house burns down to the foundation. What does it cost to reframe rebuild it into roughly the same quality and equivalent?

Sophie: Exactly. And a lot of times people will think that it's the same thing as market value. Right. And I always like to remind folks that market value has many more factors than the insurance dwelling and they're just different factors. So, for example, if you have a view of the water, that's going to impact your market value. If you have a very large lot size, that's going to impact your market value. Dwelling replacement value, the big things to look at are going to be square footage of your home, cost of building materials, contractor fees in your area. Those are some of the kinds of the primary factors, right? And so, each policy, we take a customized approach. We look at the property, we have some systems that we can put the information in and populate around what that dwelling replacement value should be. And so that's the one I see the most often is underinsured, especially in California. I'll see a policy in a home is insured with a dwelling replacement value is like 1 million, but in reality, to rebuild that home in today's market to like kind of quality would be like, 2 million.

Nathan: Interesting. Yeah, that makes total sense, especially with how much inflation we've observed with construction and people doing renovations. I mean, just costs have gone up dramatically. And so, I could totally see how the underlying insurance wasn't keeping pace at that same rate.

Sophie: Exactly and then one benefit of the premier carriers that we represent, some of the common ones you may have heard of would be like Chubb Insurance, Pure, AIG, Cincinnati Insurance, Private Risk, Nationwide Private Client, and so on. One of the big differentiators with those companies is that they are going to offer a broader homeowners contract. And the main highlights that I think are important to point out are going to be one guaranteed placement value on your home. So, let's say somebody has a home that's, you know, a $2 million to rebuild in today's market. We do a customized review and appraiser goes out, verifies that value. Oftentimes we'll do a customized home appraisal for the insurance company. They'll come out and take photos and verify.

Nathan: You know, fit and finish and materials used. Right. So, I can't come out after the fact and say, my entire house was built out of Italian marble. Like let's actually document it.

Sophie: Exactly and what's nice about those is oftentimes they, they find additional security, like safety features in the home. And then it adds discounts.

Nathan: Fire suppression systems, things like that.

Sophie: Exactly. Automatic water shutoff valves, residential sprinkler systems, central fire, and burglar alarms and so on.

Nathan: Yep. That makes sense.

Sophie: And so, let's say we have the dwelling value at 2 million, okay. Well, a premier company is going to give you something called guaranteed replacement. And what that means is exactly what it sounds like. There's no cap. They are going to guarantee they're going to rebuild that home to like kind of and they stand by their word.

Nathan: Interesting. So, let's say we have the policy value says, hey, we'll replace it up to this point, but the actual market for construction costs have inflated up to this point. The insurance carrier says, even though the policy is valued here, we will meet at whatever the market replacement value is on a guaranteed basis.

Sophie: And to keep it as customized as your home, so some very high-end homes might have a lot of customized features, right?

Nathan: Sure.

Sophie: They might have items that have been imported from Europe. Well, Chubb is going to get those items that have been imported from Europe. They're going to try to replace those as best they can. And so, it's not so much off the shelf. It's very customized and yeah, there are different factors that can impact the replacement cost of homes. Let's say there's a large fire in the neighbor and many homes come down, well, all of a sudden there could be a shortage in contractors and that can drive up the price. And so there could be unforeseen circumstances that end up creating a situation where it's going to cost quite a bit more to rebuild your home than was expected. And so, it's guaranteed and then the other part of that is instead of just having a guaranteed contract, it's nice to have another option which is called a cash settlement option, and what that means is let's take a $2 million home, burns to the ground. It's going to cost $3 million to rebuild. Okay. Well, maybe they want the insurance company to rebuild that home for $3 million, or maybe they say, we didn't want to live here anymore anyways, and we want to sell this land and we want to move to Hawaii. So instead of taking the rebuild cost, that when you do a cash settlement, when you cash out, you can take the dwelling value that's listed on the contract as a form of payment and walk for it with a check, and then you can sell the land. And so, a cash settlement feature is really nice because it gives you the flexibility to do what you want. Do you want to rebuild the state of home, or do you want to take the cash? And I just think that clients really appreciate that flexibility.

Nathan: Super interesting. Super interesting. Sophie, for clients that have kids that are going off to college, this is something I remember I was interested in when we talked before, clients' children are leaving to go to college. How do they want to view or modify their insurance portfolio based upon those family changes?

Sophie: Another question I get a lot, as you can imagine. So, the first thing I would recommend for folks is to notify your insurance agent. Really, with any changes to your insurance, portfolio, it's always best to notify the carrier so they can note your files, right? Because at the end of the day, insurance is a contract between the insurance company and the insured, right? And you're transferring your risk in exchange for premium and so the more information an insurance company has, the smoother a claim is going to be handled, is what I found in my experience.

Nathan: And no surprises that way.

Sophie: Right, no surprises. And if there's a change in your situation, just send them a note. You can send me a note and say, hey, my kid is going to college in a few months. What should I do? So, the first number one is notify your agent. And then the next thing to mention is as a brokerage firm, you have access to so many different companies and all companies are going to handle different situations in their own methods and in a way that works for them their underwriting and so on. So one, you know, kind of break it down to mention that one thing that we typically see on auto policies is that when you have a student who is going away to college, there are a couple of different discounts that can be added. One is called a distant student discount. And it's really neat because what that is for, is it is essentially a way to tell the insurance company, hey, my kid is going away to college. They're not taking a car with them. They're going to come and visit. They're going to drive on holidays. They're going to drive in the summer, but they're not a regular daily driver anymore.

Nathan: The risk has been reduced and as a result of which the insurance company offers a discount because that person's not there to drive the vehicle on a regular basis. That's the frequency of risk, a potential risky outcome is reduced.

Sophie: Exactly. And I really appreciate that because you know, I think that makes a lot of sense overall, right? And it gives you the comfort of knowing they're still listed on the policy. They're a listed driver, but you're just not paying such a substantial amount of premium for them. So, if they're not, so that, you know, when you say my kids go into college, there's a couple of questions, right? One, are they taking a car or not? If we're not taking a car, the distance student discount will apply and if they are taking a car, then we still need to note the files, and so, most of our underwriters will say, what's the school? What's the garaging address? Which vehicle are they taking? And so we say, OK, the Honda is going to Boston. It's still going to be registered. A lot of times, if it's a temporary situation, you don't always have to change the registration, right? So, it might still be registered in Washington and they're driving it over. They get, they're not actually getting, let's say they're going to call it in Boston. They're not necessarily having to get in a Massachusetts auto policy. You can still have it on your Washington policy, which typically keeps it more, uh, cost effective. And then just list that vehicle at a different garaging address.

Nathan: Interesting. Yeah. To your point on just information sharing. I don't think that's folks' initial inclination is to share more information with their insurance company but now hearing you talk about that distant driver discount, I imagine that most families are probably walking right past the savings and not even taking advantage of it.

Sophie: Yeah that's actually a good point.

Nathan: So super interesting.

Sophie: Oh, and one more point there. The good student discount which most folks start receiving once their children are licensed, assuming they are getting a 3.0 GPA or higher. The insurance company typically won't want documentation for that, but they're not going to continue to ask you and hound you for that. They just need it one time. They send them the most recent transcript report card and they will add that credit to the policy. Well, that still applies for college and for med school, graduate school, that good student discount continues to apply. So, in a way, you might have a significant savings when you have your child away at college without a vehicle and they get a good student discount, because then they're getting both those discounts.

Nathan: You could be raking in the savings.

Sophie: Yeah, and you just got to remind them that they need to keep their grades up.

Nathan: Yeah, absolutely. More incentive. I like it. I like it. Thank you.

Nathan: So, for the other one I wanted to ask you about, and I think this is something that we've observed happening a lot over the last couple of years. If clients or families are purchasing a vacation home or a rental property, and I think maybe it might be helpful also to understand the distinction between a full -time rental, maybe Airbnb’s as well. I know that's become a really popular investment strategy for some families. How do I want to think about? How does my insurance change if I buy a vacation house? How does my insurance change if I buy a rental property or an Airbnb?

Sophie: Great question. Well, I would say we want to break it down to a couple different areas to answer this question. One would be if it's going to be a secondary home, like a vacation property, then just for you and your family, it's very simple. You just add another homeowner's policy, and you have it rated as a secondary home. If you buy a home in Arizona, your primary is here in Washington. Well, we'd add an Arizona homeowners policy for that location and it'd be listed as secondary, and then that home would be listed on your personal umbrella for excess liability as well. So, whether or not the home is rented to others is going to be kind of the deciding factor on which policy form that we place it on. So, a secondary home, vacation home, is just another homeowners form. A home that's rented to others, some insurance companies have that on something called a landlord form and the policy is actually a little bit different. And then the next thing, the next question on, you know, a secondary vacation home is a bit more straightforward, right? And then if you have, if you're buying a home as an investment property and it's going to be rented to others, there are a couple different questions that we need to really understand in order to adequately protect you. And that is, you know, the first question is, okay, if it's going to be rented to others, is that going to be on an annual basis where they are going to sign a lease? You're going to recommend renters insurance for the tenants.

Nathan: It's like a full-time normal traditional rental property.

Sophie: Exactly. And those are quite, quite straightforward and simple to ensure as well.

Nathan: Okay.

Sophie: And so, we would put that on a landlord policy form and again, the umbrella would extend over that, and it would indicate the fact that that is a landlord policy.

Nathan: Got it. So, I'd have, let's say I have a rental property in Arizona. I have my own individual homeowners policy on that, and then I also have my umbrella, excess liability umbrella policy would also carry over coverage on top of that as well.

Sophie: Exactly, and then if you have a policy that a home that is rented to others, whether it's an annual rental or a short-term rental does make a big difference and the reason being the shared economy. So, let's think of Airbnb, VRBO for homes, Uber with vehicles, Lyft, that sort of thing. The shared economy has been growing in popularity over the years, but insurance companies are known for being a little antiquated and not always the best at keeping up with the times. We continue to push for changes to the contracts. I'm always like, hey, when are we going to be able to accept this exposure? And so, at this point, a short-term rental that is listed on a vacation rental website such as Airbnb, it's a that is going to be tricky with many insurance companies, but luckily, we do have markets that will insure them, right? So, it's one of those things where it's not like a one size fits all. Some of the premier companies that we work with that have more sophisticated contract language and I would say, you know, broader coverage overall, they are a bit more hesitant to kind of play in that space of short-term rentals and so, what can happen is they might say they don't want to be on that exposure. Well, if that happens, the nice thing about working with a brokerage firm is that we can then move that. We can kind of solve for that problem. So, for example, Safeco Insurance is a company that in the last few years opened up their appetite for that business. So, they have a nice product, good coverage. I can put that short-term rental with Safeco, then it's still within one agency. We've just had to kind of move that piece out. So, it's one of those things that it's that, you know, each situation we approach uniquely, we go to the underwriter and you know, there's, it's not a one size fits all approach with insurance. We could go to our underwriter on one account, and they say, yes, we're going to make an exception on this. This looks, this fits our appetite. In another account that has a very similar exposure could be declined. So, it's really beneficial for a client to work with an agent who is going to multiple carriers on their behalf to see what we can do to best protect them.

Nathan: Yeah, so I think that's interesting because most folks would probably default to, I want to bundle, right? And I think a lot of insurance companies want you to bundle. I want to get all my coverage to the same place. But what I'm hearing you say, Sophie, is that it actually might be beneficial for me and my insurance portfolio to say, I'm going to have my homeowners policy here and for my three Airbnb's that could be covered with a completely different company.

Sophie: Right and that might have to be the case. I will highlight that a premier insurance company does tend to want to provide a holistic portfolio and so, they oftentimes will require primary home, auto and personal umbrella to be consolidated. So, it's usually to kind of be able to work with these companies, they're going to require three lines of business. And besides that, if we have to break off a policy, a boat or this or that with another company, that's no problem and we can solve for that.

Nathan: That makes total sense. That makes total sense. Last question I wanted to ask you about was for households that have valuable art, or jewelry or collectibles of some kind, you know, for my collection of Monets that I have in my other room right here, how do I want to approach protecting my valuable belongings?

Sophie: Great question. Well, I'd like to break it down for folks so they really kind of understand where the coverage is stemming from, what they want to transfer to an insurance company to insure, because at the end of the day, we are looking at risk transfer, right? I do have some clients that might have a large jewelry collection and they only want to ensure 50% of their collection. They're happy self-insuring 50%. That's fine. It's, uh, we want to think about your risk tolerance when we're looking at your valuable articles. Um, and so the first thing to mention is that on a homeowner's policy, you know how we mentioned there's dwelling replacement value, there's personal property, which is the contents. Well, within a contract on the personal property section, there is going to be an area that is usually called special limits of insurance and that means that within the coverage for your contents, there might be a few areas that the coverage is limited. And to have full coverage, you need to add it separately, whether that be as an endorsement or a separate valuable articles policy. And so, for example, your policy will say, say it has a million dollars of contents of personal property on your policy and its replacement costs new for old. There's deductible that a claim is subject to. And within that million, it might say the most we'll pay for jewelry is $10,000 in a loss. The most we'll pay for firearms is $10,000. Same with like silver or China collections. And so there are certain items that have limited amounts of coverage and then there's the deductible that applies. So, if you have, a lot of times our clients will take a high hollowness deductible and self-insure smaller losses. It also helps to keep the premium more competitive and we're in a hard market. So we want to protect your insurability. So someone has a $10,000 deductible on their home and then their jewelry is limited at 10,000 on the contract.

Nathan: It's a wash.

Sophie: It's a wash. There's exactly.

Nathan: There's no point. Yeah.

Sophie: Yeah. So, what we do is we want to look at a collection also known as a valuable articles policy. And the benefit of one of those policies is that not only will it provide full coverage for your items, um, on a scheduled items such as a let's say an engagement ring that's insured for $50,000 on the contract. It's going to be worldwide coverage with all of these premier insurance companies that we represent. It's going to be worldwide coverage, mysterious disappearance, you know, um, fact, so very broad contract for all of these. Uh, everything is covered except for a handful of excluded items.

Nathan: Okay.

Sophie: And when you schedule a piece of jewelry, that essentially means you're telling the insurance company exactly what it is. We usually like to have an appraisal. If we don't have an appraisal, a receipt is good to have. If we don't have that, we can do a description and a value. So, you know, we want to be as specific as we can. We put that on the policy. Let's say it's insured for $50,000. Well, the contract will give you 150% appreciation for the market value. And so, the market value appreciation is a nice thing to have on jewelry because oftentimes, you know, the cost of gemstones and gold, different metals can increase and so if you're traveling and the diamond falls out, for example, and you file a claim and to replace that exact same ring would be more than $50,000, they're going to give you 150% of what it was insured.

Nathan: Interesting.

Sophie: If it's warranted, that the value has increased.

Nathan: Sure.

Sophie: So, it's kind of nice to have that little buffer there.

Nathan: Yeah.

Sophie: And that the other one is that it's zero deductible on a valuable articles policy. And the claims are typically settled very quickly. I've had some clients who, you know, a Rolex was lost or stolen and the insurance company has the check in the mail the next day. So, it's been, it's a policy that is, it's beneficial to have. It's you do have a lot of high value items that you want to protect and jewelry being one of the most common. And then, you know, fine art is an interesting one to discuss. Some of our clients are have extensive art collections. And, you know, one thing is always wise to have your high value items appraised to really understand what they're worth. And then when you are looking at coverage for art, the rate is much less expensive than jewelry because the chance of a loss is lower.

Nathan: I'm not taking my collection of Monets on my cruise with me and accidentally dropping them into the ocean, but my watch or my ring, I could.

Sophie: Exactly. Jewelry has a higher rate to insure than fine art with every insurance company that we represent.

Nathan: That makes total sense. That makes total sense. I could see how this component of valuable belongings art, jewelry, et cetera, could also be another piece that's fairly overlooked as well as you progress your life. Okay, maybe you get a couple of nice watches that you replace, you know, upgraded engagement ring. Next thing you know, you've got probably well in excess of, let's use your example before, of $10,000 of jewelry that's covered on your homeowner's policy. You could have substantially more than that across all those different types of belongings.

Sophie: Quite a few clients that are investors in fine art or in high-end jewelry. And should there be a loss, it's important to financially protect yourself as well.

Nathan: That makes total sense. That makes total sense. Awesome. Sophia, that is all we have time for today. I just want to thank you so much for joining and helping to educate our clients about their insurance portfolio and some potential areas that they might be overlooking. So, we really appreciate your time, really appreciate your expertise. I'm going to make sure if anybody does have any questions, they want to connect with you, that all your contact information is in the description below. So, for anybody that does have any questions, we've had clients work with Sophie. Her team is fantastic. So, we'll make sure that her contact information is below for anybody that wants to do that. Sophie, thank you so much again for your time and for everybody listening and watching. Have a wonderful day. Thank you very much.

Sophie: Thank you so much.