The economy is still leaning against the ropes. People are tightening their belts to buckle down for the next few quarters. And, now people are talking about the insurance industry giants, such as State Farm and Allstate, ?sucker-punching? their customers.

Double Digit Home Owners’ Insurance Rate Increases

Sunrise on higher insurance rates for most Chicago home owners

Allstate was the first to announce last month that their homeowners rates will increase by 17.3% for all of it customers. State Farm is now following suit and are hiking their rates by 13%. As I glance over the many other insurance companies also requesting to increase their home premiums by double digits, it’s safe to say that the insurance industry is barreling toward a hard market?no questions asked.

The insurance industry is similar to Wall Street?this cycle of growth and decline exists everywhere?the rates go up and down over time. The reason that this news is so disheartening is that the timing couldn?t be worse. We have just emerged from the longest soft market cycle in recent history. A soft market is when insurance premiums are low and companies are actively competing to write as much business as possible. Insurance underwriters allowed the homeowner to have numerous claims, high limits of coverage, flexible policies, and still qualify for the lowest rates. The insurance companies did this for a simple reason: to win market share.

Of course, the soft insurance market is a great time for both the homeowner and insurance company. However, when the insurance companies themselves get too lax and careless, problems begin. This false sense of security leaves companies unprepared for when the insurance market turns towards a hard market.

A hard market is simply the opposite of the soft market: coverages are now limited or even eliminated, underwriting guidelines are more stringent, and the insurance premiums begin to rise dramatically.

There is no one reason that causes a shift to a hard market

The current hard market seems to be driven by the demands of the reinsurers whom started losing millions of dollars with the terrorist attacks of 9/11. One may ask, ?What do terrorist attacks in New York have to do with my homeowners policy in Chicago?? And the simple answer is a lot. Reinsurance carriers provide the insurance policies for insurance carriers such as State Farm and Allstate to provide protection from hurricanes, earthquakes, flood lawsuits, etc. In recent memory, there has been billions of dollars lost, coast to coast, and now the reinsurance carriers who are losing money are now raising the annual premiums they charge insurance companies, which in turn trickles down to the homeowner.

What Can I Do?

As I tell my clients, now more than ever, you want to be taking a proactive approach to protecting your investments and assets. Know what insurance company is covering your property. Are they financially sound? What is their A.M. Best rating? Get to know the agent that sold you the policies, make sure they clearly explain your coverage AND limitations. Make sure your agent understands your concerns and make sure they are addressed. If your agent can?t provide these basic levels of support, team up with a competent independent insurance professional who will help you understand and navigate this hard insurance market?they have the tools and resources to smooth out the cycle.

Chicago's Row Houses Are a Favorite Rehab Target

Over the past few months, I have noticed more and more home insurance activity:

• People picking up houses in foreclosure to fix it up to rent out;
• Buying foreclosures to move in to eventually;
• Renovating homes to flip them;
• People who can?t sell their homes either (1) renting out their homes or (2 ) even walking away from their homes.

Whatever the reason is, please understand something very important: A standard homeowners insurance policy does not provide coverage for vacant homes, homes under construction, being renovated, or rented to others. A standard homeowners insurance policy is designed and rated for the insured who plans on moving into the home permanently. If there is any variation of this, the policy becomes null and void?immediately.

What should you do if you or a client find themselves in one of the above mentioned situations? Call you friendly neighborhood insurance agent and explain the change in risk. By doing so, you will have the appropriate coverage to protect your biggest asset?even if that asset is not working for you at this time.

An Example of When Standard Homeowners Insurance Won’t Work

A client is buying a foreclosed home in Chicago because it was such a great price. The client does not have any immediate plans on what to do with the home.

• Option 1 Keep the home as is, vacant, and maybe sell it in a year or two.
• Option 2 Rehab the home: update the kitchens, bathrooms, windows, paint, and possibly rent out.
• Option 3 Rent out the home as is, until the market gets better and then re-evaluates the options.

Most times, clients call and tell me that they are buying this home and it will be “owner-occupied” because that is what the loan requirements state. Most insurance agents will write an “owner-occupied,” standard home insurance policy because (1) the client doesn?t disclose the truth or (2) the agent isn?t providing the level of professionalism that the client needs. A good insurance agent will ask the right questions to get to the truth because it is the agent’s job to protect you in the event of a loss.

The Possible Solutions

• Solution 1 The client purchases a Vacant Building policy that not only protects the mortgagee’s interest but it also protects the client’s interest because he just spent $340,000 on a home and if it burns down, the client would want the home rebuilt. A $ 340,000 Vacant Building policy will cost $1396 per six months. The client can lower the amount of coverage to fit their risk tolerance and budget. At $200,000, the six month premium drops down to $842.
• Solution 2 The client needs to purchase a Builders Risk policy, again, to protect the mortgagee and their selves. The Builders Risk policy covers not only the existing structure, but all of the money you will invest into the home. The client is planning on spending $260,000 on the full, gut rehab of the home. A $600,000 ($340,000 existing structure + $240,000 renovations) will cost only $1,200 per year.
• Solution 3 The client needs to buy a Dwelling Fire policy, again, to protect the mortgagee and their selves. The Dwelling Fire policy will provide coverage for the existing structure, and more?very similar to a standard home policy. It will als, recognize the fact that the home is being rented out and in the event of a loss, the policy will reimburse the loss of rent you will experience. A Dwelling Fire policy will also provide the client with Liability and Medical Payments to Other coverage. This is important for the client to protect their financial exposure, in case your tenants have a party and someone gets hurt. Here is the kicker: A $340,000 Dwelling Fire policy will only cost $921 per year.

As you can see, a good insurance agent will make sure the client is protected, and the costs of doing so are minimal when compared to the worse case scenario?of having no coverage.

Put that money away for a rainy day.

As a note, as I explained in a previous post, I am not a proponent of slashing insurance expenses across the board without understand the long term ramifications. It definitely can be expensive to be cheap. But, with a little knowledge, you can put real money in your pocket in one short afternoon.

How can you do you save some money? By reading the following tips:

Insurance Economics 101: Ways To Put Real Money Into Your Pockets

1. RAISE YOUR DEDUCTIBLES. Many people have the frame of mind that, in the event of a loss, they want to pay a little as possible. While this does make sense, looking long term, the average person files a claim once every 13 years. If you raise your deductibles up from $500 to $1,000 or more, you can easily save 10?15% off your annual premium. If you are paying $800 per year, this easily translates into $80 ? $120 per year. Multiply that by 13 years and ($1040 ? $1,560) you have saved REAL money.
2. USE A MULTI-POLICY DISCOUNT. If you trust your insurance agent who handles your home insurance, ask them to also provide your auto insurance. Yes, you may have a great rate with a discount auto insurance carrier but the multi-policy discount is easily 15% discount off both the home and auto premiums. Many are surprised that they save about $300 per year doing this. A few insurance carriers are now giving multi-policy discounts up to 7% if you insure your auto and life insurance together.
3. IMPROVE YOUR CREDIT SCORE. Many insurance carriers now rely heavily on your personal credit score in determining your premiums. So, by keeping your credit score a high as possible, you will get the best rates.
4. PAY YOUR PREMIUM IN FULL. If your budget allows for this, insurance companies are now giving 5%+ discounts for clients who pay in full for home and auto insurance. You also will save the administrative fees they charge to provide you with a monthly bill.
5. INSTALL ALARMS. A centrally monitored home alarm will save you about 10% per year. You will also see some savings if you have deadbolts, smoke detectors and fire extinguishers in your home. But, on an auto, the alarm discount is a measly 1-3%, regardless of the alarm your have, be it even the high-end services like LoJack, OnStar etc.
6. INSURE YOUR HOME ? NOT THE LAND. Again, see my previous post. But, in summary only insure the cost to rebuild your house, not the market value, which includes land.
7. REMAIN LOYAL. If you put everything with one company, usually after 3 years, you may see your insurance premium lower by 5% through a loyalty discount. After 7+ years, this discount can be closer to 10%.
8. GET REPLACEMENT COST COVERAGE. This idea doesn?t put money into your pocket immediately BUT during a claim, you will be happy that you spent a few extra dollars. There are several places you should have replacement cost:
   • Make sure your home has Guaranteed Replacement Cost Coverage on Dwelling. Or at least make sure you insure the structure for 80% of the ITV. Please see my previous post. This can save you thousands and thousands of dollars.
   • Make sure you have Personal Property Replacement Cost on Contents. In the event of a loss, if you don?t have this coverage, that $1,000 TV you just bought will have depreciated and you may see only $800 come back to you.
   • With regards to your auto, this applies only is you buy a NEW CAR. Get GAP coverage from an agent, not the finance company. This will simply provide you insurance to cover the difference between what you owe and what your car is actually worth if your car is totaled.
9. DON?T FILE SMALL CLAIMS. Yes, we all buy insurance to financially protect us from claims. But, please don?t file a claim if it is a few hundred dollars over your deductible. As I previously mentioned, the average home claim is every 13 years and the average auto claim is every 5 years. Insurance companies would rather pay you $300,000 every 13 years versus paying you $400 every other year. Insurance carriers like severity?not frequency:
   • Homes: Someone breaks into your garage and steals 2 bikes and your lawnmower. Total loss is $1,300. You have a $1,000 deductible. Yes, you can file a claim but I would strongly discourage you from doing it because with one claim, your rate won?t increase a lot, but you are now in a precarious situation for the next five years. If you file another claim, regardless of size, you can have your policy dramatically rated up for the next five years or simply canceled. You will be able to buy insurance but at 175% ? 300% more for at least three years.
   • Autos: Pulling out of your garage you sideswipe your car; you back into a fire hydrant, etc. Total loss is again $1,300. You have a $500 deductible. Again, I would strongly discourage you from filing the claim. If you file the claim for $800, this would be a covered claim and it would be recorded as an At-Fault accident. At renewal, your auto policy could increase by 30% for the next 3 years AND you will lose safe driver discounts. On an average auto policy of $600 per six months, your $800 claims will cost you $360 per year for 3 years.

   AND…THE MOST IMPORTANT WAY TO SAVE MONEY IS…

10. WORK CLOSELY WITH YOUR AGENT. If you ask your agent to shop you around on a regular basis, you will be able to level out the ups and downs of your insurance premiums. On average, insurance premiums DO increase by 3-5% per year, claims or not. On your home policy, in year one, you insure your home at $600,000. At renewal, the coverage will be $618,000+. This causes your premium to trend upward over time. A good insurance agent will be able to work with you and keep your premiums manageable and coverage adequate to fully protect you and your family.

We would like to thank voobie for generously sharing today’s photo via the Creative Commons License. Thank you!

A modern Chicago brick condo...what's its ITV?

Over the past few months, the economic downturn has caused many of us to reevaluate our household budgets and seriously reconsider our spending. Along with this comes the direct insurance companies inundating our mailboxes with ?promises? to save you hundreds of dollars on your home insurance. If it sounds too good to be true…they generally don’t really detail the important coverages and benefits that you will lose when you “save” all that money. And the devil is in the details.

My Home Value Dropped…Should My Insurance Coverage Drop?

In an attempt to save money, more and more of my clients have called to let me know that their property values have dropped so they expect their insurance premiums to do the same. My response to these comments usually doesn’t sit well with many since, being an insurance agent, my job to provide comprehensive coverage and sound risk management.

It’s About Rebuilding Costs, Not Market Value

Reputable insurance carriers utilize a third party source such as Marshall & Swift, to calculate the actual building replacement cost of a given property. This concept is called Insurance-To-Value (ITV) which focuses on a building’s unique features, (number of baths, number of bedrooms, construction type, size of decks, and many other interior and exterior upgrades) not solely the square footage. This method gives insurance agents a better sense of what it will really cost to send a contractor out to rebuild your house, if need be. Based on a few total losses I have been involved with over the years, when having to rebuild your home is not a good time to come up short by a few tens of thousands of dollars.

An Example of Over Insuring

For example, a homeowner spends $1,000,000 to purchase a 2.5 story frame home. It has three bedrooms, three bathrooms and is in Lincoln Park. Of course it has generous upgrades. After consulting with the homeowner, the ITV is calculated to be $650,000. Often in this situation homeowners feels slighted because they just spent $1 million on the house, but I only want to have them insure it for $650,000? After explaining the calculation and pointing out that they won’t have to purchase the land again, they understand the calculation better and are more comfortable. However, some homeowners remain skeptical, so then I suggest they look at a policy that has TRUE Guaranteed Replacement Cost coverage. This gives the homeowner the peace of mind by insuring the home at $650,000 ( which is 100% of ITV). However, in the event of a total loss and the rebuild cost somehow is actually $1 million, the insurance carrier will pay the $350,000 difference.

But…It Works the Other Way Around Too

Let’s look at an example on the other extreme. A person finds a great brick three-flat in perfect condition in Logan Square. It is a foreclosure and they pick it up for $300,000. However, the ITV of this building is likely to be calculated at somewhere around $600,000. Just because they got a great deal, doesn’t mean they can rebuild the building for what they paid for it! So, it must be insured at the ITV level to obtain the best rates and the true guaranteed replacement cost.

Of course, the person is going to only want to insure the building for the purchase price. A good insurance agent will still push to have the house covered at $600,000 because if the house is insured at $300,000, a ?coinsurance penalty? can be imposed in the event of a loss. The coinsurance penalty clause, which is built into most property insurance policies, states that you must insure the dwelling for at least 80% of the ITV. By insuring the building for anything less will cost you a lot of money in the long run. Here’s how it works. Let’s say you didn’t insure to 80% of ITV. And, let’s say you have a kitchen fire and there is $50,000 of damage to your home. When the insurance company pays you, they will divide the amount of insurance that you purchased ($300,000) by the amount you should have purchased (80% ITV is $480,000). The insurance carrier will then only pay 62.5% of the claim, or $31,250. That’s right…you have to pay $18,750 out of your own pocket.

Hopefully you now see the problem with those “Save Thousands On Your Insurance” flyers you get in the mail. It’s about more than your premium?you have to keep your ITV in mind. So, please speak to an independent insurance agent who focuses more on coverage and protection rather than simply price. You will be happy you did.

Today’s photo was generously shared by Sectionz via the Creative Common’s License. Thank you!

Cleaning a Flooded Basement is Expensive and Definitely Not Fun

A week of record high temperatures in early spring cause rapidly melting snow to overflow a stream located in the backyard of a home in Chicago. The exterior drain of the home backs up and allows water to enter the finished basement, resulting in flood damage. The water causes a crack in the foundation and damage to the wood flooring, built-in cabinetry, wet bar, area rugs, furniture and the electronics of the home theater system. Collectibles as well as a computer for a home-based business are ruined. The home?s older electrical wiring needs to be replaced to comply with Chicago ordinances.

Homeowners’ Insurance Does Not Cover Flood

The answer, for many residents in Chicago, is unfortunately NO. Flood damage is not covered by a standard homeowners policy. It must be purchased separately from a licensed agent.

Most people do not purchase flood insurance for the simple fact that they believe they are not at risk?because they live in Chicago. And, at first blush this appears reasonable.  People obviously think about it. Over the years I’ve heard many reasons for not buying it, ? I had two sump pumps installed,? ?My house is brand new, its water tight,? ? I live in a duplex down condo unit, so my association will cover me.?

Over 30% of All Flood Claims Come from Areas with Minimal Risk.

Flood insurance is defined as, ?a general and temporary condition of partial or complete inundation or two or more acres of normally dry land or two or more properties from one of the following: Overflow of inland or tidal waters; mudflow; collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or unusual and rapid accumulation of runoff or surface waters from any source.?

In Chicago, we experience the unusual and rapid accumulation of water quite often, starting in the fall with the leaves clogging the sewers to the violent temperature swings during the winter.

Until recently, flood insurance was only available from the federal government via the National Flood Insurance Program (NFIP). A few select carriers have now designed their own personal flood insurance policies to address the gaps in the NFIP system:

• Personal flood insurance covers flood loss even if the flood is confined to just the one insured property. NFIP covers only if two or more properties have been affected.
• Personal flood insurance insures a home and its contents up to a total of $15,000,000. NFIP provides a maximum limit of $250,000 of coverage for the dwelling and $100,000 for contents.
• Personal flood insurance includes a minimum of $15,000 of coverage for contents in a basement and minimum $30,000 of coverage for real property in a basement. NFIP does not cover this type of damage.
• Personal flood insurance covers additional living expenses, like meals and lodging, if you can’t live in your home. NFIP does not.

The average flood insurance premium is $350 per year. It is worth the investment. Just ask your friends and neighbors who lived in Albany Park last fall.