As the island struggles with the ongoing COVID-19 pandemic, it is hard to believe that another hurricane season approaches. Unfortunately, unlike all of our social events this year, the weather is not cancelled.
Life for most, if not all of us, has changed significantly, and financially, this will be a tough year for most. Bermuda residents will all be looking to manage expenses and cut costs wherever possible. Hurricane preparedness, as we all know, can be expensive. Nonetheless, the models are calling for another active year, so even while most of our attention is currently dedicated to social distancing and hand washing, we must still be ensuring that some of our focus is held in reserve for preparing for the upcoming Hurricane Season.
In the quest to cut costs this year, one temptation that some people might consider is to reduce their insurance coverage, either by lowering their Sums Insured, or by removing coverages that they think they will not need. Insurance premiums for homes in Bermuda sometimes feel like a wasted expense and many of us figure we will never make an insurance claim. Some think that our sound building foundations give us more peace of mind than our insurance policy does.
Our buildings are certainly well-built, yet unfortunately, through each storm we see people surprised by the extensive damage to their home, or how much the damage costs to repair. As we saw with Humberto last year, even the strongest of homes can suffer damage from the tornadoes that can form within a storm’s wind field. For homeowners who have decided to reduce their Sums Insured, they now have an additional, unfortunate surprise – the impact of underinsurance penalties.
Underinsurance is the result of setting your Sums Insured at a point that is lower than the full replacement cost of your home. The amount by which a home is underinsured is applied, as a percentage, against the total value of a claim, resulting in a shortfall between the claims payment and the cost of the repairs for the damage to your home. These costs can be significant. Although there might be a moderate savings in annual premiums through setting Sums Insured lower than recommended, at the time of the loss that underinsurance can cost you thousands of dollars. There are some, but not many, who can pull a significant shortfall from savings to pay their contractors. Most other find that they must take on debt in order to have their home fully remediated, are unable to remediate to the same standard that they once had, or who are simply unable to salvage their homes.
There is an additional concern for homeowners who still have ongoing mortgages. Mortgage agreements require homeowners to secure adequate insurance on the buildings that they jointly own with their bank, or risk defaulting on their mortgage. If insurance purchased by a homeowner is not adequate, their bank will often instruct them to buy the correct amount of limit, or will do so on their behalf and will add the insurance premium to the amount owing from the homeowner.
One of the core principles of insurance is that it is intended to put a person back to where they were prior to the loss. We, as an industry, do not like to see clients have claims paid with deductions for underinsurance. Therefore, we try to work with homeowners to ensure that their Sums Insured are adequate before there is an event that would cause damage. Should you have any doubts as to whether your home might be adequately insured, please check with your insurer – none of the local markets have professional quantity surveyors on staff, but all have tools to calculate an estimated minimum rebuild cost. Alternatively, you may wish to engage a professional for a comprehensive assessment of your home’s replacement cost. This would be the minimum amount you would wish to have your home insured for. If your home has higher end fixtures and fittings, you may want to ensure that your Sums Insured contemplates a higher standard than the base rebuild values – which your insurer, or a quantity surveyor should you choose to hire one, would be happy to walk through with you. There are resources available to help homeowners set their values appropriately and insurers would love to be of assistance.
No doubt, many will be looking to save money wherever they can this year, but underinsuring your home is not a good way to do it. Your home is one of your greatest assets; keeping adequate insurance in place throughout the year protects not just your home, but also your investment. I think we all have enough to worry about this year without having to add underinsurance to the mix.