RISK ASSESSMENT

How Much Insurance is Enough?

When purchasing insurance, it is important to buy the right amount for your particular circumstances. The following summarizes our experience. For ease of understanding, the following generalizations are categorized as Physical Assets or Liability.

Physical Assets
Physical assets include all of your physical possessions including your primary and secondary homes, autos, boats and other items that are subject to insurable perils.

Homeowners – For many, the cost of their home can be the largest single concentration of investment monies. But yet, according to numerous insurance researchers, most homeowners are underinsured. There are a variety of reasons why this is the case, including homebuilding material inflation, failure to increase coverage after home improvement upgrades and a booming real estate market which inflates replacement cost valuation. The fact remains, in the event of a major loss, coverage is inadequate in the majority of instances.

It is extremely important that the replacement cost limit in the homeowner’s policy (Dwelling Coverage A) be a current and accurate representation of what it would cost to rebuild your home in its entirety using materials and craftsmanship of like kind. When estimating the replacement cost consider the home’s features, its size, the nature and quality of the construction, the materials used, and where it is located. It is a recognized fact that the cost of construction will vary from town to town based upon the profit margin expectations of builders.

The replacement value of your home often varies significantly from its actual purchase price, its estimated market value, its assessed value and its appraised value for taxes. In many instances, it can cost more to rebuild your home than to buy a new one.
Kettle Creek can help you to estimate the replacement cost of your home. As a guideline and tool to help you think through the process consider the following:

Auto Physical Damage - Auto insurance blends several types of coverage into one policy including: physical damage to your auto, bodily injury and property damage liability, medical, and uninsured and underinsured motorist’s coverage. In terms of physical damage to your own auto, coverage is available on either an Actual Cash Value (“ACV”) basis or an Agreed Amount basis. In essence, with ACV the customer’s recovery is determined after the loss and is based upon the published value of the car and its perceived pre-accident condition as determined by a claims adjuster. Alternatively, the Agreed Amount approach takes into account the values as published in those same guides but states the value in the policy at the outset of the policy period. In most instances, the value insured is agreed to by the insured and the insurer prior to policy inception. Coverage for physical damage should reflect the actual market value of the vehicle. It is Kettle Creek’s opinion that this is a superior way to insure an auto for collision or comprehensive coverage.

Other First Party Injury - Uninsured motorists and underinsured motorists coverage (“UM/UIM”) is probably one of the most misunderstood forms of insurance. It is bundled as part of your automobile policy and in rare instance, will be included in a personal excess liability policy. Uninsured and underinsured motorists coverage (UM/UIM) provides first party coverage in the event an accident occurs and the operator of the other vehicle does not have liability insurance or does not carry adequate liability insurance. According to the summary of by-state auto insurance laws published by the Insurance Information Institute (http://www.iii.org/individuals/auto/a/canidrive/ ) the highest minimum required limit for bodily injury is $25,000. It is apparent that $25,000 is sorely inadequate should a major accident happen, so purchasing UM/UIM is a way to protect you against the financial irresponsibility of other drivers.

Personal Liability
Personal Liability pays for liability claims arising from accidents that occur on your premises resulting from your actions (or failure to take action) or as a result of your activities. Liability includes, but is not limited to, damage to the property of others, bodily injury, contractual liability and personal injury to name a few of the types. Having adequate protective limits is imperative.

Third Party Liability – As a rule of thumb, Kettle Creek believes that the limits of liability purchased should be equal to or greater than the total market value of all of your assets including real estate, other possessions, financial assets and retirement funds. Should an untoward event take place that results in a law suit, it is quite possible to be sued for more than you have, and with the recent change in personal bankruptcy laws, it is more difficult to protect your assets than ever before.

The Building Blocks – We generally recommend buying $500,000 of Homeowners Personal Liability as part of the Homeowner’s Policy and buying $500,000 in liability limits as part of the Auto Policy. Should you have a boat that, because of length or the horse power of the motor, necessitates the purchase of a separate boaters policy, be sure the Protection & Indemnity limits equal $500,000. This is true with all of your assets, including vacant land. Buy $500,000 in liability limits in all underlying policies. Supplement the underlying policies with Personal Excess Liability coverage such that the sum of the underlying liability limits purchased, plus the umbrella liability policy limit, is equal to, or greater than, the market value of all of your assets. The following graphic conceptually portrays the thought process:

How Much Insurance is Enough - Liability

What Actions You Should Take

So what should you do to be sure you are adequately protected?

• Prepare an inventory. Calculate the replacement cost.
• Calculate the market value of all of your assets.
• Consider your’s and your family’s potential loss exposures (homes, boats, cars, kids, dogs, pools, domestic help, trampolines, etc.);
• Recognize that you can be sued for more than you have.
• Understand that the insurance company has the obligation to defend you for covered losses.
• Review your policies to be sure you are properly covered. Know what is covered and what is not covered.
• Call us!