Put Noah on Standby

by Mark Goldwich

First thing this morning I got a call from a contractor who was drying out someone’s home. He had an unusual situation he was dealing with, so he called to see if I could answer some question he and the homeowner were wondering about.

As is true for much of the Southeast, and other parts of the country as well, we have been experiencing afternoon thunderstorms just about every day this week. Yesterday’s deluge was especially heavy, as evidenced by the semi-pro baseball game I took my son to but got rained out before even starting, and the news reports of localized flooding. The lightning show was also quite spectacular.

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In any event, the contractor explained he had been inundated lately with cases he described as

“floods”, and today he was dealing with a homeowner who had water in at least 4 rooms, ruining carpet, baseboards, drywall, and any contents that happened to be on the floor. The water came in under a door when their atrium took on more rainwater than could be drained off (as it typically does during heavy rain). So the question was, “is this water damage covered by the homeowner’s insurance policy, or by a flood insurance policy?”

The immediate answer, as is often the case, was, “that depends”. I realize people are not fond of that response, and it sounds like I am trying to avoid giving a definitive answer, but especially when it comes to insurance, there are often more questions that need to be asked before an answer can be given with any degree of certainty.

One of my questions was “what did the insurance company say?” I’ll admit this question was more a question of curiosity, since my answer is never based on what an insurance company says, and just as I would expect, the answer from the insurance company was, “you’ll need to wait for the adjuster to come out and make a determination.” And while that doesn’t sound like a good answer, as we’ll see later, it really is the proper response.

Odds are even when the adjuster comes out, an answer will still not be available, as adjusters today are rarely able to make such coverage decisions in the field, as they did in previous decades. I would think as technology improves the speed of communication and research, such decisions would be easier to make on the scene, but the reality is that adjusters today are usually relegated to asking questions, taking photos and measurements, and then relying on a claim examiner in an office somewhere (who often has little to no field experience handling claims) to make the final decision.

After asking the contractor a few more questions, I learned the atrium was an exterior atrium, created by 3 walls that were at ground level. I also learned the area of water that rose high  enough to enter the home was not very large, consisting mainly of the area of the atrium itself. In other words, the “puddle” did not extend to any fence or neighbor’s property line, and was much less than 2 acres in size (we’ll see why this was important shortly).

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Armed with this information, I was able to answer with a high degree of certainty, which of the homeowner’s policies (home, or flood) would cover this event, even without having to read either policy, and here’s why: homeowner’s insurance policies generally do not cover for rain water which collects on the ground and enters the home (they call this “surface water” or “flood”); and flood insurance only covers for events specifically defined as “flood.”

According to FloodSmart.gov, a “flood”, in simple terms, is “an excess of water on land that is normally dry.” The official definition used by the National Flood Insurance Program (NFIP) is “A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from:

• overflow of inland or tidal waters;

• unusual and rapid accumulation or runoff of surface waters from any source;

• mudflow*; or

• collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.”

*Mudflow is defined as “A river of liquid flowing mud on the surfaces of normally dry land areas, as when earth is carried by a current of water. Other earth movements such as landslide, slope failure, or a saturated soil mass moving by liquidity down a slope, are not mudflows.”

So basically, if it rains a whole bunch, but the water that accumulates into an ever-increasing puddle does not reach the neighboring property, and does not exceed 2 acres, it is not covered under the flood policy, as in the case of my friend the contractor’s new customer.

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Therefore, the answer to the question “is the water damage covered by homeowners or flood insurance?”, in this case is, “probably neither.” Why? Because surface water is excluded by the homeowners policy, and the event did not meet the definition of “flood” in the flood policy. The insurance company should have known that in the few minutes it took for me to make that determination, but before they can deny a claim officially, they are obligated to fully investigate the facts of the claim, and document for their own records whether or not it should be covered, in the event the homeowner does not accept their conclusion and hires an attorney to fight them on it. And as explained to the contractor, my answer was based on the information given to me at the time, and if the homeowner wanted, I would be happy to fully investigate the facts and compare my findings to those of the insurance company.

One more thing about this particular example is that this homeowner did not have flood insurance. Like most people who do not live in a designated flood zone, if their mortgage company does not require them to carry flood insurance, or if they don’t have a mortgage, they simply don’t get a flood policy. In this case, it probably would not have mattered anyway,  I don’t believe it would be covered by the flood insurance policy based on the facts provided, but it highlights a problem we see on a regular basis – people often don’t consider flood insurance until after it’s too late. Even though most insurance companies provide bold warnings that flood is not covered under the homeowners policy, and even with all the commercials FEMA puts on TV advising people to get flood insurance, if it is not required, many people simply don’t get it. Perhaps they think if they really needed it, someone would make them buy it.

But as noted by FloodSmart.gov, “people outside of mapped high-risk flood areas file over 20-percent of all National Flood Insurance Program flood insurance claims and receive one-third of Federal Disaster Assistance for flooding.”

The bottom line is don’t wait for Noah to sound the alarm, or for you find out first-hand what flood insurance is all about before talking to your agent about flood insurance. It may be a good idea even if you are not in a flood zone, and it should be less expensive there as well.

Mark Goldwich is president of Gold Star Adjusters, a group of public insurance adjusters dedicated to helping citizens get the maximum settlement for any insurance claim.  

A Little Summer Reading

by Mark Goldwich

At breakfast this morning my kids were talking about going to the library today with their grandma to pick out some books to read over the summer. They talked about some of the books they might get, or even the types of books. Naturally, they wanted to read books that were “fun”, and I thought they should read books that were more educational.  In any event, it got me thinking about books, reading, and school, so I thought I would take this opportunity to write about what I first learned on the subject of insurance in school – which for me would have been in college.

People sometimes ask how I started working in insurance, and when I tell them I graduated from the University of Florida with a Bachelor of Science degree in Insurance, they ask how that happened. It was a bit of a fluke, actually. When I went to register at UF, I met with an administrator who was helping me fill out forms, and she asked what I wanted to major in. I said, “Business”. She said, “OK, so you want to enroll in the Business Administration program, but what about your major?” Again I replied, “Business?” not sure what I had missed the first time around. She then explained, “Business Administration is the college program, but you need to tell me what specific degree you want.” Clearly, I had not put a lot of thought into this, so I gave up on trying to not appear ignorant and replied in defeat, “I don’t know, what are my choices?” She began to quickly rattle off a list as if I wasn’t the only knucklehead who didn’t know what degree he was seeking, “Marketing, Management, Economics, Finance, Insurance, Accounting,…”

“Insurance” I promptly quipped, interrupting her as if I knew this all along. She didn’t need to know I only said this because my dad was an insurance agent, and I had no clue what the others entailed (I didn’t have much of a clue what insurance entailed either, but that was just something else she didn’t need to know, and at least it was a word I recognized). “OK, Insurance it is…and don’t worry, you can change your major at any time” she said as if most people who first choose Insurance end up switching.

And the rest is history.

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But before the rest, came several fairly boring courses on Risk Management and Insurance. And

while I don’t remember a whole lot directly from those classes (it was the 80s, after all), I remember enough to help me understand some key concepts, and to see how insurance has changed over the decades.  Insurance (in one form or another) has been around for a long, long time, since about 2000 BC, and while the policies today are very complex, the basic concept is very simple: Insurance is the transfer of risk of loss from one entity to another in exchange for money. Insurance is a form of risk management.

In life, there are always risks. There is a chance you will get sick, or your property will be damaged, or you will die, etc. For each of these risks, there are really only a few ways to deal with them:

Avoid the risk – just as it sounds, you avoid the activities associated with the risk. If you don’t want to die in a plane crash, you avoid flying. If you don’t want to lose a home to fire or foreclosure, you rent. Avoidance is a fairly certain method of managing risk, but it is not always practical. Also, by avoiding flying to a work conference, you may be more likely to die in a traffic accident. Avoidance is the most effective, but the most extreme method of risk management.

Reduce the risk – this method takes into consideration that you can’t simply avoid everything, so instead you merely seek to reduce the chances of the risk in question. Examples would include doing research to fly on only those airlines with the best safety records, taking better care of yourself in terms of nutrition, sleep and exercise, completing a safe driving course, having working smoke detectors and fire extinguishers in the home.

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Share the risk – this method includes insurance, and involves an agreement to share the loss (or

gain) with one or more parties. As populations have grown, so have the potential pools of parties looking to minimize risks by sharing the risks with others. Instead of placing all of their goods on a single ship, early merchants would place smaller amounts of goods on multiple ships (alongside other merchants), in the event one of the ships were to sink. Insurance typically involves a concept called “risk transfer”, where the policyholder transfers the risk of financial loss to the insurance company, in exchange for a fee (called premium), alongside many other policyholders seeking similar risk protection. Technically, they are not transferring the risk of the specific loss to the insurance company, because the insurance company does not literally go through the loss, but instead they are merely entering a contract to be reimbursed or compensated following a covered event.

Retain the risk – this involves accepting the loss from a risk, and is what is commonly known as self-insurance. Basically, any risk that cannot be avoided, and is not shared or transferred, is retained. Often, there is a combination of risk transfer and risk retention when it comes to insurance. The deductible, co-payment, and any loss in excess of what the policy pays, is retained. Why would someone retain the risk? Maybe the potential loss is so small that the cost to transfer that risk is high compared to the cost of paying for the loss itself. Or maybe the potential loss is so large, that it is either uninsurable, or the cost of insuring it is just not feasible.

So let’s delve a bit deeper into the guiding principles of insurance. The 4 principles are:

Insurable interest – this simply means that the person taking out the insurance would suffer a monetary loss upon the occurrence of the insured event. This is essential. Otherwise, one could insure property they have no interest in, and does not benefit by the safety of the property, and they could cause harm just to receive the policy’s financial benefit. 

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Utmost good faith – the insurance contract, like other contracts, must be based in good faith, and

would not be valid if the parties obtained the policy by way of fraud or misrepresentation. This is why you must answer policy application questions truthfully and accurately, and be sure to read the entire application prior to signing it, especially if someone other than yourself answers any of the questions. Why? If you misrepresent an answer on an insurance policy question, the insurance company can not only decline to pay your claim, even if the claim is completely unrelated to the application question, and even if the claim was otherwise covered by the terms of the policy, by rescinding the policy altogether. I call this “denial by rescission” and find some companies specifically and actively use this as a strategy to reduce claim payments (a little bit of risk reduction of their own).

Material facts disclosure – similar to utmost good faith, the person taking out the insurance has a duty to disclose material facts relevant to the subject property. This duty may even extend to material facts you are supposed to know about. Obvious examples would including disclosing your correct age and health condition on a life insurance policy, or the distance to a fire hydrant on a policy that insures against the risk of fire.

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Principle of indemnity – this principle states the insurance policy should be a contract of indemnity, and nothing more, so the person receiving the policy benefits after an insured loss would be no better off, nor worse off, than they would be had the loss never occurred. The idea here is that the person taking out the insurance should not be able to use the policy for “speculation”, or to profit from a loss.

In my experience, it is this last principle that insurance companies have deviated the most from in the past several decades, and they have done this to themselves in order to market their products more effectively as competition has increased. Replacement Cost coverage is one example, where the insurance company promises to pay you for a brand new item to replace your old item. Or maybe you have seen commercials recently for car insurance that promises to replace your old car with one that is a model year newer. These may be great concepts for marketing and sales, but they just don’t conform to the principle of indemnity.

Congratulations on completing your summer reading for today. I sure hope it was more interesting than the textbooks I had to read in college, and that you learned a bit in the process. Class dismissed!

Mark Goldwich is president of Gold Star Adjusters, a group of public insurance adjusters dedicated to helping citizens get the maximum settlement for any insurance claim.  

Why Buy Insurance?

by Mark Goldwich

Just this week I got asked a question I am asked several times every year. I was speaking with a woman who had recently had a water loss at her home, and she was considering whether or not she needed our assistance with her homeowners’ insurance claim. Along the way, as it tends to happen, we talked about her insurance policy, what it generally covers, and what it generally doesn’t.

While homeowners insurance policies vary from company to company, there are many similarities when it comes to coverages and exclusions. Most policies cover by one of two methods – “all risk”, which certainly sounds like it covers the insured for just that, all risks, or anything that happens. Does anyone really believe an insurance company will pay for anything that happens to your property? Of course not. What they really mean, and what you should hear (in your head) when they say “all risk”, is that the insurance company will cover you for all risks that are not later excluded in the policy.

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If the policy is not an all risk policy, it is what is called a “named peril” policy. With a named peril policy, you are given a list of perils that are covered, and also a list of exclusions. Generally, there are exceptions to the perils, and also to the exclusions. If the event that damaged your property is a named peril, you still need to review the exclusions, but if the event is not one of the named perils, it doesn’t matter what the exclusions are – it’s just not covered.

It might surprise you then to hear both policies appear to cover similar things, such as fire, windstorms, accidental pipe leaks, and theft, to name a few.  Both types of policies tend to exclude similar things, such as wear and tear, mechanical breakdown, flood, pollution, rust, mold, repeated leakage, and more.

So what ‘s the difference?. There are two main differences. First, the all risk policy covers more items, simply because it covers the limited number of events listed in a named peril policy (and for that reason, it is both more expensive, and  it is easier to market as a better insurance product). The other difference, at least as how it has been explained to me, is that with the all risk policy, the legal burden to prove a claim is not covered is on the insurance company; whereas with a named peril policy, the burden prove a loss is covered is on the insured.

After we talked about her policy and the coverage and exclusions contained, that’s when she asked the obvious question: “Why do I even have insurance anyway?”

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There are a few answers to this question (even though it’s almost always said halfheartedly). If there is a mortgage on the property, as is usually the case, the mortgage company requires the homeowner to purchase insurance to protect the mortgage company’s financial interest in the property.  In that case, the homeowner has no choice, but it may be for the best.  If there is no mortgage on the property, the homeowner does have a choice, and a decision to make. They could purchase insurance, or not.

Most people in this situation decide to purchase insurance rather than saving the money they would otherwise be spending on insurance premiums to use that money to pay for any unexpected events that the crop up. They know it would take several, if not many, years to save enough money to cover the expense of even a relatively minor loss. And they also know a major loss, at almost any time, would leave them wholly unable to rebuild or replace everything lost.  This could mean financial ruin for them.

Ultimately, people buy insurance because they can’t afford to suffer a major loss without it. They prefer to transfer the risk of paying for such a loss to a company that is financially able to pay a large loss, or even a total loss. They can afford manageable monthly payments, and they can usually afford their deductible, but just as people tend to buy homes using a mortgage instead of paying cash, they use insurance to pay for repairs to the home instead of paying for those repairs themselves.

Even those who could afford to pay cash for their home, or who could pay cash to repair or replace their home in the event of a catastrophic loss, tend to use insurance to spread and share the cost, as well as avoiding liquidation of assets or conversion of  investments in order to generate the needed cash.

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You see, when people ask the question “Why do I even have insurance anyway?” it’s more of a rhetorical question. They know why they have insurance, they are merely complaining about paying higher and higher amounts of premiums for lower and lower benefits. It should also be noted this question invariably comes when a claim is not being covered, or not being paid completely. No one ever asks this question after collecting $200,000 for a large loss just months into their first year of insurance when they have paid less than $1,000 in premiums. No, it usually comes after 10 years of paying premiums faithfully and then having a relatively small claim declined.

It just goes to show, whether or not we have a mortgage, and whether or not we’ve been paying premiums for a long or short time, we buy insurance just in case, for peace of mind, to hedge our bets, to leverage another financial tool at our disposal, and for any number of other reasons based on our personalities, our risk tolerance, and our desire for stability. In other words, why ask why?

Mark Goldwich is president of Gold Star Adjusters, a group of public insurance adjusters dedicated to helping citizens get the maximum settlement for any insurance claim.  

Accidents Never Take a Vacation

by Mark Goldwich

Summer is kicking into high gear. The kids are out of school, the fourth of July is upon us, the heat index is high (dangerously so, for some), and people are taking vacations, myself included.  In fact, as I write this, we are just taking off from DFW Airport in Texas, on our way back from a fantastic family vacation in San Francisco, California.

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This is probably not the best time to think deeply about vacation-related accidents, but I have a few hours without walking to the next trolley, taking pictures of the local sights, or eating yet another high-calorie meal. So here I am, on the way to a cruising altitude of 33,000 plus feet, wondering how a properly designed wing system and a pair of well-maintained engines help this very heavy people mover defy gravity, while trying to focus on risk management. 

I'll start by going back over a month ago, when we were planning the trip. My mom, whose idea it was to take the trip to begin with, said she wanted to get trip insurance, and suggested we look into it as 

well. She had actually bought - and even used similar 

trip insurance in the past - and so now she usually 

gets it on her more expensive trips. 

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Trip insurance works similar to other types of insurance where you can pick and choose the coverage and amounts you are interested in obtaining. You can choose from medical coverage in the event you become sick or are injured while outside of your normal health coverage plan (obvious factors to consider here are what your health insurance or medicare plan does not cover). You may also elect to purchase travel protection that can reimburse you for prepaid reservations if your trip is delayed or canceled. There are even policies that include baggage protection should you have items lost or damaged while being transported. You may also add accidental death or dismemberment coverage just in case you are killed or dismembered while flying in a jumbo jet or riding a cable-car on the way to Fisherman’s Wharf (if you have life insurance, you probably don’t need this).

My wife and I talked about coverage based on the cost of the insurance, and what we felt were fairly low odds of needing the insurance'  As a result we decided to pass. After all, that is what voluntary insurance is about - factoring in the cost of the insurance, the odds of mishap, the cost of not having the insurance, and the peace of mind that supplemental insurance is supposed to impart. 

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Let's face it, any number of unfortunate accidents could have occurred before or during our trip that would have prevented us from going at all, or that could have cut our trip short.  This occurence would have cost us thousands in unrecoverable expenses, as a result setting us back financially. Then again, nothing did happen, and in hindsight, we made the right decision and saved almost $500. For me and my family of four, the cost of the plan was just too much for what we perceived as the odds of anything happening that would prevent us from taking our vacation. 

For my mom, the cost of her plan was outweighed by the cost of her trip, should something unexpected come up as had happened before. Nothing happened to her either, but her plan was much less, and it was worth it to her for the peace of mind she enjoyed.

While we were away, we rented a car for two days to go sightseeing beyond the San Francisco area. When I got to the counter, it was suggested that I might want to opt for up to three different types of insurance; collision coverage for the rented vehicle, liability coverage for damage I might cause to others, and medical coverage for me and my family should we be injured while using the rental. 

I'm not going to say it was a particularly hard sell, but even after I mentioned that I have full auto coverage and health insurance, the rental agent briefed me on some of the potential advantages of purchasing their plan, like not having to file a claim with my own insurance company. Let's just say that I wasn't swayed. For me, the value of convenience and peace of mind is fairly low, especially when combined with my experience at not needing such supplemental insurance in the past. If just one factor was different (for example, if I didn't have good auto insurance), I may very well have opted for the relatively inexpensive rental car policy. 

This is not to say you should always reject trip insurance or supplemental rental car coverage. Especially when driving an unfamiliar vehicle, in a strange place, the odds of accidents increase exponentially. Also you need to factor in the driving habits and conditions at your destination.  Needless to say, everyone has their own tolerance for risk, and everyone values intangibles like convenience and peace of mind differently. 

Knowing how to deal with risk avoidance and risk management is all about  being tuned into your own thresholds for dealing with risk, as well as knowing what risk management plans you already have in place. This and common sense  will go a long way towards helping you make financial decisions in this area.

Until next time, whether you are lighting off fireworks left over from the Fourth of July, or traveling near or far away, have a safe, happy, and healthy summer!

Mark Goldwich is president of Gold Star Adjusters, a group of public insurance adjusters dedicated to helping citizens get the maximum settlement for any insurance claim.