Over the last decade, hurricanes and tropical storms have devastated coastal regions, with eight of the 10 costliest U.S. hurricanes occurring since 2004, according to the Insurance Information Institute.
Insurers have responded by limiting coverage and, at times, even excluding catastrophic perils. As a result, insuring properties—especially high-value ones—in coastal states has become increasingly complicated.
Depending on the location and condition of a property, it may take up to five insurance policies to provide appropriate coverage: homeowners insurance, wind and hail, excess wind, flood insurance and excess flood.
Coastal residents can usually count on the homeowners insurance policy for broad coverage on traditional perils such as fire, theft and vandalism. But coverage for losses arising out of wind, hail and flood may be minimal or even nonexistent.
The extent of coverage will depend on an insurance company’s underwriting standards. Ideally, a standard insurer provides a homeowners insurance policy without excluding wind and hail—though flood is almost always excluded.
If the property presents a risk that is unacceptable, an insurer may require a large wind or named storm deductible, exclude wind as a covered peril or deny all coverage completely. Agents should seek coverage from other insurers; most states require a diligent effort to place with at least three standard insurers.
If unable to obtain the necessary coverage, the property may need to be placed in the excess & surplus market.
E&S insurers may be willing to provide coverage, since they are not subject to the same rate and form approval process by the state regulators and can offer greater flexibility. Agents would work with a surplus lines broker to determine the appropriate policy. But keep in mind that such nonadmitted insurers are likely not covered by the state’s guaranty fund in the event of insolvency.
In addition to E&S insurers, property owners may have another option for coverage from their state residual markets, commonly called Beach Plans, FAIR plans or Wind Pools. The quality of coverage varies by state, but it is generally less comprehensive with lower limits than available from standard insurers.
A common scenario might involve a standard insurer providing a homeowner insurance policy that excludes wind and hail, combined with a residual market policy that covers only wind and hail. Some state residual markets do, however, provide a full homeowners insurance policy.
It is important to pay attention to the maximum dwelling limit provided by the residual market because it may be less than the replacement cost of the property.
In this case, it may be necessary to offer an excess wind policy provided by E&S insurers. This policy would be purchased in addition to the policy from the residual market and would only pay damages, if losses exceed the limit of insurance from the residual market. This scenario requires a total of three policies just to cover wind.
Flood has been excluded under the homeowners policy for decades, and most agents are well aware they need to recommend a separate flood insurance policy provided by the National Flood Insurance Program.
Flood coverage is not as broad as homeowners, and one of the most notable limitations is the maximum dwelling limit of $250,000. A high-value home with a substantial replacement cost would be woefully uninsured.
As many witnessed during Superstorm Sandy, rising waters can quickly destroy an entire structure, causing a total loss. Hence, property owners should also purchase a separate excess flood insurance policy if the NFIP policy limits are inadequate. This is typically written by an E&S insurance company, which will likely require the property owner to purchase a flood policy providing the maximum limits.
David Marlett is chair of the Appalachian State University Department of Finance, Banking and Insurance, and holds a distinguished professorship from the Independent Insurance Agents of North Carolina.