From the May 2013 issue of Investment Advisor • Subscribe!

Premium Care: Why Specialty Insurance Carriers Make Sense

In the wake of Hurricane Sandy, advisors might want to investigate specialist insurers for their clients

According to Ross Buchmueller, when the financial crisis hit, specialist insurance carriers’ market share began to erode. Consumers trying to cut expenses turned to cheaper homeowner’s policies from standard carriers.

However, when Hurricane Sandy roared up the East Coast, some who lost homes and possessions found that economizing might have been penny wise but pound foolish. By February, insurance agents were seeing an uptick in inquiries about specialty coverage.

Buchmueller, president and CEO of Privilege Underwriters Inc. and founding member of PURE (Privilege Underwriters Reciprocal Exchange), said the superstorm highlighted “the difference in being with a standard household carrier versus being with a specialist.”

Rosalyn Binday, president of Advocate Brokerage in Scarsdale, N.Y., said that after Sandy there were distinct differences in how client claims were covered by specialists and by standard carriers. “Neighbors would have coverage where their carrier didn’t, and [homeowners] were becoming aware that there’s a world of difference from company to company.”

She recalled one instance in which two houses, one insured by PURE and one by a standard insurer, experienced severe damage from a tree limb crashing through the roof. While the PURE adjuster worked quickly and settled the claim “very fairly,” the other company provided its clients with “a very unpleasant experience every step of the way.” It disagreed with valuations, challenged choices of people to repair the damage, and their clients “felt they were treated as if they were cheating.”

Then there’s the case of the raccoon: A wayward raccoon had taken up residence in the homeowner’s attic, unbeknownst to the family, and “lived there merrily until it collapsed and landed in the living room.”

Under normal circumstances, a wild raccoon indoors can do a lot of damage, but this was extraordinary. The raccoon, “frenzied, hysterical and hurt, knocked over every lamp. It bled on couches and Oriental rugs, and flung its body into doors and windows.”

Binday pointed out that a conventional policy would cover damage to wall-to-wall carpeting, doors and windows as part of the structure, but not to furnishings; if the cause of the loss isn’t on its named perils list, it’s not covered. When was the last time you saw “raccoon bleeding” on a named perils list?

Customers may believe abandoning specialty coverage will save money, but Binday disagrees. “The interesting thing,” she said, “is that a company like PURE is not expensive. You can move your money in different areas and get different deductibles.”

Buchmueller pointed out other differences between specialists and standard carriers. Living expenses could be particularly high for a HNW family displaced bySandyfrom aManhattanloft or a home on the beach. After the storm, available living quarters in hard-hit areas were difficult to find, with correspondingly high costs for a comparable place to stay while their own homes were uninhabitable.

A specialist, said Buchmueller, “focuses on like kind and quality, so lifestyle is maintained.” He added that specialist coverage would “not have preset limits, so in cases like this, where the cost to rent property goes up, [the insurer] responds more generously” than a standard carrier; the specialist “will do its best to make you whole.”

Another potentially costly difference is in deductibles. In hurricane-prone areas, standard policies carry high deductibles, and specialist policies offer policyholders the option of choosing even higher deductibles “to reflect [their own] liquidity and willingness to assume more risks,” Buchmueller said.

However, after Sandy, if the loss was greater than $50,000, those deductibles were often waived by specialist insurers. Homes with significant wind damage or trees through the roof “often had not only full coverage, but no deductible.”

Other differences include coverage for backed-up sewers and drains, sump pump failures, and expanded flood insurance coverage; coverage for trees that fall on a homeowner’s property but do no other damage (not covered by traditional policies); and even limited contributions to prevent future losses.

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