The smart way to buy property insurance

Question:
What are some of the things that I should pay attention to when buying insurance for a commercial building that I own? It was built about 10 years ago and was recently valued at $30 million. The walls are made of reinforced concrete blocks while the roof and floor are of the same materials. A hairdresser and a car-parts retailer are the occupants. The many earthquakes that are now taking place - especially the ones in Haiti and Chile - have made me extremely nervous. The building has never been insured.

- BC, Spanish Town PO, St Catherine

Answer:
The recent earthquakes in Haiti and Chile provide interesting contrasts. The differences between them are germane to any local conversation about risks and insurance, and how risks are handled.

Many persons here bury their heads in the sand when talking about the damage that natural disasters can cause. They ignore our long history of hurricanes and earthquakes. Many thanks for posing your question at this time.

The January 12 earthquake in Haiti was estimated to have killed more than 200,000 persons. The Chilean quake on February 27 - which was about 900 times stronger - killed fewer than 1,000 persons. Few persons and businesses in Haiti bought insurance to protect their assets against damage by earthquakes. Consumers there paid non-life premiums of US$19 million in 2008. Chileans paid US$2.3 billion in premiums to insurers that same year.

strict building code

Ten per cent of Chilean houses were insured against earthquakes. Six out of every 10 businesses had coverage. There were no building regulations in Haiti.

Chile has one of the strictest building codes in the world.

Most of the funds for the reconstruction of Haiti are expected to come from grants and loans from other countries - sometime in the distant future. This assumes that donors will honour their commitments. In the case of Chile, the financial resources will come from international insurers and reinsurers. Moneys will be paid under the terms of contracts that were signed long before the earthquake.

Some persons here feel that our buildings are overdesigned. They believe the buildings will withstand anything that mother nature throws at us.

I am sceptical. Our existing building code was developed after the 1908 earthquake. The Jamaica Institution of Engineers - whose members should know say that if an earthquake similar to the one that struck Chile were to take place in Jamaica, 70 per cent of the buildings here would be destroyed.

All of these things, I believe, validate your decision to stop 'self-insuring' your building and to transfer some of the risks to the insurance market.

The following things should be borne in mind when thinking about insuring your building:

You are exposed to two kinds of losses in the event that the building is destroyed or damaged. Funds will be needed to rebuild it if it is destroyed, or to repair it if was damaged. If either of these events occurred, you would also suffer a loss of income. Perils insurance can protect you against physical loss or damage of the building, as well as from the loss of income.

Perils insurance contracts provide protection against loss or damage from fires, earthquakes, hurricanes, floods, riot and strikes, malicious persons, explosions and impact by aircraft and vehicles. Coverage for earthquakes, hurricanes and floods - which costs about 80 cents out of every $1 of premium - are 'married' with other risks. They cannot be bought without fire insurance.

Perils insurance policies have compulsory deductibles (or excesses). The excess is 2.0 per cent of the sum insured. It applies to each loss that arises from earthquake, hurricane and flood. This is another way of saying that only 98 per cent of the insured amount is protected. The policyholder carries 2.0 per cent. Your deductible, based on a sum insured of $30 million, would amount to $600,000. Each loss would have to exceed $600,000 before insurers would pay you anything.

Property insurance contracts are subject to 'average'. The condition of average - as it is properly called - is intended to penalise consumers who underinsure. It says that if the replacement value of your building was, say $40 million, but you insured it for only $30 million, that decision will affect how much you will be paid in the event of a claim. For example, if the building suffered a loss of $10 million, insurers would pay only $7.5 million. In the event of a $10 million claim for earthquake, the consumer would collect only $6.9 million. This would be because of the combined effect of the average clause and the excess ($30 million/$40 million x $10 million x 100 - $600,000). Most persons tend to complain about how unfair the average clause is rather than focusing on getting their sum insured right.

Insurance companies should be financially strong. They should be around to withstand calamities like those in Haiti and Chile. Buying insurance on the basis of the cheapest premium should not be the most important factor in making this kind of a decision, as many persons believe.

Five years ago, I wrote an article headlined "When the 'big one' strikes". It was written after the demise of Dyoll Insurance Company, which occurred as a direct result of Hurricane Ivan in 2004.

Our 'big one' has not occurred as yet. My hope and prayer is that it will not take place any time soon; that we will have more time to make plans to lessen the impact it will have on our lives.

Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. Email: aegis@cwjamaica.com or send text (SMS) message to 812-7233.