Reinforcing the Safety Net

Beth Pearson understands insurance isn’t anyone’s favorite topic.

“Insurance is something people don’t love to talk about, but it’s so key,” she said — and she speaks not only as president of Pearson Wallace Insurance in Amherst and Pittsfield, but from personal experience.

“I was in a car accident — I was hit head on,” she said, but she was able to sleep at night knowing she had the protection she needed.

“Insurance is a financial tool, and sometimes people forget that,” Pearson noted, adding that policies are dense and complicated, and people don’t always want to read them or have tough conversations with their agents, or they just take out policies with direct writers online and don’t worry about it — until they have reason to worry, anyway.

Beth Pearson

“Everything has gotten incredibly expensive lately. And people think they can save on their insurance — but skimping on insurance, or having a strategy of bare minimum coverage, can really backfire when a loss occurs.”

For this issue’s focus on insurance, we spoke with four local insurance experts on the biggest mistakes people make when it comes to insurance coverage and claims. Most of what they had to say fell into one of six categories.

1. Not Covering Full Replacement Cost

Pearson has heard plenty of questions regarding why clients need so much coverage on their home, and in this economy, she gets it.

“Everything has gotten incredibly expensive lately. And people think they can save on their insurance — but skimping on insurance, or having a strategy of bare minimum coverage, can really backfire when a loss occurs,” she said. “Your biggest investment is your home. So you don’t want to compromise on the coverage.”

And that means insuring not for the assessed value of a home, but the potential cost of replacing it — and everything in it — in the event of a total loss, Pearson explained.

“Someone might say, ‘my house was only appraised at $550,000; why do I want insurance for a million dollars?’ Well, it’s because you want the full replacement cost. And the elements that make up the replacement cost valuation include the cost of construction, the cost to meet all the new green standards, the cost of materials, and the time it takes to rebuild,” she went on, noting that even a current circumstance like the Strait of Hormuz disruptions could cause supply delays.

Meanwhile, fire, smoke, and water damage can wipe out almost all one’s possessions — and items like furniture, clothing, and others are more expensive to replace these days, she added. “If you’re only getting the cash value instead of the replacement cost, you don’t have the ability to recreate your home as it was before the fire.”

Christine Bey, Personal Lines manager at Encharter Insurance in Amherst, agreed.

“Most companies like to insure a home to replacement cost value — not what you purchased it for, not what you think the value of it is, but what it would cost to rebuild that home from the ground up at today’s building costs,” she explained. But there are other costs to consider as well.

“We can add other bits and pieces to a policy, like loss of use. So if you can’t stay in your home because of a covered claim, they will pay for you to stay in another home or rent a hotel. Loss of use includes coverage for all of your belongings in your home, too. Then there’s liability on top of it. There’s so much that goes into the policy above just insuring to the value of the home.”

Christine Bey

“Most companies like to insure a home to replacement cost value — not what you purchased it for, not what you think the value of it is, but what it would cost to rebuild that home from the ground up at today’s building costs.”

2. Not Including Specific Coverages

“Do you have a dog? What kind of dog do you have?” asked Michael Long, CEO of the AXiA Group in West Springfield. Those are important questions, he added.

“Some insurance companies exclude certain types of dog, and some require you to tell them if you’ve got a dog — and if you don’t, they might not pay the claim. And the average dog bite claim is over $50,000.”

Or take e-bikes, which have become very popular, selling in the seven figures annually.

“Most insurance companies do not cover liability that’s created on an e-bike,” Long said. “So if you’re driving down the road and you take a right and cause a car to smash into another car and somebody’s injured, you have no coverage. If you’re on a bike path and you hit somebody and they fall down and bang their head, you have no coverage.

“That’s a big problem — and, unfortunately, it’s not talked about very often,” he continued. “Some insurance companies say they will cover it, but if I read their policy, it’s not clear. So you’ve got to get something from your agent in writing that they’re covering that. I don’t care about the $3,000 for the bike. I mean, that’s important. But the $100,000 lawsuit, the $1 million lawsuit, that’s more important.”

On the commercial insurance side, there are a host of considerations businesses might not consider, some of them involving leases, Long said.

For example, “we’ve seen cases where there’s damage to a strip mall. Our customer is on the end — no damage on his property. The city comes in and says, ‘building law says, since half of this building is destroyed, we have to tear it down.’ The guy on the end, whose building did not have any damage, goes to turn a claim in, and the insurance company says, ‘where’s your damage? The fire didn’t cause any damage to your place. No coverage.’”

Pearson brought up a few specific commercial insurance products worth having, including employment practices liability insurance, which protects against worker claims that their legal rights have been violated; hired and non-owned auto coverage, which applies when, for example, a manager runs to the store for supplies and gets into an accident; and business interruption and extra expense coverage, which kicks in if, say, a fire shuts down a restaurant for five months.

“The property coverage kicks in as you start to rebuild the exterior and the interior, but you still have bills, you still have key employees that you want to keep, you need to pay yourself, maybe you have credit card debt,” Pearson said. “With business interruption coverage, the carrier pays the costs to maintain the business while you’re rebuilding.”

And it should be adequate coverage, she added. “If you have $2 to $3 million in sales, but your business interruption coverage is $100,000 and you’re paying the rest out of the pocket, that can go very quickly.”

3. Underinsuring for Personal Liability

Speaking of adequate coverage limits, personal liability in an accident — whether at home, at work, or on the road — is an extremely critical component of insurance, Bey said.

“Choosing price over coverage is probably the biggest mistake we see. We like to tell people that price isn’t always as important as that coverage. For example, the state requires you to have $35,000 worth of property damage on an auto policy. In reality, increasing that coverage is minimal in pricing. We always tell people, ‘if you go up to that larger limit, that $250,000, you’re only going pay maybe $50 more a year.

“It’s the same with a homeowner’s insurance policy. Liability is really important,” Bey added. “I feel like, these days, everyone is a little sue happy. We see a lot more liability claims coming through — dog bites, people being injured on someone else’s property, things like that. So if you have $500,000 worth of coverage on your policy, to increase that to a million, it’s only about $30 more a year.”

Pearson agreed. “If you’re putting on minimum liability, it’s easily exhausted by a serious accident. If somebody’s injured on your property, or if you cause a major, multi-car accident, the medical bills and legal fees can skyrocket way past your limits.”

And that applies to circumstances people might not even think about, she added.

“If somebody’s overserved at a party and goes out and kills someone, you’re liable. If you have teenagers, you might say, ‘hey, they’re 18 years old; they’re very responsible,’ and go to Aruba for a week. And the teenager has a massive party, and someone dives into the pool and breaks their neck — you’re liable. I tell people, ‘these are not just fictional events — they can happen.’”

4. Not Taking Simple Risk Mitigation Steps

The policy and premium comprise just the start of a good insurance strategy, the experts we spoke with said. Equally important are the steps a customer can take to reduce the risk of an incident in the first place.

“Anytime we write a new policy or we go over a renewal with a customer, we want to talk about all the options that companies have out there when it comes to discounts — and a lot of those discounts are related to mitigation of losses,” Bey said.

For example, “companies are giving better pricing to people who have newer roofs, or who have water leak detection, or a burglar and central fire alarm. There are discounts for all of that — and some of those discounts are pretty substantial.”

Michael Long

“Some insurance companies exclude certain types of dog, and some require you to tell them if you’ve got a dog — and if you don’t, they might not pay the claim. And the average dog bite claim is over $50,000.”

Long also noted the importance of automatic water shutoffs.

“The average water damage claim is over $100,000. But there are water sensors, and some insurance companies offer a reasonable discount for water damage coverage if you have them,” he said. “And most fires are created by electrical problems — not by lightning, not by discarding smoking materials, but electrical. And there are companies right now that are offering discounts for systems that examine your wiring by plugging something in, testing the wiring throughout your house.”

Pearson said people sometimes neglect easy fixes — such as an automatic water shutoff valve or Wi-Fi leak sensors by the washing machine and water heater — because there’s a little cost and set-up time involved. “But the impact can be huge. If you’re catching a leak early, it transforms a major mold remediation nightmare into a simple plumbing fix.”

On the commercial side, “you really should have a lawyer look over your contracts, and you should have safety meetings with your employees. Those are really big, and are going to help everybody be on the same page,” said Linda Eichstaedt, Commercial Lines manager at Encharter. “And document everything — keeping really good records is so important.”

She told BusinessWest she just had a conversation with a client about cyber coverage for a business. “They were asking, ‘why would we really need cyber coverage?’ We have tons of educational material, and I sent them examples of things that can happen if you don’t have it.”

The general consensus in the industry these days is that it’s not only big companies that are targets of cybercrime; anyone can be.

“Phishing attacks are going out all the time to all kinds of people. They don’t really distinguish between what type of business you have,” Eichstaedt said, which is why businesses should not only have a cyber policy, but takes steps to train staff to avoid becoming the reason a hack gets through, from multi-factor authentication to training on phishing emails. “So many businesses are working online, and with so much online presence, they don’t always realize the risk.”

5. Filing Too Many Small Claims

And when it’s time to file a claim … well, it might make more financial sense not to.

“Another thing people do too much is filing small claims,” Bey said. “Especially on a home policy, when you have a claim on your file, your insurance premium is going to go through the roof.

Linda Eichstaedt

“Phishing attacks are going out all the time to all kinds of people. They don’t really distinguish between what type of business you have.” 

“So when insured calls us and asks, ‘do I have coverage for this tree that just fell?’ we’ll have the discussion that ‘yes, you do have the coverage, but you have this deductible on your policy. And then on top of that deductible, if you do file a claim, you’re going to see a surcharge on your insurance the next couple of years,” she explained.
“So sometimes, it’s just not worth it to file a claim that’s under, say, $5,000 because, in the long run, you’re going to end up paying more in your premium.”

The idea behind avoiding smaller claims, Bey added, is that insurance is mainly for large losses, when a policyholder really needs the payout.

“If somebody has two losses, chances are the insurance company is going to non-renew them. And if you’re non-renewed, chances are nobody’s going to take you in the standard market, and you can expect somewhere between a 50% and 100% increase for three years,” Long said, laying out the actual impact of too many small claims.

“So if you’re paying $1,500 for your insurance policy, which is probably a reasonable average, and you have a $3,000 loss that you put in, and then you have somebody steal something, so you put in another $2,000 claim in, you’re going to be canceled, and your premium will double for the next three years at least — so you’ve lost money. It’s going to penalize you in the end.”

So if a customer calls to report the theft of a couple bikes worth $1,500 and has a deductible of $500 or $1,000, Long said, “I’m going to say, ‘you’d be crazy to turn in a claim.’”

6. Not Adjusting Coverage as Circumstances Change

The local insurance experts we spoke with all emphasized the importance of the client-agent relationship, and one time when it comes in handy is when life circumstances change.

“If you improve the value of your house by 5% — you put a deck on, or you put a sunroom on — and you don’t notify your insurance company, you’ve actually voided some of your coverage,” Long said.

Other changes that warrant a talk with the agent, Bey said, are a teenager getting a driver’s license (they should be put on the parents’ policy); the purchase of jewelry, art, or other items of high value; or brining home a motorcycle or boat.

“Some people buy a new toy, and maybe it’s not super valuable, but at the same time, you want to make sure you’re carrying that liability coverage in case someone gets injured while you’re using it,” she explained. “You may not want the collision coverage for it, but you’re going to want the liability.”

At the end of the day, it’s about clear communication, Pearson said, not only on the personal lines side, but for business clients.

“I’m big on sitting down with a commercial client once a year, or more, to do a review. ‘What are your goals? What are you planning for next year? What were the challenges this year?’ Insurance is an important financial safety tool. It’s incredibly important to your success.

“A great insurance expert is not just someone who sells the policy and disappears, but who acts as a chief risk officer for you,” she added. “It’s not just a piece of paper; it’s a promise to help clients, to give our expertise, and to make sure you’re actually covered when the worst case scenario might happen.”