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Coastal Living: Bad Weather Pushes Insurance Higher

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As Mother Nature’s fury reminded us this week, weather can be devastating. That’s not lost on insurance companies writing policies in coastal areas, where the cost of having a beach home — or one kind of close — just keep rising.

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Indeed, even being near the coast in a hurricane-prone area can put a bull’s-eye on property owners’ pockets. Consumer after consumer report skyrocketing premiums.

Christine Juneau, who lives a dozen miles from the beach in Parkland, Florida (near Fort Lauderdale), has watched her insurance go from $2,800 a year in 2000 to $4,100 last year. Her premium for 2011: $7,026.

“It is frustrating to keep paying more and more to insure a house that seems to be worth less and less every year on the real estate market,” she says.

That’s a common refrain, particularly among those who live in areas deemed to be at high-risk for storm-related damage. But what many don’t realize is the cost of the premiums is tied to the cost of labor and materials to rebuild a home, not what it would take financially to buy a new one.
“An insurer is looking at the need to rebuild,” says Chris Kissell, senior managing editor of Insurance.com. “The market value has no relevance in that case.”

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Higher costs for the raw materials combined with a new look at the potential exposure for insurers does, he said.

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Growth in coastal areas and an increase in destructive storms that have cost insurance companies have combined to push consumer costs sharply upward.

“No pun intended, it’s the perfect storm,” Kissell says.

High-end homeowners can particularly feel the pinch, since their properties will exceed the coverage provided by the federal flood insurance program and most regular homeowners’ policies. In some cases, they could find themselves holding at least four separate policies to insure their coastal homes: homeowners’, windstorm, flood and excess flood coverage.

“That’s where it starts to get expensive,” says Loretta L. Worters, vice president of the Insurance Information Institute.

But Daniel Odess, president of Florida-based East Coast Public Adjusters, says the issue is less one of heightened risk and more about insurance company profits. He argues that insurance companies, which have powerful lobbying operations, have portrayed such things as insurance fraud by their customers as a reason to hike rates.

“There is such a focus on the profit by the insurance companies,” he says. “It truly is more about making money than the things that have happened.”

As for premiums, Odess says: “They’re absolutely at a record high.
His advice to homeowners:

Read your policies and know what’s covered and what’s not

Make copies of policies and seal them in bags in two separate locations

Digitally document your home from all sorts of angles, particularly to show what you’ve done to prepare (not just show personal property) to avoid having a claim denied or minimized

High-end homeowners, in particular, should be sure of what their coverage includes — Though premiums are higher they often come with more conditions

“We put so much faith and trust in the insurance industry we forget this is just another contract — a contract to protect the largest investment in your life,” Odess says.

Worters of the Insurance Information Institute says consumers often don’t understand all the issues affecting their insurers and the rate increases they face. Natural disasters elsewhere in the world, for instance, can have an impact on the reinsurance market which will then affect the costs of U.S. insurers, she says.

Plus, Worters says, with the interest in living near the coast — which has steadily been increasing — the risk of catastrophe grows.

“We’re building homes where they shouldn’t be built,” she says. “These homes are at a much higher risk.”

Wind-related damage by far is the biggest cause of property damage in the U.S. When it comes to insurance payouts, hurricanes and tropical storms dominate, even though tornadoes tend to be more lethal.

On average, tornadoes account for $1.1 billion in damages to crops and properties, Worters says. Hurricanes, she said, cost an average of $5.1 billion a year.

With coastal development growing and an active hurricane season forecast (the season starts June 1), the prognosis for losses — and insurance rates — is bleak.

“Disaster losses along the coast are likely to escalate in the coming years, in part because of huge increases in development,” Worters says. “One catastrophe modeling company predicts that catastrophe losses will double every decade or so due to growing residential and commercial density and more expensive buildings.”

Hurricane Andrew, which devastated South Florida in 1992, was the storm that sent the message of how expensive it could be when a natural disaster strikes, Worters says. Insurance companies have to take in more money than they pay out for the just-in-case that insurance exists for.
“That’s why they have to have money in reserve – to pay those claims,” she said. “We wouldn’t be a very good business if we didn’t do that.”

Meanwhile, consumers are feeling the pinch and the pressure to avoid their coastal dreams.
The Marshalls were living in Rocky Point., North Carolina, off the Cape Fear River and called it quits when homeowners’ insurance was set to rise 40%. They moved further inland.
“The people who own property along the coast, especially on the barrier islands, have to be very rich to afford it,” Frankie Marshall says.

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