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Type of Construction & How It Affects Your Premium

Calculating premium for Real Property has many different factors. One of the largest factors involved is the type of construction of the building. Use this article to find out how to determine what type of construction your building is, and what the construction type might mean for your rates.

While there are various styles of buildings and many different building materials available, each structure can be categorized into a certain class, based on the construction of its outer walls and what the floors consist of. Below you will find the different classes used, and how they compare to one another. The list is organized from Most Susceptible to Fire, to Least Susceptible to Fire:

Frame/Brick Veneer:

This type of construction is the most common for homes and small commercial buildings. This class gets its name from having the structure framed and supported by wood or light steel frame. Brick Veneer is part of this category because the brick on these buildings does not actually support the structure. Frame construction is the easiest class to burn down or blow over, but it is also one of the cheapest and most versatile buildings to construct.

Joisted Masonry:

In this class, the building is supported by cinder blocks, precast cement walls, or layered, load-bearing bricks. When cinderblocks are used, a brick veneer façade is often added for visual appeal, but, again, the bricks add no structural support. While the outer walls are masonry, the floors will be wood or light steel joists. Being so, this class is more expensive to build, but is less likely to be burned down or blown over than Frame.

Non-Combustible:

As the name implies, these structures are made of non-combustible materials. This type of construction is typical used for utility buildings and garages, as the structure is entirely made of light steel or similar light, non-combustible materials. These types of structures are harder to burn down than both Joisted Masonry and Frame, but wind resistance varies. These buildings are also less furnished than other structures (no drywall, no insulation, exposed wiring, etc.), making them cheaper to build than the other construction types.

Masonry Non-Combustible:

In Masonry Non-Combustible, the outer walls are made of cinder block, load-bearing brick, or poured cement, while the floors are either heavy steel, poured concrete, or both. This is typically the type of construction used for small to medium sized commercial/industrial buildings. This construction type makes the building harder to catch on fire and sturdier than the Joisted Masonry construction, making it safer.

Modified Fire Resistive/Fire Resistive:

These types of constructions are used for mid-sized to large buildings (E.g. Skyscrapers, multi-floor shopping complexes, etc.) as these buildings typically hold a lot of people and a lot of property. The construction can vary slightly, but these buildings are a step above Masonry non-combustible as fire-proofing techniques have been used on the structure. The jump from Modified to full Fire Resistive depends on the degree of the fire-proofing done. The common fire-proofing test is a multi-factor test. (The class rating is determined by the inside temperature staying below ‘X’ degrees for ‘Y’ or more hours with a fire burning at ‘Z’ degrees. Different variants of ‘X’, ‘Y’, and ‘Z’ create different fire-proofing classes of fire-proofing. )

Why Do These Classes Matter?

Determining the construction of the building is an essential part to receiving a quote. All property-insurers will need to know the construction type before they can provide a quote. This is because each construction type carries a different rate, depending on its susceptibility to certain perils (E.g. Fire). For example, let’s say you have an apartment building you wanted to insure. You think it is Frame construction when it’s actually Joisted Masonry. The premium you’ll pay is going to be higher than if it was properly rated as a Joisted Masonry building. Furthermore, some buildings are too risky to insure if they weren’t constructed with appropriate materials. As an example, some companies will refuse to quote buildings over two stories if they are Frame construction.

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

Preparing for Winter: A Homeowner's Guide

The leaves are starting to fall, the days are getting shorter, and Husker Football is in full swing. Just around the corner is winter, and with it brings many possible headaches for homeowners. This article will give a list of items to do to prepare the exterior of your home for the winter.

The autumn chill has set upon Nebraska, whether we like it or not. The months ahead will only get colder, and with Nebraska weather you never quite know what to expect. Though there are some things you just can’t avoid (thus your Homeowner’s policy), there are a few maintenance items that you can do to help keep your home claim-free this winter:

• Start out with a visual inspection of your roof. If it’s a pitched roof, make sure there aren't any missing shingles or tiles. Also make sure to check for warping and worn-out shingles. For those with flat roofs, make sure bubbles haven't formed, and make sure that the gravel is thoroughly covering the membrane. Have any problems fixed.

• Next, inspect the flashing. The flashing is the covering where your roof changes from sloped to vertical (or horizontal to vertical).  It can also be found around skylights, vents, and chimneys. Worn out flashing is a great place for water to slip underneath, causing big headaches later on. Make sure to have any damaged or worn out flashing replaced.

• While still on the roof, make sure all of the gutters and downspouts are clean. Leaves, dirt, and shingle bits can clog them (parents, you might find some missing toys while you're at it!). Clogged gutters will trap water, and when it freezes, all sorts of problems can happen.

• Now make your way off the roof to inspect the premise. Make note of any trees with dead branches or branches that hang over your home. Make sure to have these types of branches trimmed, as the weight of snow and ice along with high winds could make them fall, damaging your roof or hurting someone walking underneath them.

• If you found large problems with your roof and it needs to be replaced, now is the time to consider upgraded hail-proof roofing products. Many insurers will provide a discount for new roofs, and most offer an additional discount for hail-proofing.

Nobody likes claims, so take an afternoon to check over the exterior of your home. Catching a small problem before it turns into a big one could save you a lot of time and money! 

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

Agreed Value: Combating Coinsurance

In this article, we will be discussing how Agreed Value affects the Coinsurance Clause on property insuring policies, and how Stated Value works on your auto policy. Please be familiar with Coinsurance, Replacement Cost, and Actual Cash Value before reading this article.

The Coinsurance Clause is a safeguard that keeps property properly valued. You can insure your home for its full worth with Replacement Cost (RC) valuation, or you can insure it for its depreciated worth with Actual Cash Value (ACV). However, sometimes you want to insure something for an amount that isn't either of those values—this is where Agreed Value comes in.

Let’s use an older home for an example. Its Replacement Cost is $350K, and after depreciation, it’s only technically worth $200K, which is the Actual Cash Value amount. However, its market price is $150K. Wanting to insure it for what it is worth on the market would end up in a coinsurance penalty at claim time, so you changed the valuation to Agreed Value. With Agreed Value, the Coinsurance Clause is suspended, so no penalty would apply if a loss were to occur. Using Agreed Value usually results in a premium charge, but would most likely cost less than insuring the home for the full $200K.

Another use for Agreed Value is going beyond ACV. Using the same values as the first example, let’s say the homeowner has put a lot of time and money into the house. The homeowner believes the home is actually worth $250K. Using ACV, the most that the homeowner would receive after a total loss is $200K. However, using Agreed Value, the homeowner can insure the home for any amount he or she wants that is in between the ACV and RC amounts—as long as the insurer will agree to it.

When insuring vehicles, insurance companies automatically insure them for ACV. The Stated Value of the car is the current value, which accounts for depreciation. However, if the car is damaged mid-term, the Stated Amount given at the policy inception may be outdated, and the amount paid out may be less than the Stated Amount. To bypass the Stated Amount uncertainty, vehicles can be insured at an Agreed Value. If the carrier allows for Agreed Value, the value shown for the car is the exact amount paid out after a total loss.

Agreed Value allows for policy flexibility that would otherwise be impossible with the Coinsurance Clause and Stated Value. There's a lot of options at your disposal to create the perfect insurance program for your situation, so make sure to discuss it with your agent!

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

Introduction to the Directors & Officers Policy

The Directors & Officers (D&O) policy has many similarities with other forms of liability insurance. However, the D&O policy is specifically used to protect the upper management (CEOs, CFOs, etc.) from lawsuits claiming that they've made poor decisions that have negatively affected the company/organization.

The Directors and Officers (D&O) policy is another straight-forwardly named insurance policy. It insures Directors and Officers of both for-profit and not-for-profit organizations, including educational institutions and privately held firms. It was created for CEOs, CFOs, and other directors, officers, and board members as they can be sued for their company's/organization's poor financial performance, and/or mismanagement of funds. Directors and officers have high levels of liability since they are such key players in their firms. Since they are often sued for being the cause of adverse financial situations, whether or not it was a foreseeable/preventable event, the D&O policy is often looked at as an extension of an Errors & Omissions/Professional Liability policy.

Triggering coverage of the D&O policy would happen when one or all of the directors and officers are brought into a suit that demands financial compensation for decreased value, mismanaged funds, and/or poor performance of the organization (supposedly) caused by their managerial decisions. (Note: the D&O policy will not cover claims of bodily injury or property damage, because those should be covered by other types of insurance) ‘Supposedly’ is in parenthesis because all accusations against the directors and officers, even if they are completely unfounded, will trigger coverage from the D&O policy. Once the policy has been triggered, it would then pay for their legal defense costs, and would cover any settlements or judgments made.

Noteworthy Elements of the D&O Policy:

Typically, the D&O policy acts as a reimbursement for the expenses incurred by the company/organization in defending themselves, as opposed to other policies that have a Duty to Defend. In a Duty to Defend policy, the insurance company pays for the legal representation/defense costs, but also provides the lawyer(s) as well. However, most D&O policies require the company/organization to find their own legal representative(s).

Most D&O policies are written on a ’Shrinking Limits’ basis, meaning that the defense costs reduce the D&O policy limit. This is different from other liability policies, such as the standard Commercial General Liability (CGL) policy. With the CGL policy, its policy limit is not reduced by defense costs. To say this in another way, the CGL’s defense costs are paid outside or on top of the policy limit. Conversely, in the D&O policy, defense costs reduce the policy limit. 

Shrinking Limits Example: Your firm’s officers get sued after stock prices drop, so your $1mil limit D&O policy with Shrinking Limits responds. It costs $250K to defend the officers in court, and then the suit is settled for $1mil. Your D&O policy would only cover $1mil of the claim, leaving $250K to be paid out-of-pocket.

Another Element of almost all D&O policies is that they are written on a 'Claims Made' basis instead of an 'Occurrence' basis. This may require the insured to purchase 'Tail Coverage' when switching carriers. If this is the case, make sure to discuss Claims Made and Tail Coverage with your agent.

Policy language varies greatly in D&O policies, and one policy provision you need to watch out for is the Hammer Clause. The Hammer Clause refers to the policy language that states that if the insurance carrier suggests that the insured(s) offer a settlement but the Insured(s) refuse it, the insurance carrier will not pay for anything that happens afterwards. So any defense costs, new settlements or a final judgment against the insured(s) will be paid out-of-pocket. The Hammer Clause effectively forces the insured(s) to agree to the settlement, even if they believe they didn't make any mistakes. The basis for the Hammer Clause is that it is often far less expensive to make an initial settlement out of court than to battle out the suit in court. However, agreeing to pay the settlement is effectively accepting responsibility, and can be personally damaging to the insured(s) career(s) and/or can be detrimental to the firm's image when the insured(s) didn't actually make a mistake.

A Soft Hammer Clause is the policy language that allows the insured business to retain coverage after rejecting a proposed settlement from the insurance carrier. However, all expenses incurred after the rejection will be subject to a coinsurance penalty (typically 50%), requiring the insured to pay their part of the coinsurance percentage.

Stop, Hammer Time: Your $1mil D&O policy is triggered when stockholders sue for poor managerial decisions that lead to reduced stock prices. Before the court date, the insurance company offers a settlement of $300K. Since you don’t believe you made any wrong decisions, and you don’t want your public impression to take a hit, you reject the settlement and continue to the hearing. However, the final judgment ends up in favor of the stockholders and they are awarded $400K, and an additional $200K in defense costs was incurred after the settlement rejection.

With the strict Hammer Clause, you would have to pay the excess $600K out of pocket.

(400 + 200 = 600)

With a Soft Hammer Clause of 50%, you would have to pay $300K of the excess out of pocket.

( [400 + 200] x .50 = 300 )

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

Causes of Loss—Modifying Your Protection

Every insurance policy has perils that are covered and excluded. In Property insurance policies (E.g. your home, commercial building, etc.), the policy follows the ‘Cause of Loss Forms’. The Forms are Basic, Broad, and Special. Each Form insures your property against different perils, with Special being the most thorough coverage.

Note: Before the three Forms can be properly discussed, you’ll need to know what a Named Peril policy and an Open Peril policy mean. In a Named Peril policy, the coverage provided is limited to the perils that are specifically named. If something happens that isn’t specifically named, the claim will be denied. Conversely, in an Open Peril policy, every claim scenario is covered except for named exclusions. So if a claim was caused by literally anything other than the named exclusions, it is covered.  

Basic:

As you’d expect from its title, the perils covered by Basic Causes of Loss are very limited. This Form is a  Named Peril coverage, covering your property for only the most basic perils. Typically, your Basic form will cover the following:

• Fire
• Lightning
• Windstorm/Hail
• Explosion
• Smoke
• Vandalism
• Aircraft or Vehicle Collision
• Riot or Civil Commotion
• Sinkhole Collapse
• Volcanic Activity

Broad:

Broad Form is another Named Peril coverage, expanding on the perils found in the Basic form. The Broad Form includes all of the Basic Form’s perils, and expands the coverage to include the following:

• Burglary & Damage Caused by a Burglary
• Falling Objects
• Weight of Snow and Ice
• Freezing of Plumbing
• Accidental Water Damage
• Artificially Generated Electricity

Special:

As you might have guessed, Special Form is written on an Open Peril basis, making it the most comprehensive coverage form. The biggest benefit to the Special Form is that it would cover odd, completely unforeseeable accidents that would otherwise be excluded in the other policy Forms. Being an Open Peril policy, the Special Form typically has the following exclusions:

• Ordinance or Law* 
• Power Failure*
• Earthquake**
• Flood** 
• Neglect
• War
• Nuclear Hazard
• Intentional Acts

*These exclusions could be covered by adding an endorsement to the policy and paying additional premium.

**These exclusions can sometimes be added by endorsement or by purchasing a separate policy.

The bottom line:

Not all policies are made equally. Don't leave things up to chance—always make sure to check what coverage Form your property insurance is written on. When you compare insurance quotes, always make sure to take a look at the policy language—even two ‘Special Form’ policies could have different exclusions! 

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

Understanding Your Homeowner's & Renter's Policy

Many people don’t fully understand how their Homeowner’s or Renter’s policy works. This article will give a brief overview of the coverage included in both policies, and will provide links to articles that further explain the coverages and terms.

Homeowner’s and Renter’s insurance policies are package policies designed to cover the insurance needs of the average renter or homeowner. There is a lot of overlap with these policies, but the Homeowner’s policy covers the extra property exposures that they face. Each of the policies have coverage parts, designated by different letters. Below is each coverage part, with a description of what it does:

Coverage A, Damage to the Home:

Coverage A is exclusive to the Homeowner’s policy, as a renter (obviously) doesn't own their residence. The coverage provided can be widened or narrowed, depending on the provisions inside the policy. The first provision that modifies coverage is what valuation the home is written as—either Replacement Cost or Actual Cash Value. The abridged explanation is that Replacement Cost valuation would provide you with a brand new home after total loss, where Actual Cash Value would reimburse you with the market value of the home, allowing you to go find another home of similar price to purchase.

Another provision that modifies Coverage A is what Cause of Loss Form it is written on. These Forms define which Perils your home is insured against. The Forms are Basic, Broad, and Special, with Basic providing the narrowest of coverage and Special being the widest. Lastly, you are required to insure your home for approximately its exact worth due to the Coinsurance Clause.

Coverage B: Other Structures:

The Other Structure coverage is another Homeowner’s policy exclusive, as it covers any unattached buildings or structures on your property (such as a shed or gazebo). The amount given by the coverage is usually 15% of the Coverage A amount, and can be adjusted to accommodate your specific needs.

Coverage C, Personal Property:

Both the Renter’s and Homeowner’s policies have Coverage C. This section provides coverage for all of your personal items, such as your TV, furniture, clothing, etc. Like Coverage A, it is subject to Replacement Cost or Actual Cash Value valuation and the Causes of Loss Forms. However, Coverage C is also subject to Sublimits. Sublimits typically apply to collection items, such as furs, guns, precious metals, etc. To properly cover all of your personal property, you may need to increase the Sublimits, or alternatively, you can Schedule each individual item.

Coverage D, Additional Living Expense:

Also known as Loss of Use coverage, Coverage D can be found on both the Renter’s and Homeowner’s policies. Coverage D would reimburse the policyholder’s expenses after a covered Peril makes their home uninhabitable. So if a fire destroys your home, Coverage D will pay to put you in hotel while your home/apartment is being rebuilt. It will also pay any additional expenses you have to pay, such as increased cost for food. The amount provided for Coverage D varies, but can usually be increased. Note that this coverage typically is only available for a stated amount of time, such as coverage for up to six months after a covered loss.

Coverage E, Personal Liability: 

This section covers the renter or homeowner and their family against lawsuits (legal liability). Situations that would be covered by your Personal Liability coverage would be if your dog bites someone, if a guest trips and injures themselves on your property, if you damage someone else’s property, Personal Injury, etc. The limits can typically be set as low as $50,000 up to $500,000. (the Personal Umbrella policy provides additional liability coverage on top of the Personal Liability coverage)

Coverage F, Medical Expense: 

Also known as Medical Payments coverage, this coverage is available for both Renter’s and Homeowner’s policies, and it is a supplementary coverage to your personal liability. Though your Personal Liability coverage will cover any medical expenses that you’re held liable for, the Medical Expense coverage will pay the medical expenses of people who harm themselves on your property even though you didn't negligently cause it. Essentially, this coverage was designed to pay their medical bills to keep you out of court.

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.