The author, at Bessemer Trust, argues that while the hurricane season cannot be controlled, proactive planning - including both insurance coverage and risk mitigation - is key to protecting properties and keeping loved ones safe.

When hurricanes blow – as they do at this time of year – it is a sharp reminder of the need for insurance protection and a sensible understanding of risks. The Gulf Coast region and places such as Florida’s eastern side are regularly affected (a fact that firms flocking to Florida might want to bear in mind). With a lot of HNW individuals and families based in regions affected by hurricanes, advisors need to know about how well covered they are, or not. 

In this article, Gary Pasternack, head of insurance advisory, Bessemer Trust, explores the terrain. (More on the author below.) The editors are pleased to share these views with readers; the usual editorial disclaimers apply. Jump into the conversation! Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com.

We’re halfway through the 2021 Atlantic hurricane season and, as the National Oceanic and Atmospheric Administration predicted, we’re seeing another year of above average activity. As recent Hurricanes Henri and Ida unfortunately demonstrated, rising sea levels and surface temperatures continue to intensify hurricane conditions, leading to often catastrophic damage. Insurance can’t solve all the harm that hurricanes cause, but advanced planning can help protect a family’s properties and loved ones both this year and beyond.  

Why windstorm insurance
Windstorms have the potential to significantly damage a home. While most homeowners’ policies cover windstorm damage, the specifics of that coverage often change in catastrophe zones. In areas prone to storm damage, insurers will frequently impose either a separate windstorm deductible which applies to damage from any wind, or a hurricane deductible which is triggered when a hurricane makes landfall or its winds enter a state of residency. These special deductibles are typically equal to 2 per cent to 15 per cent of the insured value of the dwelling and make the insured responsible for paying a larger portion of a loss. 

Insurers can also include a variety of other restrictions. Outside catastrophe zones, many insurers will pay the actual cost or a percentage of the dwelling limit, for rebuilding the house, additional living expenses and rebuilding to code. In catastrophe zones, these coverage amounts will often be significantly reduced. For instance, in high risk areas insurers may only pay up to the dwelling limit to rebuild, when in other locations they would pay the actual cost, even if greater than the limit.

In high-risk coastal areas, insurers may be unwilling to provide individuals with windstorm coverage on their homeowner's policy or may even decline to provide a homeowner's policy altogether. In these locations, it may be necessary to seek coverage from a secondary-market insurance carrier that offers a separate supplemental windstorm policy or purchase a homeowners policy with windstorm coverage.  

While windstorm insurance can be costly, having a well-built home or implementing risk-mitigation measures, such as installing storm shutters or reinforcing a roof can help lower premiums - or at least improve the insurability and protection of the home. In Florida, for example, insurers use a Uniform Wind Mitigation Inspection to assess how well the residence is built to withstand hurricane wind damage, which insurers use to underwrite and price policies. 

The case for flood insurance
Flooding is the most common - and costly - natural disaster in the US. 

While a homeowner’s policy usually covers water damage originating from inside a home, such as bursting pipes or overflowing fixtures, it often will not cover damages caused by floods - surface water emanating from outside a home, such as heavy rains or surges from rivers, lakes or oceans. For this type of coverage, consider obtaining a separate flood insurance policy or adding it to an existing homeowner’s policy through a special endorsement, if offered. 

Most homeowners purchase primary flood insurance through the National Flood Insurance Program (NFIP). With an NFIP primary flood policy, a homeowner can insure a home or condominium’s interior for up to $250,000 and a personal property for up to $100,000. Building structures on the property, such as a guest house, would each need a separate flood policy. Unfortunately, the structures most susceptible to storm damage - seawalls, docks and those built over water - cannot be insured.
 

Flood policy premiums range from $500 to over $10,000 and are largely determined by the flood zone and elevation of the residence. For example, a home located in a high hazard zone (an area with at least 1 per cent chance of flooding in a year) that is not elevated, will have one of the costliest policy premiums. 

While only a limited number of insurers offer private flood insurance, it can be worthwhile obtaining. This insurance will pay even if your property is the only one flooded, for instance, by heavy rains. Unlike the NFIP, Private flood insurance policies will pay for the replacement cost of damage to a secondary home and for personal property, and may pay for detached structures and additional living expenses.    

In areas at high risk of severe flooding, when the cost to rebuild a home and replace personal property is greater than the coverage maximums on a primary flood policy, excess flood insurance is worth considering. These policies pay when the primary flood policy limits on dwelling or personal property are reached. Excess flood insurance typically mirrors the respective underlying NFIP or private primary flood insurance policy regarding what’s covered, what’s excluded, and how losses are settled. 

As with primary flood insurance, excess flood insurance premiums vary depending on the flood zone, elevation of the residence, and coverage amount. They also can differ substantially from provider to provider. Working with an insurance advisor to set coverage amounts correctly to avoid paying for too much coverage is critical. 

Valuable articles insurance
Valuable articles insurance is designed to protect prized possessions, such as fine art and antiques. 

Though sometimes overlooked, valuable articles coverage pays for wind and flood damage, and may also be used strategically to reduce costs and eliminate deductibles. Even when a homeowner’s insurer won’t offer wind or flood coverage because the risk of loss is too high, a valuable articles policy may be available. 

To potentially lower costs, consider reducing the amount of personal property coverage on a homeowner's policy by the value of any fine art or antiques, instead insure those belongings as valuable articles.

This change may yield a net savings, depending on the relative cost of the personal property and valuable articles coverage. Even if a total premium increases, hurricane or other deductibles will often no longer apply to the fine art or antiques insured as valuable articles. 

This insurance also offers important benefits against flood damage. While NFIP primary flood policies only pay up to $2,500 for fine art and the functional value of antiques, valuable articles coverage can pay the full value. Under NFIP primary flood policies, for example, an antique chair would be solely assessed for its functional value as a chair, and no value would be accorded for its rarity or craftsmanship.  

Preparing for the unpreventable
While the hurricane season cannot be controlled, proactive planning - including both insurance coverage and risk mitigation - is key to protecting properties and keeping loved ones safe. Though there’s no one-size-fits-all approach when it comes to creating a comprehensive hurricane season plan, working alongside a trusted advisor can help ensure appropriate coverage for the damages that are unpreventable this hurricane season and in those to come.

About the author
Pasternack is principal and head of insurance advisory at Bessemer Trust. In this role, he is responsible for leading the insurance advisory group and advising clients on matters concerning insurance and risk management. Prior to joining Bessemer, Pasternack was vice president and manager of US Trust Company's insurance consulting group and a member of JP Morgan’s insurance and risk management department, where he specialized in designing and managing insurance programs for families, trusts, and estates. Before that, he was senior underwriter at the Chubb Group of insurance companies.

He is a founding trustee of the Private Risk Management Association, an organization dedicated to the high net worth personal insurance profession. He has published articles in Family Wealth Report, and other publications.