Property and Casualty (P&C) insurance dates back to the 1600s, when individuals insured their ships and cargo before overseas journeys, and in the days following the Great London Fire. Ben Franklin started the first fire insurance company in America in 1752; and by the early 1900s, the insurance industry started to resemble the one we know today.
All insurance is intended to help manage risk by exchanging “risk of loss” for premium dollars. This article is the first of a two-part series that discusses P&C Insurance specifically.
Together, P&C insurance is a very important aspect of the comprehensive financial plan, a part that is often overlooked by the average person or family when constructing their plan for financial independence. When meeting with new clients, we have even seen instances where other financial planners neglected to review this important protection.
What is P&C Insurance?
Property insurance protects your property (i.e., the stuff you own), such as your home, car, apartment, and belongings.
Casualty insurance provides liability coverage if you are found legally responsible for an accident that causes injury to another person or damages their property.
Together, P&C insurance includes three main areas:
- Homeowners/Renters Insurance
- Auto Insurance
- Liability Insurance
This article highlights areas within homeowners and renters insurance policies that can impact the success of your financial plan.
Homeowners and Renters Insurance
Homeowners insurance protects your home and belongings against covered perils, such as theft and fire. Such policies include liability coverage to protect you in the event you’re found legally responsible if someone is injured at your home or you cause damage to someone else’s property. Coverage may include replacing the item itself, compensating for loss of income, or reimbursing you for extra expenses incurred due to the loss of the item.
Renters insurance provides the same coverage, but specifically for the tenant’s lost or damaged possessions. Not every policy is the same, so whether you own a home or are renting, you should understand the extent of your protection.
The typical homeowner policy includes coverage for your Dwelling and Other Structures, Personal Property Coverage, and coverage for Loss of Use. Dwelling and Other Structures coverage may help pay for the rebuilding or repair of the physical structure of your home if it is damaged by a covered hazard. Hazards covered by most policies include fire, smoke, lightning strikes, windstorms, hail, explosion, vandalism, theft, damage caused by the weight of snow, falling objects, and damage from aircraft and motor vehicles. Non-covered hazards often include floods, earthquakes, and sewer backup. You should check your policy to verify if these (or other hazards) are included or excluded.
The amount of coverage for your dwelling is also very important. Remember that market value is different from replacement cost, which refers to the cost to rebuild your home as it was before the disaster. The amount of dwelling coverage should be at least 80% of the replacement value and is calculated by multiplying the average building cost in your area by the square footage of your home. Verify the amount with your insurer, as well as if you have Guaranteed Replacement or Extended Replacement cost coverage on your dwelling, which adjusts the dwelling coverage annually based on current market conditions.
Condo insurance is a separate and distinct policy that protects against structural damage to the interior of your unit. The Condo Association is required to have insurance for the dwelling.
Personal Property and Liability Coverage
All three policies – homeowners, renters, and condo – provide for Personal Property and Liability coverage as well.
Personal Property coverage is insurance for your “stuff,” as George Carlin would refer to it. Your choice is typically between replacement cost coverage or actual cash value. If you have replacement cost coverage on your personal property, the insurance company will reimburse the cost of purchasing a new item at the time of the claim. Actual cash value covers the replacement cost of the specific item less depreciation. We recommend opting for replacement cost coverage.
Liability coverage helps cover medical bills, pain and suffering, lost wages, and legal costs in the event you are found responsible for causing harm.
Loss of Use Coverage
Loss of Use coverage is helpful if you need to relocate from your home if it is deemed uninhabitable. It may cover relocation expenses or additional living expenses including storage, laundry, parking fees, pet boarding, moving costs, and temporary housing (such as a motel or apartment). You can purchase a policy with a limit to such coverage, which saves you money on your premium. However, it is ideal to have the full loss covered; thus, we only recommend limiting the coverage if you need to save money upfront.
If you have any questions about your policy, do not hesitate to contact your wealth advisor. Without the proper coverage in place, your financial plan could be negatively impacted in the event of an accident.
To learn more about the other two areas of P&C Insurance – Auto insurance and liability coverage – read “How the Auto and Liability Insurances You Select Can Impact Your Financial Plan.”