“High School” Insurance

Recently, I had the opportunity to visit with a friend of mine.  Since I recently opened an insurance agency, he asked me to take a look at his coverages to see if I could do an “apples to apples” comparison with what he had and see if I could get him “a better deal.”  Since I’m in the business of writing insurance, it was my pleasure to do so.

He faxed me his declaration pages and I took a look at what he had. He was insured with a couple of very reputable insurance companies, so I knew that he was at least somewhat protected.  The second thing I noticed, however, was that his coverages were a complete mish-mash.

Most people, when purchasing insurance, are looking to get a lower rate.  They consider insurance to be one of those “necessary evils” that goes along with living in the modern age.  The state of California requires it by law, and you can’t close escrow on your home without it.  That’s about all most of us really think about when we make insurance purchases.  There are, however, some very real things that people, especially homeowners, need to consider when choosing coverages.

My friend has three vehicles, three kids under driving age, is married, and owns two homes:  one that he lives in, and one that he rents out.  His coverages went something like this:  Liability for all three vehicles  15/30/25, Uninsured motorist 15/30 on two cars, and no uninsured motorist on the beater truck.  Comprehensive and Collision deductibles at $250 for all three vehicles.  He also had $500 deductibles on both of his house policies.

While most people wouldn’t see anything amiss here, as an insurance professional, and a risk advisor, I see loads of problems.  I asked my friend how he came up with the coverages.  After much head-scratching and thinking back, he realized that he was carrying the same coverages that he had when he purchased his first car right out of high school. He got the 15/30 liability because it was all that was required to drive legally, and he got the $250 deductible because he didn’t think he could afford more than that if something were to happen to his car in an accident.  He had changed auto insurance companies a couple of times since then, but he had just asked the agent to do an “apples to apples” comparison.  He had been approached by his various insurance agents in the past regarding his coverages, but he had blown them off because he thought that they were just trying to sell him more insurance that he didn’t need.  Basically, he still had “high school” insurance even though he had graduated years ago.

My friend and I are both a few years removed from high school, but his coverages had not caught up.  The only thing he really knew about his home insurance was that his escrow company set it up through an insurance agent that they knew that would provide an evidence of insurance document in a hurry, since he and his wife had not chosen a company prior to the closing date.  The price seemed reasonable so they went with it.

In a situation like this, I try to make all of the insurance work together and cover the most glaring gaps in coverage.  My friend was woefully uninsured on the liability side, and way over-insured on his physical damage coverages.  It’s easier to understand if you look at a real-life scenario in which the coverage gaps become obvious.

Imagine that my friend is driving out to his job at Edwards Air Force Base.  He’s going the speed limit, but sees a tumbleweed rolling toward him from the desert.  He looks over at the tumbleweed to gauge if he will be able to miss it.  When he looks back at the road, he sees a minivan stalled in the roadway with its emergency lights on. There is no way he can stop in time and he rear-ends the minivan going about 50 miles per hour.

Much to his horror, he finds out that the minivan is occupied by a woman and her three children.  The woman is unconscious and the children look like they are injured as well.

After the police arrive and the ambulance takes everyone away, he calls his insurance company to report the accident.  Fortunately, he’s okay, just a little shaken up.  He feels terribly about the accident, however.  His insurance company takes the claim and he waits to see how everything plays out.

In a little over two weeks, he gets a letter from his insurance company telling him that his coverages will likely not be sufficient to cover the loss.  While he will only pay $250 out of pocket for the repairs to the vehicle in which he had the accident, the $30,000 provided by his liability coverage will not be NEARLY enough to cover the bodily injury sustained by the mother and her children.

Right on the heels of the letter from his insurance company, he receives a certified letter from an attorney representing the mother. The attorney states that the damages he is claiming on behalf of his client exceed $250,000.  My friend feels a pit in his stomach because he realizes that to raise that kind of money, he is going to need to sell one of his houses and put a second mortgage on the other one. This accident will be haunting him for a long time.

Fortunately for my friend, this is a fictional story.  Unfortunately for other folks, this scenario has been a reality.  People have had their futures destroyed by a tumbleweed rolling down the road.  They only had “high school” insurance.  When you are in high school, the world tends to be pretty forgiving when you make mistakes like the one discussed above.  When you’re on the other side of forty, however, the world gets a lot less forgiving.

I suggested that my friend make the following adjustments to his insurance portfolio.  First of all, raise the deductibles on everything to $1000.  By doing this, he saved himself almost $900 a year.  In my opinion, spending $900 a year to save yourself $750 in case of an accident that will probably not happen is a bad use of the insurance dollar.  Also, take the comprehensive and collision coverages off of the beater truck.  He was spending about $250 per year to insure a $1000 truck.  Once again, not a good use of the insurance dollar.  While he could barely afford the $250 deductible when he was in high school, $1000 would not be too difficult to come up with in the event of a loss to his vehicle.

Secondly, I showed him how little it would cost him to raise his liability limits to $250,000/$500,000/$100,000.  Essentially what this means is that if the aforementioned accident scenario were real, he would probably have been fine from a coverage point of view.  The numbers mean that he has $250,000 worth of bodily injury coverage for one person, and $500,000 worth of bodily injury coverage for the total incident.  He also has $100,000 worth of coverage for the other person’s vehicle:  more than enough to buy a new minivan.  I also suggested that my friend consider purchasing a personal liability umbrella policy.  In my friend’s case, $1 million worth of extra liability coverage would cost him only about $250.00 per year.

So how did my friend fare?  One would think that with all of this extra coverage, he would be paying tons more.  The interesting thing, however, is that after all is said and done, he is actually saving about $75 per year.  This is WITH the liability umbrella policy.  You may ask how this is possible.

First of all, my friend got major discounts by bringing all of his policies to one company.  Most major insurance companies offer multiple-line discounts, and they often multiply when you add additional coverages like life insurance to the mix.  There was major savings right there.  Also, he had the “beater truck” with another insurance company, so he added multiple-car discounts to the already substantial multiple-line savings.

Finally, by raising his deductibles to $1000 and eliminating comprehensive and collision on the truck, he saved a signficant amount of premium which he then used to increase his liability coverages.  As far as his vehicles go, the stop loss amount is the value of the vehicle.  With the liability portion, there is theoretically no ceiling to how much you can be sued for.  It just makes sense to let your coverages “graduate.”

If you would like to see how you can graduate your “high school” insurance, feel free to contact me at (661) 946-4224.  My office is at 44309 Lowtree Avenue, Lancaster, CA  93534.

(The “friend” mentioned in the story above is a compilation of a number of my customers who have benefited from the risk management approach to their insurance needs).