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Buying Home, Car and (maybe) Umbrella Insurance

Buying a house brings many joys, amongst them is insurance. This is an update to my last article on buying insurance and covers auto, home and umbrella insurance. I explain how I evaluated companies to buy insurance from and how I choose the limits for our insurance policies. In our case we bought everything from Amica. Our total cost savings by going with Amica over staying with Allstate was 17%.

Contents

1 Vetting the Players

In deciding which insurance companies to work with I want the answer to one question – Will the company pay off when an insured event occurs? It turns out that the answer to this question comes in two parts:

  • Is the company financially able topay off what it owes? To answer this question I check the "long-term" rating with major credit rating agencies A.M. Best (aa or aaa), Moody's (Aaa or Aa) and Standard and Poor's (AAA or AA). The values in parenthesis are the ratings each company uses to identify a company in outstanding financial health. I usually have to search a bit to find the 'composite' rating for the entire corporation.
  • Does the company pay off claims fairly or does it try to screw its customers?
    • First I go to Washington State Insurance Commissioner's website and navigate to Publications->Auto->Auto Insurance Annual Complaint Comparison Guide. This lists all the companies licensed to sell auto insurance in Washington state and assigns them a 'complaint index' based on how many complaints the commissioner's office gets about the company as a function of their size in Washington State. There is a similar report for home insurance, just go to the "insurance type" drop down and select "homeowners". I try to find companies that do well on both lists. Note that the same company can appear multiple times on the list because different people get assigned to different subsidiaries of the company and those subsidiaries can and do have very different ways of treating their customers.
    • I then go to Better Business Bureau and see what kind of complaints the company has. Large companies will have an "HQ" entry where the BBB collects complaints from all over the country. The BBB usually shares a general summary of the company (e.g. Satisfactory or Unsatisfactory) as well as a break down of how many complaints of what type the company gets and how the company resolves those complaints.
    • I also check J.D. Power and Associates Homeowners Insurance [Center(2006b)] and Automobile Insurance [Center(2006a)] ratings which give an 'over all experience' rating of up to 5 points.
    • Finally I'll search the Internet for the company's name with words like "sucks" or "rip off" or "cheat" and see what comes up.

2 The Line Up

Once upon a time I would have spent a bunch of time figuring out which companies to talk to. This typically saved me a lot of money. But now that I have a child I just don't have time the way I used to. So I cheated. I included Allstate because they are my current insurer and I have had good experience with them. I picked State Farm because their over all scores are actually pretty good and I used to have them and I liked them as well. Met life ended up on the list via an independent insurance agent. Amica ended up on the list because I decided to add J.D. Power's insurance surveys and they had won both the home and auto for the last several years running.






Allstate Amica Met Life State Farm










Financial Rating (A.M. Best/Moodys/S&P) aa/Aa2/A+ A++ (no long term)/?/No Coverage a+/A2/A A++ for short term but no longer term rating/Aa1/?





Insurance Commissioner Rating (Auto/Home) 0.57143/2.20690 0.35714/1 0.21429/0.72414 0.47619/0.48276





BBB Ration Unsatisfactory [of Chicago(2007)] Satisfactory, 1 complaint and they are a BBB Member! [of Rhode Island(2007)] Satisfactory [of Dayton(2007)] Yikes! [of Central Illinois(2007)]





J.D. Power (Auto/Home) 3/3 5/5 3/3 4/4





Internet Search "Sucks" shows up pages and pages of complaints including dedicated websites Everyone seems to love them. Fairly tame, especially compared to Allstate. "Sucks" shows up pages and pages of complaints including dedicated websites





3 Auto Insurance

I cover the details in my previous article on buying auto insurance. Only two things have changed since I wrote that article.

  1. Marina and I decided not to renew our AAA membership because it was too expensive (and we didn't save enough with AAA discounts) and now use emergency repair services from our insurance company
  2. Although we occasionally check on-line prices for auto insurance we generally want to get all of our insurance coverage from one company

But a brief highlight of what we look for:

  1. Our liability (both normal and under insured) – I have no idea what to set this to but it's set for us if we get umbrella insurance
  2. We take a $1,000 deductible on collision/comprehensive (generally the highest on offer)
  3. We don't carry collision/comprehensive on cars whose value is in the $2,000 range
  4. We don't carry personal injury protection (PIP) or other insurer provided medical insurance (we both have health insurance so we don't need the extra coverage)
  5. We make sure to point out that both Marina and I drive very little (under 7,500 miles a year) which usually gets us an extra discount

We also get a free copy of our C.L.U.E. Report to make sure we know what the auto insurance companies know about us including accidents, claims, etc.

4 Home Owners Insurance

For the basics we look for:

All Perils Coverage
Home insurance can either cover "named perils" or "all perils". Named perils only protects against the specific things the insurance coverage lists. All perils covers everything that isn't explicitly excluded like wars, floods, etc.
Insured Home Value
In the end home owners insurance is about, in the worst case, rebuilding the house from the ground up if it's destroyed. We have no idea how much that would actually cost so we have to rely on the insurance companies to give us an estimate. Yes, we can go investigate cost per square foot for constructions in our area, I actually tried that while I was buying our house to get a sense for how big the housing bubble was and frankly it didn't work. Nobody was willing to give me an estimate, there were always too many caveats. Unfortunately the price that houses sell for aren't a useful guide because they include the cost of building the house, the cost of the land the house is on and the developer's total profit. So in the end I had to rely on the prices I got across multiple quotes combined with Dwelling Replacement Cost Coverage (see next).
Building Ordinance & Law Coverage/Dwelling Replacement Cost Coverage
Changes in the law can significantly increase the cost of rebuilding or repairing a house. Stricter building codes can mean that when repairing damage not only does the repair have to meet the new codes but so does anything in the house the comes near the repair, this can cause serious price increases. So we make sure the policy has 'extra' coverage in case we don't have enough insurance. 25%-30% "overage" coverage is pretty typical. Note that "guaranteed" coverage isn't typically guaranteed, there is almost always a blanket limit somewhere you can't go over.
Personal Property Replacement Cost Coverage
By default when a piece of personal property is stolen or destroyed and we use insurance to replace it all we will get from the insurance company is the value of the item minus depreciation. So in the case of our 10 year old TV set if it were stolen we would get the cash value of a 10 year old TV set, which isn't much. In practice this means we would not be able to buy a new TV set. To address this problem home insurance policies (and rental policies) offer replacement cost coverage. With this coverage if an item has to be replaced the insurance company will give us enough money to buy a new item.
Loss Of Use Coverage
If the house is damaged badly enough that we can't live there while it's being repaired then we will need money to live somewhere. Coverage tends to get quoted either for a period of time (E.g. 12 or 24 months) or a dollar amount (e.g. 10% of the insured value of the property).
Personal Liability Protection
Beats me what's 'enough', but this is set for us if we get umbrella insurance.
Sewer/Drain Backup
Home Owners insurance doesn't usually cover water related damage but many will have a rider to coverage water damage from sewer/drain backup. This is about the only serious source of water damage for any of the homes I've lived in so I like to have it.
Extended Personal Property Coverage
Personal property coverage tends to be really limited for more expensive items like art or jewelry. For these more expensive items we have to get special riders that identify the property directly and covers it. I don't bother however with items like computers that (at least in our case) are worth much less than our deductible.
Deductible
We tend to go for the highest deductible we can. Currently that's around $5,000. Some companies offered higher deductibles but the savings in premium for these higher deductibles have been in the $10-$20/year range so we didn't bother.
Earthquake Coverage
As explained in more detail below I decided to get earthquake coverage. We took a 10% deductible. It's high enough to lower our costs but low enough to not leave us 'naked'. Allstate offered us earthquake coverage viaGeoVera but they use a 'one pot' deductible that ended up meaning that in practice the dollar value of our deductible was literally twice what it would be under a straight "10% of the value of the house" deductible.
Flood Insurance
As mentioned below floods are not a real issue where we live so we decided to skip flood insurance.
Mold Insurance
We live in new construction that in the time we have lived here has shown itself to be of good quality so we don't believe the probability of mold issues is high enough to be worth addressing. As such we skipped mold coverage.

4.1 Earthquake and Flood Insurance

That the Pacific Northwest is subject to devastating earthquakes is a closed question[U.S. Department of the Interior(2003)]. The Seattle area in particular is criss crossed with faults. But just because a bad thing can happen doesn't necessarily mean it will. The one question I've never been able to get a decent answer to is – what is the probability of a devastating earthquake hitting the Redmond area in the next 50 or 100 years? The chapter titled "When and Where Will the Next Big Earthquake Occur" [Noson et al.(1998)Noson, Qamar, and Thorsen] is as close as I have found to a prediction and if I'm reading it right it predicts 6.5/7.0 quakes every 35 to 110 years and even larger quakes every few hundred years.

But even that information isn't necessarily useful. For example, the 2001 Nisqually quake was 6.8 and while it was scary the damage to my home in Redmond and Redmond in general was pretty much zero. It didn't even shake the items off my shelves at home. The reason for the low level of damage is that the Nisqually earthquake happened very deep below the ground so by the time it reached Redmond the over all impact had been significantly reduced.

But I did find [Kahn et al.(2001)Kahn, Gamble, McConaghy, and Srull]prepared for the city of Redmond that outlined a number of risks that the city faced. The top of the list was earthquakes. I can't say that the reasoning in the report gave me a lot of confidence but it's the best I have. The report also explained that floods, although somewhat common, tend to be minor and aren't likely to occur anywhere near where I live. So I'll skip flood insurance. One new fact that I did learn from the report is that the area in which I specifically live is subject to landslides. Thankfully the area is thickly forested with deep ground cover but still, it's good to know. I will need to make sure that our earthquake coverage also covers landslides.

5 Umbrella Insurance

The general rule of thumb seems to be to have enough liability insurance to at least cover one's net worth. I suspect this rule comes from the famous American saying "I'll sue you for everything you're worth." But the rule doesn't make any sense to me.

For example, if we get sued for say, slander (all puns intended), our liability insurance would have to cover both the cost of hiring attorneys as well as the cost of any eventual damages if we lose. I can't come up with any rational reason why the cost of the lawsuit and the cost of the settlement should be in anyway related to our net worth. Damages are, at least in theory, supposed to be based on the damage done, not based on the offending party's ability to pay. I'm not naive, I recognize that juries, especially for punitive damages, take into consideration how deep the money well they are reaching into is, but that still doesn't account for things like lawyers costs.

Besides, if the argument is really 'how deep is the well' in terms of figuring out the damages then one needs liability insurance not just for one's existing net worth but also for one's future net worth. Courts can and do 'garnish' wages (e.g. take some fixed percentage of all money earned now and into the future) to pay off jury awards. So just covering how much we are worth today isn't enough, we would need to cover how much money we will make from now until we die.

Of course if the lawyers learn we have umbrella insurance they are likely to sue us for even more so they can drain the umbrella insurance and then move on to our actual assets and earnings. So maybe having umbrella insurance is a bad idea since it could just encourage lawsuits?

This all also begs a fundamental question – how likely is it that we will actually be sued? In deciding to cover an event with insurance one needs to take into account both how much the damage might be and how likely the event is to occur. Neither fact by itself is really very useful in determining appropriate coverage. Even in litigious America I have no clue as to how likely we are to be sued and what kind of legal fees and settlement amounts we are likely to be discussing.

Umbrella insurance, I suspect, certainly has a role to play in an insurance portfolio. It covers certain kinds of risks, mostly around "personal injury" we cause to others like liable, slander, physical harm, etc. that isn't covered by our existing home or auto liability insurance.

But still, the whole situation smells bad. Without some idea of what the size and frequency of the risk is (and I can't find a bloody clue in that area) how are we supposed to know how much umbrella insurance, if any, is prudent?

Color me confused.

References

[Center(2006a)] J.D. Power Consumer Center, editor. J.D. Power Auto Insurance Provider Ratings, 10 2006a. URL http://www.jdpower.com/finance/ratings/auto_insurance/index.asp.

[Center(2006b)] J.D. Power Consumer Center, editor. J.D. Power Homeowners Insurance Company Ratings, 10 2006b. URL http://www.jdpower.com/finance/ratings/homeowners_insurance/index.asp.

[Kahn et al.(2001)Kahn, Gamble, McConaghy, and Srull] Khalid Kahn, Jane Gamble, Eric McConaghy, and Collen Whitten Srull. Hazard identification vulnerability analysis – a special report prepared for the city of redmond, June 2001. URL http://depts.washington.edu/mitigate/HIVA.doc.

[Noson et al.(1998)Noson, Qamar, and Thorsen] Linda Lawrance Noson, Anthony Qamar, and Gerald W. Thorsen. Washington state earthquake hazards. Information circular 85, Washington Division of Geology and Earth Resources, 1998. URL http://www.geophys.washington.edu/SEIS/PNSN/INFO_GENERAL/NQT/welcome.html.

[of Central Illinois(2007)] Better Business Bureau of Central Illinois, editor. BBB Reliability Report – State Farm Insurance Company, 03 2007. URL http://www.peoria.bbb.org/commonreport.html?bid=6000391.

[of Chicago(2007)] Better Business Bureau of Chicago, editor. BBB Reliability Report – Allstate Insurance, 3 2007. URL http://www.chicago.bbb.org/commonreport.html?bid=12014144.

[of Dayton(2007)] Better Business Bureau of Dayton, editor. Better Business Bureau Reliability Report – Metropolitan Property and Casualty Insurance, 3 2007. URL http://www.dayton.bbb.org/commonreport.html?bid=6001943.

[of Rhode Island(2007)] Better Business Bureau of Rhode Island, editor. BBB Reliability Report – Amica Mutual Insurance Company, 3 2007. URL http://www.rhodeisland.bbb.org/commonreport.html?bid=8319.

[U.S. Department of the Interior(2003)] U.S. Geological Survey U.S. Department of the Interior, editor. Earthquake Hazards in Washington and Oregon Three Source Zones, 10 2003. URL http://www.pnsn.org/CascadiaEQs.pdf.

11 Responses to Buying Home, Car and (maybe) Umbrella Insurance

  1. Dean Alt says:

    It was really great that your link was one of the first to pop up when I googled on umbrella insurance because it immediately confirmed my suspicions – that there is almost no way to know how much coverage you need. 99% of stuff on the topic is written by insurance people.

    The only thing I’m confused about is, if you get sued for something that the policy would cover, for an amount greater than, say, your one million dollars policy, does that mean the insurance company provides the lawyers and, if so, doesn’t that mean they are going to fight like hell not to lose their one million dollars, whereas they might not fight so hard if it was just say, a 50,000 claim? More generally, are you likely to have a much better defense if you are teamed with a big insurance company on a big claim?

    Also, are you recommeding Amica over State Farm? Would your answer change for a major event like earthquake where company resources will be put to the test? Also does it make sense to have Amica if you live in So Cal?

    Thanks so much,
    Dean

  2. Dean Alt says:

    I didn’t realize my comment above would be posted! But, I guess that is fine!

  3. Administrator says:

    I’m not a lawyer but my understanding is that the insurance company can always choose to settle. So let’s say someone sues me for $10,000,000 and let’s say I have a $1,000,000 liability insurance policy. The insurance company decides it makes the most sense to settle so they strike a deal with the claimant agreeing that the lawsuit will be reduced to $9,000,000 and the insurance company will immediately pay out $1,000,000.

    At that point the insurance company has paid out the maximum it owes and it no longer has any interest in the case. Thus leaving me alone to fight the now $9,000,000 lawsuit.

    The point being that the interests of the insurance company and myself do not necessarily align. Of course if the insurance company thinks the lawsuit is cheaper to fight than settle then sure, now I will have some serious fire power on my side.

    As for recommending Amica over State Farm I relied heavily on the table in section 2, all the entries there apply nationwide but the insurance commissioner rating. It’s probably worth looking up the ratings in California. The latest consumer complaint study for California for home insurance actually puts State Farm ahead of Amica.

    Washington State suffers from major earthquakes and I’m told the rate of major earthquakes is about equal to Southern California (my old home). The reason you hear more about earthquakes in CA is that smaller quakers are much more frequent there. In any case I did worry about earthquake coverage which is why I checked credit ratings. That gives me some idea of how much damage the company can take. And in that area State Farm and Amica rate equally. So personally I wouldn’t worry about that in terms of choosing between State Farm and Amica.

  4. Administrator says:

    If you want me to remove your comment I’m happy to do so. I don’t want to put anyone in an uncomfortable position.

  5. Dean Alt says:

    No need to remove it at all. I very much appreciate your prompt comments as this is something I’m struggling with. I asked a somewhat famous finance professor who self-insures everything he can afford and, while he could not recall the number for sure, thought he had $10 M in umbrella insurance!!!

    I would assume that even a big outfit like State Farm does not settle for $1M very often, at least if it’s not negligence so, though I get your point, I’d hope it doesn’t happen often. Actually, I didn’t realize that they can settle and still leave me holding a bag. Can they settle for less than 1M and still leave me holding the bag, or only for the maximum? I wonder why they anyone would settle for the maximum anyway, except to avoid legal fees, which probably aren’t that expensive for them, plus they might recover the fees, if they win.

    Thanks so much!

    Dean

  6. Administrator says:

    I also try to self insure as much as I can, this is one reason why I take very high deductibles. Small claims anyway just jack up rates so I view my various insurances as being for ‘catastrophes’. Anything less than a catastrophe I cover myself.

    My understanding is that the insurance company is on the hook up to the full amount of the policy so they can’t negotiate a settlement for themselves for less than the policy amount if that leaves liability outstanding. But I believe all the policies say that the insurance company does not have to pay out damages higher than its policy amount. So if it pays out a settlement for the full limit of its policy then shouldn’t it be off the hook?

    As for the cost of going to court even a cheap lawyer costs $250/hour and that isn’t counting administrative costs. So $1,000,000 divided by $250/hour is 4,000 hours which equals 2 work years. So if there is a $10M claim against a $1M policy and the insurer figures they are looking at two lawyers for at least 6 months (E.g. $0.5M in legal fees) and there is still a 40% chance of losing the case (thus requiring the other $0.5M in the insurance company’s liability to be paid out) then they might just decide to settle. Who knows? I have thankfully stayed far out of courtrooms and I’d very much like to keep it that way so I’m not in a good position to comment. For all I know 99.999% of cases are for tiny amounts and insurance companies regularly either just pay the whole thing off or fight to the death. I just don’t know.

    That was the point of my original lament. I can’t find any good figures to help me understand what risk I’m facing so I can calculate how much insurance is appropriate.

  7. Dean Alt says:

    I was under the ipriession that big insurers have in house attorneys that aren’t as expensive, but I’m just guessing. Thank you for your help. I’ll probably buy 1M and sleep a little easier. I have two young drivers in the family now.

    Dean

  8. Dean says:

    I’m dealing with my agent who deosn’t really deal with claims so may not be accurate on two items I’d like to ask:

    Somehow I got the idea that one of the advantages of an umbrella policy, in addition to a higher covereage limit, was that it also covered some things one would never think of. My agewnt made it clear that it is strictly a liability policy, so only covers claims against me, not any damage I might suffer. Since she says the policy is indeed called a personal liabuiluty policy, I guess she is correct. And so I ask, is there some sort of NON-liability coverage that I should be getting that I’m not, if it’s liability only?

    Also, when I told her I’d read that one’s amount of assets is virtually irrelevant and that someone could sue you for the amount of the umbrella insurance ploicy PLUS the vlaue of my assets to boot, she questioned how the other side would ever even know I had a policy, that such info would be kept highly confidential by State Farm. I did not know that answer and merely replied that I hadn’t seen a single thread on the internet that suggested that a lawyer would not learn of the insurance policy in due course, so I assumed they have a way of finding this out. My guess is that she just is unaware, but I’d like to pass on this inforamtion to her. And, so I ask: Indeed, how does the other side learn that you have a nice, juicy umbrella policy they can go after? Is this something that one must disclose in a depsoition, or do they learn it even earlier than that, so that they can decide whether the case is even worth their time? Please excuse my ignorance.

    Thanks muchly,
    Dean

  9. Administrator says:

    Dean, I’m not sure I follow your first question. The purpose of the umbrella policy is to protect you if someone sues you for damage to which you are liable. This can be damage that you caused directly or it could be damage where you are the ‘responsible’ party, the classic example of the later being someone who gets hurt on your property.

    One thing, though, that Umbrella policies cover that home liability policies usually do not are things like slander, defamation of character, etc.

    For coverage to damage done to you, you need to get specific insurance. So damage to your house is covered by home insurance, car by car insurance, etc. Health insurance covers most of the rest. For anything else you have to sue the person who hurt you and pray they have enough money to pay out.

    As for how the other side can find out I honestly don’t know for sure since I don’t know if this sort of thing can show up in discovery. Although I would imagine that when you file your own papers and suddenly a bunch of insurance company lawyers show up on your fillings the other side might clue in. But I did find this article from a personal injury attorney saying that they ‘look for’ umbrella policies to squeeze more money. This leads me to suspect that lawyers have a way to find out if there is an umbrella policy.

    This actually makes a lot of sense. If the suing party couldn’t find out about the umbrella policy then the suing party couldn’t sue the insurance company to cover the damages. So my guess is that lawyers have figured out how to find out. Can’t leave any dollar unturned. :)

  10. Michele says:

    I found your article on Umbrella Insurance interesting. I have had an Umbrella for about 15 years and never thought I would have to use it. But I got in an accident and I do think having an Umbrella makes people sue you for more. The Umbrella is one million and the lawsuit (which will hopefully be settled prior to court) wants two and a half million. There was no death or quadraplegia. The victim was a teenage friend of my daughter. So…having an Umbrella is the most prudent thing to do….but you may find yourself with a multi-million dollar settlement demand (whether it is justified or not).

  11. STATE FARM RIPPED OFF A WIDOW & TWO LITTLE GIRLS. (THEY WERE EASY TARGETS) Please read more, and see photos/slideshow here: http://www.myspace.com/statefarmsucks

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