Confessions of a Damage Insurance Broker: Making Choices in a Changing Insurance Market

Interview with Jacques Amzallag: Top Damage Insurance Broker

The insurance industry is changing. Premiums are going up, and so are claims-exclusions.

It’s  a good time to hear from an expert in the field!

I recently had the pleasure of interviewing Jacques Amzallag, top damage insurance broker at Racine & Chamberland.

Here are some of the highlights of the interview.

Towards a “Hard” Insurance Market

What’s the difference between a “hard and “soft” insurance market?

 The insurance industry is cyclical, just like any other market. According to Jacques, the industry is moving into a part of the cycle called a “hard” market, where premiums go up, and criteria of admissibility for coverage goes down as insurer appetite for certain risks drop. Depending on the carrier, additional exclusions to coverage wording can also find their way into your policy.

 While some of this may be due to changes in climate and social and political situations such as the pandemic, we do well to remember that the insurance industry is a market like any other:  risk is priced into premiums based on coverage availability and loss potential. When additional carriers enter the space and offer coverage, this forces the remaining insurance companies to drop premiums to be competitive. In contrast, if insurance companies tighten up and exit from certain market segments, premiums to rise. It’s the law of supply and demand as it applies to insurance.

 Long story short, as we enter a “hard” market, we mustact with the knowledge of what this means 

Over- And Under-Insured: How Do I Know?

How do you know if you have enough coverage?

In a hard insurance market, landlords concerned with the price of insurance may be tempted to decrease their coverage to control costs. This usually isn’t a good idea, according to Jacques.

Before making decisions, make sure you understand a few key aspects:

·         Reconstruction cost: Many landlords opt to skimp on reconstruction costs in order to reduce the price-tag on the premium. This may not be the best idea, according to Jacques.

There are two problems. First, in the case of a total loss, the insurer might not cover the value needed to rebuild. In this case, the client can face trouble with the mortgage lender or with the rebuild of their investment.

Reconstruction value is also an issue in event of a partial loss. If you make a claim for a partial loss of the value of your property, the insurer will calculate replacement value and verify that you have priced the value of insurance correctly based on the co-insurance clause applicable in your contract. If the landlord has insured his property below the required ratio, the insurer will require him or her to become a co-insurer towards the claim.

Ex:

Example 1: Compliance with the Co-Insurance Rule

Cost to rebuild the building

1 000 000 $

Insurance limit in the contact

800 000 $

Cost of the claim

200 000 $

Co-insurance rule

80 %

800 000 $

X 200 000 $ = 200 000 $

800 000 $ (80 % of 1 000 000 $)

You will be compensated at 100%, which corresponds to the total value of the damage.

Example 2 : Non-Compliance with the Co-Insurance Rule

Cost to rebuild the building

1 000 000 $

Insurance limit in the contact

400 000 $

Cost of the claim

200 000 $

Co-insurance rule

80 %

400 000 $

X 200 000 $ = 100 000 $

800 000 $ (80 % of 1 000 000 $)

Because the condition was not respected, you become co-insurer proportionally. Instead of being compensated at 100%, that is for 200 000$, you will receive a compensation of 100 000$.

In an environment like today, it’s especially important to understand the rising costs of reconstruction. Most policies automatically increase the reconstruction amount from year-to-year to protect consumers, but as you renovate and as construction costs rise, these increases may no longer be sufficient.

Want to be 100% certain? Consider having the building evaluated for reconstruction cost by calling on a professional evaluator.

·         Replacement value: What’s the difference between insuring for depreciated value and replacement value?

It can be a lot of money in case of a claim!

Insuring for depreciated value means the insurer will pay out a proportion of any damage claims, not the full amount. If you have a claim, the cheque you receive will be for what it would cost to repair the damaged portion of your property, minus an amount for the age of the property. Careful: if you have a big claim, the discrepancy might be very large.

Make sure you understand the implications before accepting to insure for depreciated value.

 

·         Water damage insurance: The most common type of claim in Canada is related to water-damage. Given this is the case, scrutinize your policy or insurance quote for two things. (1) Any exclusions pertaining to water damage and infiltration. The most common fine print here has to do with hot water tanks, infiltration from the roof or sewer back-up.

Second, make sure you’ve correctly evaluated the cost of insurance required for repairing any issues. For example, sewer back-up insurance often comes in 10k slices. But are you sure 10k is sufficient coverage should you have sewer trouble? You could consult your damage insurance broker or a license contractor to give you a better idea to make sure your ball-park estimate is sufficient.

·         Earthquakes, Floods & Other catastrophes: Worried about being Chicken Little or having a Noah moment? Understand that the likelihood and cost of insuring for a specific risk is priced into the premium.

For example, flood insurance is usually pretty cheap. If you can get it, you may want to consider adding it. Unless, of course, your property is in a known flood area, in which case this coverage might not be available. That’s a detail you might want to pay attention to! If the insurers don’t want to go, it’s a possible indication that that particular risk is high, and likely expensive.

Earthquake insurance also causes a lot of head-scratching, especially in Montreal, where it’s hard to imagine this could ever be of serious concern. The add-ons for earthquake insurance are also quite expensive. Why – in a lot of cases with multi-unit properties – does the bank require the landlord to have earthquake insurance? You may want to do a little research. I almost jumped out of my seat when I read about this: Stilling quake risk in eastern Canada demands greater focus, awareness and effort: Swiss Re Canadian Underwriter

Want to learn more?

Watch the full interview here

Listen to the podcast here