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Insurance Radar: Policies that Respond to Tornado Losses

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Tornadoes represent about 57% of all catastrophic losses in the U.S., with damage costing billions of dollars. Depending on the type of property, there are several types of insurance policies designed to respond to tornado damage.

RPS producers Patti Ford (Sr. Underwriter/Broker – Oklahoma) and Jana Anderson (Area VP & Broker/Underwriter – Oklahoma), whose homes were destroyed by tornadoes, along with RPS National Claims Manager Midge Chagnard, provide an overview of the coverages available.

Personal Lines

Homeowners Insurance

“Homeowners policies generally include wind coverage for damage to the dwelling and its contents. It’s important to review the policy with your clients to make sure their coverage is sufficient due to the extent of damage a tornado can cause,” says Chagnard.

Coverage for additional living expenses (loss of use) under a homeowners policy is available to help pay for temporary relocation while repairs are being made if the dwelling is uninhabitable. The policy will pay for the extra costs of housing, eating expenses, etc., up to the applicable limit.

“Offering clients additional coverage for debris removal and residential cleanup is a good idea, as many policies do not provide enough coverage to cover the applicable costs involved,” says Ford. Coverage is usually limited to 25% of the amount paid for the direct physical loss, minus the deductible (unless stated otherwise in the policy declarations).

“It’s important to explain that the policy may not cover everything. For example, if a tree falls but does not hit the house or fence, the cost to remove or trim it will not be covered. Also, there is no coverage to replace the actual trees or shrubs if their damage is caused by wind,” notes Ford.

Condo Owner Insurance

Typically, the community association’s condo master policy will cover tornado damages to the exterior of the building, roofing, common areas, and exterior features like landscaping and walkways.

“The resident’s condo policy will cover property damage to personal property, any improvements the unit owner made inside the home, and loss of use/additional living expenses,” explains Anderson. “Loss assessment coverage under the individual condo policy would come into play in the event the association asks its condo dwellers to step in and make up the difference for any shortfall, such as recouping its applicable wind/hail deductible under the master policy.”

Dwelling Fire

Depending on the coverages selected, this policy can provide insurance for the dwelling, contents, and loss of use. It’s important to note that each coverage should be listed with a limit shown. The policy can be written to cover the dwelling owner or tenant.

Commercial Lines

Commercial Property

The ISO Commercial Property forms CP1010, CP1020, CP1030 will all cover damage caused by wind, including tornado.

Besides loss to the building and Business Personal Property, the insured will also sustain a loss to his business income. Business Income coverage covers the loss of revenue a business would sustain due to a tornado claim. This coverage could cover mortgage payments as well as employee salaries and other continuing expenses.

Business Income & Extra Expense coverage should be sold on every Commercial Property policy. If the coverage is written on a Business Owners Policy, Business Income is automatically included, however the limits may not be adequate.  

If Extra Expense is included, it would pay the additional costs for a tenant in a building to relocate – say you are a doctor who leases office space in a building. If that building is destroyed or severely damaged, it could take months or even a year or more to be rebuilt. Extra Expense coverage pays the additional cost incurred for the office to relocate so they can resume operations with minimal interruption to their business. 

Inland Marine

Damage by wind (tornado) is usually covered. This can include Contractors Equipment, Builders Risk, Motor Truck Cargo, and Bailee’s Customer Goods to name a few types.  

Being sure the values are correct for what is being covered is critical. The insured may need to maintain inventory records as well; an example would be a dry cleaner that has customers’ property they are responsible for.

Builder’s Risk

This coverage is written when a building is under construction. Typically it is written at 100% of completed value, but a large discount is given to the rate since it is only at the end of construction that the full value is exposed to loss.   

Good records need to be maintained to substantiate the values at any given time. On larger accounts, the policy can be written on a reporting form basis. It is critical that the insured understands the importance of getting his reports into the company on time.

This policy can also be written with “Soft Costs” – architectural fees, taxes, mortgagee fees, developer & legal fees, licenses and permits and even pre-leasing fees.  

Builder’s Risk Renovation

These policies can be especially tricky as typically you need a value on the existing structure as well as the cost of the renovations. If a loss occurs, it can be difficult to determine what was “existing structure” and what is the new construction.

Building Ordinance Coverage

When a building gets damaged, very often the entire building needs to be brought up to the new codes, and Building Ordinance Coverage can help. It covers the increased costs associated with repairing a damaged building due to changes in building codes since the building's construction date.

All of these coverages have different endorsements that come into play depending on the type of operation, i.e. with a restaurant exposure you would want to have coverage for Food Spoilage, or perhaps your client’s business is subject to seasonal fluctuations in values where a Peak Season endorsement should be used. 

You could have a manufacturer client that has raw materials, work in process and completed stock and those values should be broken out. Convenience stores are another class of business with several different types on property including signs, canopies and gas pumps. These all need to be taken into consideration when determining the proper amount of insurance.

All of the above are situations where having a good underwriter or broker comes into play; their expertise can help you avoid an Errors & Omissions situation by ensuring the client is properly insured.

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