- Oklahoma City, Oklahoma
RPS experts whose homes were destroyed by tornadoes discuss what insurance policies cover tornado damage for personal and commercial property.
Tornadoes represent about 57% of all catastrophic losses in the U.S., with damage costing billions of dollars. Several types of insurance policies are designed to respond to tornado damage — the right one depends on the type of property.
RPS Senior Underwriter/Broker Patti Ford and Area Vice President Broker/Underwriter Jana Anderson, along with RPS National Claims Manager Midge Chagnard, provide an overview of the coverages available. Patti and Jana's expertise goes beyond just professional — both owned homes that were destroyed in Oklahoma tornadoes.
Personal lines of insurance cover tornado damages to homes, including condominiums.
"Homeowners policies generally include wind coverage for damage to the dwelling and its contents," says Midge Chagnard. "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," she adds.
If the dwelling is uninhabitable, loss-of-use coverage for additional living expenses is available under a homeowners policy, to help pay for temporary relocation while repairs are being made. 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 don't provide enough coverage to cover the applicable costs involved," says Patti 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," notes Ford. "For example, if a tree falls but doesn't 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 wind causes their damage."
Typically, the community association's condo master policy will cover tornado damage 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 additional living expenses associated with loss of use," explains Jana Anderson. "Loss assessment coverage under the individual condo policy would come into play if 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."
Depending on the coverages selected, this policy can provide insurance for the dwelling, contents and loss of use if a fire starts because of the tornado. It's important to note that each of those three coverages should be listed with a limit. The policy can be written to cover the dwelling owner or tenant.
Commercial lines cover a wide range of risks related to tornado damage, including loss of use, extra expenses, damage to buildings under construction and more.
The ISO Commercial Property forms CP1010, CP1020, CP1030 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 business income. Business 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.
If the coverage is written on a Business Owners policy, business income is automatically included, but the limits may not be adequate. For that reason, every Commercial Property policy should include Business Income and Extra Expense coverage. Extra Expense would pay the additional costs for a tenant in a building to relocate.
For example, if a business leased office space in a building that was destroyed or severely damaged, it could take months — or even a year or more — to rebuild the building. Extra Expense coverage pays the additional cost incurred for the business to relocate, so it can resume operations with minimal interruption to their business.
Damage by wind — including tornado — is usually covered. This coverage 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 for which they are responsible.
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.
The insured must keep good records to substantiate the values at any given time. On larger accounts, the policy can be written on a reporting form basis. It's critical that the insured understands the importance of getting reports into the company on time.
This policy can also be written with soft costs, such as architectural fees, taxes, mortgagee fees, developer and legal fees, licenses and permits, and even pre-leasing fees.
These policies can be especially tricky, because 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 is existing structure and what is new construction.
When a building gets damaged, very often the entire building needs to be brought up to code, and Building Ordinance Coverage can help. It covers the increased costs associated with repairing a damaged building to comply with building codes that went into effect after the building's construction date.
All of these coverages have different endorsements that come into play, depending on the type of operation. For example, with a restaurant exposure, you would want to have coverage for food spoilage; or perhaps your client's business is subject to seasonal fluctuations that merit a peak season endorsement.
As another example, a manufacturer client could have raw materials, work in process and completed stock, and you should break out those values. Convenience stores are another class of business with several different types on property including signs, canopies and gas pumps — all of which need to be considered when determining the proper amount of insurance.
All of the above are situations where having a good underwriter or broker is essential; their expertise can help you avoid an Errors and Omissions (E&O) situation by ensuring the client is properly insured.