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  • David Shaffer

The Protection Gap in Property Insurance

On October 19, 1991, the Oakland Firestorm destroyed 2,843 homes, killed 25 people and injured 150 others. At the time and until October, 2017, it was the worst wildfire in California history. Now the Oakland Firestorm, officially known as the Tunnel Fire, has been been put into third place behind the 2017 North Bay Fires, which became the second worst wildfire event since the Tunnel Fire and in 2018, almost one year after the North Bay Fires, the Camp Fire happened, and became the worst wildfire in California history.


The Camp Fire destroyed 18,804 structures, mostly homes, within the first four hours, killed 85 people and is now considered the worst wildfire in California history to date. Total damage from the Camp Fire is estimated at $16.5 billion. One insurer, Merced Mutual, as a result of its losses from the Camp Fire, was seized and declared insolvent by the California Insurance Commissioner.


The picture here is with clients of mine who lost their home in the Tunnel Fire. I have always wanted to make sure my clients or potential new clients understand what it means to have an homeowner policy designed to properly protect them from a catastrophic fire loss and that because not all homeowner policies are identical in coverage, how to understand what to look for in a home policy that will avoid any coverage gaps after a catastrophic fire.


Believe it or not, my experience with the insurance buying public about protection gaps in insurance is a tough conversation, because so many consumers are simply uneducated about one of the most important parts of their financial life, their insurance protection, and are lulled into a false sense of security thinking they have a name brand policy and are going to be OK when a catastrophic loss, such as a fire, happens.


Unfortunately, many agents who assist consumers with the purchase of their insurance protection may lack the knowledge of how to prevent coverage gaps and may be focused on meeting sales quotas instead of talking about appropriate coverage first and price second.


I have spoken with many potential new clients over the years who want me only to focus on price alone and how much money they want me to save them. In the nicest way possible, I tell these people we are not a good match, I don't provide phone quotes, please see my website about how we do business.


It is not just an insurance industry problem there are coverage gaps in insurance. Consumers are part of the problem, and highly educated ones, if they think buying their insurance protection at the lowest possible cost is the only way they want to approach this part of their financial planning. Unfortunately, in grades K-12 and in college, financial literacy is not taught and what we don't know can indeed hurt us when it comes to insurance protection.


For those interested in the topic of Protection Gaps in Property Insurance, on March 29, 2019, a conference is being held at Rutgers Law School about a very important issue every consumer of insurance should be concerned about, protection gaps in property insurance.


What is a protection gap?


It is a coverage gap that can create a severe financial hardship that possibly could have been avoided had more time and thought and more appropriate coverage choices have been made in advance by the policyholder. It is when the policyholder finds out when it is too late, unless a lawyer can find professional negligence by the agent, that a property loss or liability judgement is underinsured or uninsured. Here is a link to the conference: https://crr.rutgers.edu/event/protection-gap/


Here is information directly from the above link about the conference. If you want to register, you can do so for as little as $25 if you don't need CE credits. In addition, by registering, you will also get access to eleven great papers being presented at this conference on this topic.


The Protection Gap in Property Insurance

March 29, 2019 Rutgers Law School, Camden NJ


Co-Sponsored by Rutgers Institute for Professional Education


The protection gap is the difference between losses that are insured and losses that could or should be insured. The Rutgers Center for Risk and Responsibility at Rutgers Law School Conference on The Protection Gap in Property Insurance will address the protection gap in residential and commercial property losses and related types of losses in the United States.


The property insurance protection gap can have significant impact on individuals and communities; a property owner who does not have flood insurance may lack the resources to rebuild after a hurricane, for example, and if many property owners lack insurance, an entire community may be hard-pressed to recover.

The concept of a protection gap raises several issues:


What is a protection gap?


What protection gaps exist in property insurance and what causes them? Some examples:


• An entity is entirely uninsured or insurance is unavailable. This is rare in property insurance in the US, with the notable and high-profile exception of Puerto Rico, which came to light after Hurricane Maria.

• Insured, but certain perils not covered. Homeowners insurance policies exclude coverage for losses caused by natural disasters such as flood or earthquake, and many homeowners fail to purchase available catastrophe insurance.

• Under-insured. Three of every five homes in America are underinsured by an average of 20 percent less than full value, according to analytics firm CoreLogic.

• Other exclusions or restrictions on coverage. Many homeowners and commercial property policies contain hurricane deductibles or windstorm deductibles, restrictive loss settlement provisions, or other limitations of which policyholders may be unaware.


What solutions are there for protection gaps?

Some examples:

• Legislators and regulators can require information disclosures and prescribe policy terms to ensure adequate coverage. In the wake of the California wildfires, the legislature enacted a series of reforms aimed at improving consumer understanding and better coverage for homeowners.

• Insurers and intermediaries can innovate products and marketing and can reduce costs to increase availability of coverage and consumer awareness. Insurtech, on-demand insurance, and parametric insurance are being offered as solutions to protection gaps.


For those who want to avoid finding out when it is too late if you have a coverage gap and would like to work with our insurance agency to help educate you on how to obtain the appropriate insurance coverage and will hopefully allow us to serve as your trusted insurance advisors to secure and service the coverage for you with our insurance partners, please contact us to start the conversation.


Thank you


David Shaffer, ARM, CPRIA

Agency Principal



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