News Letter

Issue 20, May 2002

What Happened to the Terrorism Bill?

In our last issue of Exposures, we told you about the "crisis" in the insurance industry due to lack of terrorism reinsurance. Virtually all reinsurers, (insurance for insurance companies), excluded terrorism effective 1/1/2002. The primary writers (who insure all of us) asked for the federal government to step in and provide a "back stop" in the event another 9/11 tragedy occurred.

There were predictions of doom and gloom if the government did not react quickly. Primary insurers would be forced to exclude terrorism, thus forcing banks to stop loaning money on new construction. Major construction projects would never begin and the economy would grind to a halt. These "doom and gloom" predictions have not happened, but we are beginning to see some very real issues as a result of the lack of terrorism coverage.

There are signs that the economy is beginning to feel the effects due to increasing insurance premiums and terrorism exclusions. This is happening primarily in areas such as large real estate properties and construction. Some banks that hold mortgages on large plants or other commercial structures are forcing the owners to add separate terrorism coverage. It is available, but it is very costly and actually excludes some types of terrorism losses including nuclear and biological. This extra cost is being passed onto building owners and tenants, which in turn gets passed onto consumers..

President Bush has come out in favor of a federal backstop and the House of Representatives has already approved a bill. It is up to the Senate to pass one. It looks like it may happen, which would certainly help the economy. Check out our website under "What's New" for more information.

New Scooter Law

Children under the age of 14 who ride scooters in the state of New York will soon be required to wear a helmet under legislation that Governor George E. Pataki signed in November. The New York Times reports the measure is intended to reduce the number of injuries, especially to the head, that children suffer in spills from two-wheel scooters.

Starting July 1, 2002, the parent or legal guardian of a child caught on a scooter without a helmet will face a warning for the first offense and a fine of up to $50 for subsequent offenses.

Competitive Auto Repair Parts OK

Most consumers are willing to use competitive repair parts if assured of quality.

More than half (52 percent) of respondents to the Insurance Research Council’s (IRC) most recent survey of a cross-section of Americans would be willing to use competitive auto repair parts if they were assured of the parts’ quality. Approval is even stronger (57 percent) for equipment that has been certified by the Certified Automotive Parts Association (CAPA).

While many consumers (58 percent) would agree to use certified auto parts in exchange for insurance premium savings, a significantly greater proportion of respondents (68 percent) would be willing to use CAPA parts if their insurer would guarantee the repairs.

Similarly, most respondents also would be willing to use auto repair shops recommended by insurers, particularly if these repair shops were professionally certified and the repairs were guaranteed by insurers.

"There has been on-going debate on the use of competitive auto repair parts versus OEM repair parts," said Elizabeth A. Sprinkel, senior vice president of the IRC. "However, if quality concerns are addressed through industry certifications and insurer guarantees, most Americans would be willing to approve the use of competitive auto parts and insurer-designated repair shops."

Original Parts 400% More Than New

Rebuilding an automobile from the ground up using original equipment manufacturer (OEM) replacement parts costs more than four times the car’s original retail price, according to a study commissioned by the Alliance of American Insurers. Even without the cost of paint and labor, a 2001 Chevrolet Cavalier LS four-door sedan totaled out and rebuilt entirely from OEM parts cost $63,240.14, compared with the car’s original retail price of $15,395.

Over the past 20 years, the Alliance has conducted numerous studies on the cost of crash parts using a variety of automobile models to demonstrate the excessive cost of OEM parts. The cost of rebuilding a vehicle with OEM parts generally triples the car’s original cost, although for the last two out of three years the car rebuilt with OEM parts cost four times retail.

Know Your Fire Extinguisher

How many times have you walked past a fire extinguisher and thought to yourself that someday you will read the directions and learn how to use the thing? We’ve all done it and we’re all wrong. Waiting until an emergency requiring swift action is not the time to be learning how to use your extinguisher. Let’s look at some issues that may make you better prepared.

Fire extinguishers are classified according to the type of fire they are designed to extinguish. Below are the extinguisher types and fire types they are meant to suppress.

CLASS A – Wood, Paper, Rubber, Textiles, Plastics

CLASS B – Flammable Liquids like Gasoline, Oil, Grease, Alcohol

CLASS C – Electrical

CLASS D – Burning Metals like Magnesium, Titanium, Aluminum

Some extinguishes have multiple class ratings. You may see one rated ABC, which means it can be used on ordinary combustibles, flammable liquids and electrical fires. These are dry chemical extinguishers.

Extinguishers are also rated by the weight of carbon dioxide in the container. Five, ten and fifteen-pound extinguishers are common.

Mold Coverage Rotting Away

There is a crisis looming that started in the south and west, but is spreading quickly toward the Midwest. It is mold related damage to homes. Mold has been around for a long time. The term "sick building syndrome" was coined years ago when mold grew undetected in high-rise office buildings and workers got sick. The closed ventilation system made it impossible to open windows for fresh air. Now, homeowners are feeling the effects of mold contamination.

Insurance companies already exclude mold and fungus that grows naturally in your home. So the green slime on your basement walls is not covered by insurance and never has been.

However, coverage can be triggered when another loss occurs, like a fire. The water used to put out the fire could promote mold. If this happens, the insurance company would be responsible for the clean up.

You may have heard about a $32,000,000 judgment in Texas against Farmers Insurance. This was a "bad faith" claim because the homeowner wanted to fix the property, but the insurer did not do so. Eventually, the mold became so prevalent that the owners had to move out and the home had to be demolished.

Insurer’s Response to Mold

In order to limit their exposure, insurers are not depending on exclusions for mold. They are now covering it, but only up to a maximum limit that in some cases is just $5,000. Now, if the house has to be condemned due to mold, the insurance will cover the loss, but only pay the limit, $5,000. At this time, none of our companies are doing this, but we feel it is only a matter of time.

Three of Four Renters Uninsured

A recent survey indicated that over 90% of homeowners carry homeowners insurance, while only 25% of apartment dwellers insure their property and liability through tenant homeowner insurance. Banks require homeowner insurance as a condition of a loan, but renters do not need a loan, thus many times neglect to purchase this important coverage.

While some might think their personal belongings don’t amount to much, their liability for injury to others may be more important. If a renter is sued due to personal negligence, a renters policy would protect them. This includes hiring an attorney for defense and paying any judgments.

Renters insurance is inexpensive. In many cases, it is around $100 annually.

Women Drivers - Deaths on the Rise

The number of women killed in car crashes has increased 60 percent since 1975, according to a study by the Insurance Institute for Highway Safety. The increase in deaths was not because women had become more aggressive or reckless, the study said, but because more women are driving now and covering more miles than ever.

There was no evidence to support speculation that women had become more aggressive drivers.

While 14,937 women died in crashes in 1998, compared with 9,356 in 1975, the rate of deaths per mile driven in auto accidents for both men and women has declined sharply. Researchers said the decline was due to improved safety features, such as seat belts, air bags and antilock brakes.

These safety features led to a 10 percent decline in deaths among male drivers. Men, who have historically been more aggressive and less safety conscious behind the wheel, are still nearly twice as likely to be involved in fatal crashes, the study said. Greater safety in cars, however, could not offset the hazards women faced as they drove more. Their mileage jumped 135 percent, to 886 billion miles in 1998, up from 378 billion in 1975. At the same time, mileage driven by men increased 48 percent.

Should You Pay Your Own Claim?

Some of our clients are "taken back" when we suggest they pay a small claim. "Why have insurance?" is a common response, and it is a perfectly normal one. But let’s analyze why we make that recommendation sometimes.

We believe insurance should be used for catastrophes and claims you could not otherwise pay yourself, without financial hardship. For example, let’s say you have a minor theft covered by homeowner insurance. The amount of the loss is $600 and you have a $250 deductible. You would receive $350 if you turn in a claim. Should you do it?

We need to explain homeowner rating. All insurance companies provide credits for not having losses and surcharges if you have claims. Many companies do not care how much was paid, only that a claim was made. Frequency is the issue. So, your homeowner premiums might go up $30 or $40 if you turn in the $350 claim because you would loose a loss free credit.

Now let’s say you have the big one, a major fire that costs $100,000 to repair your home. Of course you would turn that claim in, but now with two losses, your rates might go up $100 or even $200 a year because there are two losses. Was the $350 you received for the first claim worth it?

We think you should be given the option of deciding whether you want to save loss free credits on small claims. It’s your decision, but we will try to mention it to you so you can make an informed decision.

Baby Boomers Get an ‘F’ in Planning for Old Age

A groundbreaking study commissioned by the GE Center for Financial Learning, the leading online resource for objective financial education, has found that most Baby Boomers are unprepared for their long term care needs. In fact, only seven percent have an adequate plan in place.

The GE-sponsored study — the first in a series designed to underscore the myths and realties of the retirement experience — found that 70 percent of Baby Boomers are relying on their own resources to take care of their long term care needs. In addition to this often inadequate approach, Boomers were found to be misinformed and unsure about the basics of long term care planning.

More Information

CD Interest Rates Got You Down?

Try An Annuity

In you have a CD that is maturing and you’re flabbergasted by the low interest rate for the renewal, you’re not alone. Many persons, especially those on fixed incomes, are concerned about their old CD’s once paying in the 7% range being renewed for 3% or less.

If you are one of those people, you might think about an annuity in lieu of the CD. Annuities are long-term contracts issued by insurance companies that pay as long as you live. They have guaranteed interest, (between 3-5%), and right now are paying over 6%. Your money is available to you with a small decreasing penalty that disappears in five years to ten years depending on the type of plan you chose.

Here are some differences between Annuities and CD’s.

A CD is a certificate of deposit that has a maturity date. You can take interest payments, but cannot make any withdrawals until maturity without penalty.

Annuities are long-term contracts with no maturity date and can be set up to have automatic monthly payments.

CD’s are FDIC insured and annuities are not.

Annuities are tax-deferred and CD’s are not.

Annuities avoid probate. CD’s do not.

Annuities are also used as IRA’s for those building up a retirement nest egg.

If you would like to explore the idea of an Annuity over a CD, please give our office a call.

Exposures by Email

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