Remember the movie Dirty Harry with Clint Eastwood and he lays out the line to the armed robber who is looking up his gun barrel “You’ve gotta ask yourself one question: Do I feel lucky? Well, do you… punk?” That’s kind of the way it is with insurance for worst-case scenarios. I’m talking about catastrophic event insurance (known as Cat Cover in the insurance world) for natural disasters that may require a separate Rider (insurance clause) not covered by your standard homeowners’ policy. The timing for this question is right as May marks the beginning of the annual May to October hurricane season. While you can’t dismiss earthquakes in Cabo – did you know there were 5 over a magnitude of 5.2 in the last 12 months? – it’s the annual storm predictions that remind us of decisions we should be making.
The key is making an informed decision; only time will tell if it is the right one. Insurance is all about some math squint with a big computer in a windowless office crunching reams of data to make a determination of the probability of an outcome, in this case, a devastating hurricane or earthquake.
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If you feel you could stomach significant damage or even a total loss of your house or condo, then don’t insure and take your chances… punk. On the other hand, having some form of insurance may very well help you sleep at night. News of bigger and stronger storms each year may or may not worry you. If you take comfort in the fact that hurricanes are monitored and you’ll have time to prepare your home but you’re only concerned about the unpredictability of earthquakes, then you can choose to insure against one risk and not the other. We can all agree climate change is a wildcard. Hurricanes in the Pacific are fickler than in the Atlantic. Last year’s hurricane Otis caught Acapulco completely off guard as a weak tropical storm forecast to stay offshore that ended up accelerating within hours and blasted onshore as a category 5 hurricane. The moral of the story – as good as monitoring is these days, you can’t trust it.
As for the unpredictability of earthquakes, think again. The same tectonic plate line that runs through California in the US runs down the Pacific side of Baja California. There is also a hot spot about 25 miles northeast of San Jose del Cabo in the Gulf of California (aka Sea of Cortez) which is the source of almost daily smaller tremors. What you need to be aware of is whether your house or condo complex was built on bedrock or packed sand. A lot of new construction is on packed sand, built up to give you that coveted ocean view. Although compacted sand is an acceptable base for foundations in many places, stress from earthquake shaking can cause it to behave like a liquid and turn into mush. That’s how you get that cracked foundation, or worse. Forget recourse from your Mexican developer, once you own the place, you own the problem.
So let’s talk about insurance. The cost of Cat Cover is going up – no surprise. What you pay is based on the value you have at stake and how much protection you want. It’s best to get your insurance agent to explain the options as they would apply in your case. You never want to pay a wad for insurance only to find out after the fact that the loss that concerned you isn’t covered; make it all crystal clear from the outset and give the instructions in writing. In my case, before Hurricane Odile, I was paying about US$1700 a year for hurricane and earthquake insurance with a US$5000 deductible and an 80-20 co-pay. That meant my loss had to be at least $5000 before the insurance was paid and then I’d get 80% of the costs over US$5000.
After Odile, my annual premium went to US$4000 with a deductible of US$10,000, but I dropped the co-pay. The insurer may have certain limits, but you can also mix and match the numbers, for example, raising the deductible to lower the premium.
If you own a condo you’ll want to ask the HOA (homeowners association) about Cat Coverage for the common structures. The owners could consider a strategy to build up the reserve fund to match the Cat Coverage deductible on the common structures which would ensure the repairs could start without delays related to a cash call and collections. Also, make sure the HOA has current appraisals for the buildings, especially if they were built a few years ago, since the insurers will consider the value you have listed in the policy which in turn will determine your claim payout and may limit your coverage if the value is not up to date.
Lastly, don’t forget an obvious form of insurance completely within your control – storm-proofing your home. Getting hurricane screens or shutters can reduce or even give you the confidence to eliminate paying premiums altogether. There are lots of options and the payback on installing storm shutters not only saves you money but will also add resale value to your property.
So now that you know the risks and returns with insurance, do you still feel lucky?
