 Planning Day. Oh, thank you. Welcome to Financial Planning Day. And to our first speaker of the day, we have Brian Truett here from Truett Insurance Agency, who will be talking about insurance sublimits. And we're very lucky to have Brian. I know him mostly from his, the presentations that he's given to financial planners, helping us understand what we need to make sure our clients are doing. And so he's an expert to the people who are supposed to be experts ourselves. So we're very lucky to have him. Some administrative items for this session. There's a chat functionality in the bottom of your Zoom. And so if you have any questions, put them in there, and we'll get to those as the presentation goes on. You don't need to wait until the end. And if you are planning on joining us for Financial Planning Day one on ones, those are happening as well. And we have a full schedule today of presentation. So thank you for coming. And thank you, Brian, for enlightening us on insurance on Saturday morning. Yeah, my pleasure. So this is a, this is a modified class that I have done from the Financial Planner Association. So I tried to make it more accessible to, you know, people who just want to buy some insurance. But it's about sublimates. And it's a really important topic in insurance, particularly on property insurance, because there's a lot of hidden agenda in insurance carriers. A sublimate is an internal limit on an insurance policy that's not easy to see. So I used an example of life insurance. If you went out and bought a life insurance policy, and somewhere in the fine print, it said, you know, if you died of cancer, it would only give you 10% of the million dollars. That wouldn't be a really great way of protecting your family, because you don't really know what you're going to die of if you buy the life insurance policy. Property and casualty insurance has a lot of those types of sublimates in them, or in it. And it's important to read your contracts and know what you're buying when you buy insurance. The problem in the insurance business that we have is that shopping for insurance is mostly a process of someone trying to get your attention. Farmers and, you know, they have these great ads where like a moose attacks a camper, or there's the lizard and the lizard's awesome. I mean, I love the, it's in a boat and wants to get on shore and flows having this romance on the progressive commercials. I watched this very carefully. And there's nothing in those commercials to tell you what you're buying. They're just grasping your attention. So you have humor and songs, and my kids are always like we are farmers, you know. And I'm like, actually we're not kids and then no one annoys me so they do it more. But they're giving you some appeals to cost or services like that moose attacking something or the chaos guy or whatever he is, the havoc guy, you know, driving around. You can switch and save and we'll take care of you. But there's no useful information in the absence of useful information. People create their own metrics using maybe some numbers or some internal calculus. Well, this is a bigger carrier than the other carrier, whatever you think is important, you use and you make a decision and move on with your life because you've got to live your life and insurance isn't super exciting, even on Saturday morning at 10 o'clock. So what happens is in the world of insurance, there's a continuum of coverage. And at this end of the spectrum here, at the bottom where there's $1 sign, it's less expensive coverage that has very lean coverage, very narrow interpretation of coverage. So you might not have any extra extended replacement cost or code upgrade coverage. And I'll get into what some of these things are as we go forward. But you might have a depreciated payout, ACV means depreciated payout. And up here, where it's more expensive, if your house burns down, they'll just write you a check for the replacement cost of the house and tell you they're sorry you lost your house. And so the easier it is to get money from an insurance carrier, the more expensive the policy is going to be. Most policies that people purchase on homes and in autos for that matter, but this is really much more about property, falls into this middle section here. And it's called the middle market. And we call it that for a reason, because these are carriers that advertise to middle America, and they fall in between the sort of low end carriers and the high end carriers. And these carriers build their insurance policies based on a statistical probability. So they know from their loss ratios that they don't typically lose an entire house, that only happens maybe 10% of the time. So if someone has like a $40,000 loss on their home, or they have a sewer backup and maybe it's $10,000 of damage, and they have a deductible, the carrier will give you some money for that or they'll pay you the $40,000 for the loss that you suffered on the home. And you move on with your life. And everything is fine. And you thought, gosh, I'm really glad I had insurance and 90% of the people who that happens to think gosh, that was an okay experience. So a carrier can still maintain, you know, a 90% customer satisfaction rating. And be okay. It's the people who fall in the outside of the middle average claim, meaning that being dissatisfied customers. So in here, in the middle market average claim, people might have a small claim and they're fine. But if their house burns down, or if you had a sewer backup claim, and sewer backup is the number one cause of loss in our insurance agency, from a property standpoint, that particular event happens to more people at a higher rate of claim than any other type of property loss that we have. And that's followed by a water from burst pipe, and then water from wind. Fire is not even in our top three, or four covered causes of losses as the top. So, but if you had a sewer backup that say flooded your entire house, and it was a $200,000 claim, that's when your insurance carrier has put these protections in place for themselves to say, oh, we're really sorry, this is only covered to $5,000, not $200,000. You see, on page 47, line A sub chapter one, it says sewer backup is only covered to $5,000. So the carriers use these sub limits to sell insurance at a low rate and then protect themselves against catastrophic loss. So they're bringing you into the family by low rate and advertising, but then they're protecting their downside risk by having lower limits on things that are catastrophic losses. And only only only happens to 10% of people that those catastrophic losses occur. So it's not a very well known phenomenon. And that's until you reach like a large fire situation like in California where we keep having these massive fires where thousands of people lose homes and now everyone finds out that they don't have coverage. And that's where the government tries to step in and say, hey, wait a minute, you guys, you got to cover these houses. So you should know that these two slides on how insurance works are really the most important things I'm going to talk about today because it's how you protect yourself by asking questions about the rest of the things that we're going to talk about. So the first type of sub limit that I see very frequently is a really basic and subtle one. It's replacement cost as a sub limit. So most insurance carriers when they're calculating the value of a home, a value of property, use a very limited means of calculation. They come up with a minimum potential loss. So a house might, if you put all the year build and the square footage and your type of walls and roof and all those things into a system like Marshall Swift Beck, which is very common among the insurance carriers. If you did the same thing with State Farm and Farmers and Safeco and Liberty Mutual and name your other carriers, you're going to come up with a pretty uniform estimate on what the replacement cost of a house is. And these carriers are using minimums. So we've routinely seen in San Francisco a house might be insured for four or $500,000 because that's what the minimum was, but really that's closer to a million dollar home or higher depending on what people have done on the inside of that house. And so this is where you get this. This client was insured for $677,000 or $176 per foot. When we asked what was in the house, we ended up calculating that that house should have been insured for $1.5 million and that client was under insured by $862,000. This is really important because if they're starting out without enough coverage and they have things like ordinance and law sublimated or sewer backup sublimated or something like that, they end up getting them to trouble. And you'll notice that the premium on this policy was $2,000 a year, almost $2,100, and they had $1,000 deductible. We raised their deductible to $10,000 and we gave them another $860,000 of coverage. And so now their potential outlay of risk is really only the $10,000 deductible versus being potentially underinsured by $862,000. But these people were in peril if they would have had a really large loss. And the second thing on this particular sublimate is how the settlement options work on an insurance policy. So a lot of times on a policy, in fact, most times, the policy will say, we will pay you $677,000, but in order to get that amount, you have to replace, rebuild or repair whatever property was damaged. So in order to get the $677,000, you have to be able to rebuild that house. But if you can't rebuild it because you're actually underinsured, then they're going to give you the ACV, which is actual cash value. So we're going to go back to that house from 1998, depreciate everything in it, the flooring and the cabinets and everything and say, now we're going to give you less than $677,000. We're going to give you the depreciated value of what those things would be worth today. So people end up with much less than they were expecting because in a large loss, they can't afford to rebuild because they weren't insured to value in the first place. And the settlement options almost ensure that they will get far less than they would have expected than their contract would have said they would. So these are really common problems that we see in claims all the time. I do, these aren't my claims, by the way, that we see the problems on. These are claims that I do a lot of volunteer work. Since I know a lot of financial advisors and people who volunteer in organizations like this one, they'll call me and say, hey, we have this person who lost a house. And so I've been involved in many claims that weren't my own claims, but I was able to read the contracts and help people negotiate with their insurance company about how best to settle them. But it's very difficult to negotiate when you don't have enough coverage from the start. And ultimately on that contract, the insurance contract says that the burden of telling the insurance carrier how much you need is on the insurer, the person who really knows the least about insurance. So replacement cost as a subordinate is a really important thing to understand if you own a home. And things to think about when you're talking about replacement cost or what kind of windows are in the house, you know, a vinyl window is a completely different cost than say a wood window and metal windows that are fire-rated can be extremely expensive. So in certain areas of San Francisco, in particular, after the Loma Prieta earthquake and the fires that occurred, San Francisco forces rebuilt to be in fire-rated windows and fire-rated eaves because the houses are close together. So all of those types of things can raise your cost considerably. If you have a very complex roofing system, it can be more expensive or if you've put in a really nice stone or you've spent a lot of money on carpet. So pay attention to the things that you've done in your home and what you're expecting from the claim. It becomes obvious if you're underinsured. A lot of times people will know a contractor or they can get a bid. What would my total cost be to rebuild this home? It's a really good question to ask if you have contacts in that space if you're insuring a home. So that's replacement cost and it does manifest as a subliminal if you get it wrong because you can't get what you were expecting. And most people who buy insurance or buy insurance with the expectation that they're going to have their home built. So the next one I'm going to talk about is ordinance and law. It's also called building toward upgrade. It's kind of confusing because when you rebuild, like if you rebuild the house from 1998, you'd have to rebuild that house to a 2022 code. In San Francisco, there's a lot of houses that were built in 1900 and they've had some upgrades. But when you're doing upgrades on a home, you don't have to fully take care of all the code. There's a lot of grandfathered code. The bottom line with code upgrades causes unpredictable expenses for the carrier because if you have to put in like fire-rated windows or you have to put in a EV charging station or you have to redo the energy efficiency of the home, all of those things cost a lot of money. And it gets treated as a separate cause of loss. So you might have a fire, it's the first cause of loss. Okay, you had this amount of damage done in the house. And then if we have to rebuild to a different code, the carrier considers that to be a separate type of loss, a second cause of loss. So they usually express code in a percentage. They'll say we'll give you 10% or 100% or 50, whatever that number is, they will give you that amount of code upgrade on your house. There's two reasons why this gets misunderstood. One is remodeled houses, like I said, could be remodeled without triggering full code. But the fire department has a tendency and if you have a water plain, we have to open up all the walls to dry or to make sure that there's no fire. So once you've opened up all these walls, that's when the code starts to come into play. The other side is it's often said it's an extra coverage. So if you have like a million dollar house or a $500,000 house, they'll say, oh, well, you have this extra 10% for code upgrade. It doesn't increase the value of the claim. It actually limits the value of the claim. So the way that works is, oh, here's, this is some stuff that we see in code, energy seismic, San Francisco seismic is a really big one. We had a claim one time on some windows in San Francisco where the house had a big fire and the difference in the windows that we had to put in was about $40,000 of cost because the client wanted wood windows and the carrier said they would only put in vinyl windows. And then the city of San Francisco said you had to put in fire rated windows, which is triple glass metal window, which is very expensive. But we're looking at water efficiency and historic ordinance. This first picture, if you had to rebuild one of these houses here from, what square is this? Alamo Square. If you had to rebuild one of those houses, you can't just rebuild a modern house. You have to rebuild it to look like those houses because San Francisco makes a lot of money selling space for people to film that famous spot. So they're not going to let you just rebuild a modern home right there. You might have to demolish part of the house in order to comply with code. So anyway, these are some of the things that we see. And here's how this works. So if you had a house that was insured for $1 million and you had an ordinance and law sub limited 10%, that means of that million dollars, you have $100,000 towards use for code. So if you had a house with building code upgrades of a home that were 20% of the actual bill, so $200,000 of that million dollars is code. The carrier is only going to pay $100,000 towards code. So the client would be $100,000 out of pocket to rebuild that house. So the carrier ended up ensuring the house for a million, but only paid out $900,000 on the client because of code. A house that was built in 1970s is going to be about 30% to 40% code difference. So that is a big number of that million dollars. If it's 40% of code, $400,000, the person could end up having it out of pocket on a rebuild of $300,000, $400,000 of code, $100,000 comes back in from the carrier, and then you have this $300,000 that they're saying that they're not going to cover because it's code. That is where you're an outlier on that bill curve that I showed because the carrier is going to be very sorry about it, but their policy says, right here, it says that we only give you this 10% of code. So anytime you see an insurance policy that has this sub-limit, that policy is designed not to pay any catastrophic loss. That's the reason that it's there, and then if you pair this sub-limit with, say, in order to get the full value of your claim, you have to repair, rebuild the place, now the carrier can even owe you less than they would have otherwise because they're not going to give you all of the money that you had on your contract, they're going to give you less money. So when you start adding all these moving parts of the policies together, it really creates a peril. There are carriers that pay, you know, that will write 100% code and 100% sewer backup, but you have to ask for those things. And a lot of the people who are selling insurance are only doing that, they're just selling insurance, so they wouldn't know to do that because they're not involved in claims. So you sort of make your own justice if you're shopping for insurance, and you have to really know what questions to ask, and you have to know if that person even understands what they're talking about sometimes, because, you know, the companies that are selling product on television that you see while you're watching television are the same carriers that are hiring their salespeople, and those carriers aren't that worried about whether or not they know about this code upgrade and sewer backup because those carriers are using that bell curve to protect themselves. So is there any questions so far? Yeah, that's actually a good, we had somebody who wanted to know the difference between working with...