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A Fine Line

Determining whether a cottage falls under commercial or personal lines requires brokers who do their due diligence

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Unfortunately he was met with indifference, and according to Lamont, his broker was unhelpful. The broker, who Lamont believes was also the adjuster, came to inspect the property and because he couldn’t assess what caused the damage, he said insurance wouldn’t cover it.

“I said if you’re not paying for it then I’m not staying with you,” says Lamont, who had been paying $2,600 for his policy.

To this day Lamont doesn’t know what caused the damage and flooded all but one bedroom of the basement, costing him $6,000 out of his own pocket to repair. This was his only claim in the 14 years he’s owned the property.

Lamont followed through on his threat and switched brokers. He is currently with J.M & C.W Hope Grant Insurance, this time going through a referral. Lamont has a $1 million liability policy, as well as coverage for fire, theft and vandalism.

“I met [the broker] and he provides great service and is more hands on,” says Lamont. “You can call him at anytime, ask him any questions and if needed he’ll come to see you.”

A Broker’s Role

Cases like Lamont’s signify how important it is for brokers to do what they claim to do best—provide clients with invaluable service—or risk losing business. Moreover, many cottage owners have a high net worth and represent excellent opportunities to cross sell other personal and commercial lines. A drop in mortgage rates might propel more people to purchase a summer home or cottage, either for personal use or investment income, so brokers should be prepared to service these customers appropriately.

In fact, recent reports state the Bank of Canada will hold off raising its key overnight rate well into the second half of 2011. At press time, the five-year closed mortgage rate was 5.49% at each of the Big Five banks: BMO, RBC, CIBC, Scotiabank and TD Canada Trust.

Brokers with clients that want to take advantage of low rates by purchasing a cottage should be well versed in property and liability insurance that is specific to that market. While it might seem a cottage policy would mirror that of a primary homeowner’s policy, there are a few notable differences. For example, contents limits are usually lower than a primary residence because most clients don’t keep valuables at the cottage.

More importantly, it’s difficult to determine whether a cottage fits under the personal or commercial umbrella, say experts. A cottage might fall under personal lines when it is for personal use and rented out in a limited capacity, usually to family or friends. However, a cottage becomes a commercial liability when it is rented for investment income, usually to strangers.

This rule of thumb varies drastically from customer to customer, so brokers should ask clients specific questions before bringing the account to an underwriter.

Darlene Leggett, underwriting manager, Toronto Gold Centre at The Guarantee Company of North America, says brokers should have a complete description of the property including year built, square footage, distance from a fire hall, use of alarms and frequency of occupancy. Additionally, brokers should ask whether the cottage is for personal use by the owner and family only, or whether it will be rented to others for business income.

“Insurance companies may have restrictions, or perhaps even no appetite, to accept properties with rental exposure,” she says. “Some of the concerns may be who the tenants are, how well they have been screened, and how long the rental exposure will be (e.g. is the rental to one family for several weeks or is the cottage rented to changing parties weekly during the summer season).”

Brokers should know the client’s insurance history, Leggett adds. This includes the names, policy numbers and tenure with various prior insurers. Have clients been loyal to one company or have they changed carriers frequently? What is the prior claims experience? Does the client submit claims frequently and for what amount?

Also, brokers should be able to gauge how much the customer values the cottage.

“Are the owners there as regularly as they can be and are they taking steps to secure the cottage when they’re absent?” asks Leggett.

For example, some owners hire a property management company or caretakers to check and maintain the property.

“What insurance companies want to see is an owner who is thinking ahead, doesn’t want to have claims and takes steps to protect his assets,” she says.

Andrew Pettipas, broker at J.M & C.W Hope Grant Insurance agrees that proper care and maintenance is important for insurers when assessing an account.

“This affects rates, and even if the company will [insure] them,” he says. “The better shape the property is in (e.g. the roof is under 15 years old, floors are clean, yards are maintained, good quality construction), the easier it is to insure.”

Lastly, if a broker wants to thrive in the cottage market, they should be actively involved within the cottage community, says Daniel Ignoto, personal lines underwriting manager at Aviva Canada.

“Brokers should clearly define what role they would like to play in this space, and build their business plans around that,” he says. “Some of our most successful brokers in this product line are highly active in the cottage community and some are cottage owners themselves, so they understand first-hand what this product should be able to do for them.”

Cottage Risks

According to experts, cottage claims typically include damage to property due to wind and fire, or liability due to slip and falls. Water damage is a risk for any property, but with cottages it is even more troublesome because the property is typically vacant for long periods of time.

“Things can happen when owners are absent,” says Leggett. “If you experience a really hard winter and you aren’t up at the cottage regularly, ice and snow can be a factor causing burst pipes and water damage.”

She recommends having alarms installed so the property is monitored year round for fire, burglary and low temperature. If an emergency does occur, this will provide the earliest alert to the fire department or police and the greatest potential for minimizing a loss at the location.

Another claims scenario Leggett has heard of is one where raccoons entered the property and went undetected for some time. This caused about $250,000 worth of damage at a Muskoka, Ontario cottage. Also, in a separate case there was a total fire loss when a pot was left unattended on the stove.

Advise investors hoping to make money by renting the cottage of added risks, including renting to strangers who could cause damage to the property.

Melanie Pon, manager, commercial property department at Totten Insurance Group says coverage for property damage caused by renters is hard to obtain, which is why cottage landlords usually secure a deposit from renters.

“There is a hazard from renting it out to strangers, but not from our point of view because we won’t cover any damage caused by renters, unless it’s fire,” she says.

Pon notes there is an exclusion for riots, vandalism and malicious acts (RVMA) if the cottage falls under commercial lines. Also, if the owner has a boat it is a separate liability that requires additional coverage.

“If [owners] have a canoe on the property and [renters] take it out, we’re not covering liability for that,” she says. “Brokers need to explain to their clients exactly what is included in one of these policies.”

Additionally, some cottages have wood-burning stoves, which are typically freestanding units that are used to heat the cottage, and this can also be a risk.

“You have people who are renting [the cottage] who don’t really know how to use [the stove] because they’re inexperienced,” says Pon.

Christine Horuc-Lake, manager of personal lines, Totten Insurance Group says owners should ensure the stove is “ULC or CFA approved and that it’s installed to code.” If the wood-burning stove meets these requirements, the customer can get coverage for it.

Other common exclusions include wear and tear/deterioration of the building, moving and bulging of earth/property, loss or damage caused by birds/vermin/insects/rodents, water damage/continual seepage into the home and freezing.

“The more information brokers can get from their clients, the better we can rate it for them with the best coverage,” adds Horuc-Lake.

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Q&A with Philip Jarvie, senior account executive, HKMB Hub International

Q: What are some of the challenges involved with placing this product?

A: The challenges faced by the underwriters of our investment property insurance program are:

a. The building limit. It can be difficult to insure a building that has a replacement value of $3 million (for example) that is located on an island.

b. Type of protection. For example, is the property located on an island? If on mainland, is there road access 12 months of the year? Is the property used year-round or only during the summer and fall months? Is the fire department volunteer or full time? What is the distance to the nearest responding fully manned fire department?

c. Wood-burning stoves. Is it Wood Energy Technology Transfer (WETT) approved? Are tenants trained on the operation of the wood-burning stove?

d. Owner attention. Does the owner or property manager visit the premises after one vacationer has left and prior to the next vacationer arriving?

e. Water shut off. Is the water shut off when there is a period of time when the premises are not rented?

f. Toys. Will the people renting the cottage have access to watercraft and/or ATV’s? For example are there jet skis, kayaks, canoes, fishing boats, speedboats? Obviously the liability exposure varies greatly with different types of watercraft.

Q: What have been the trends with pricing and limits?

A: Pricing of rental vacation property has been relatively stable in recent years. However, some insurers have increased pricing on properties located on islands.

Q: What are some common exclusions?

A: The main exclusions or limitations are:

1. Vandalism caused by tenants is insured under our program but limited to either $25,000 or $50,000.

2. We allow vacancy for up to 60 days or 120 days. However, when vacant, we require certain conditions to be met.

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Copyright 2011 Rogers Publishing Ltd. This article first appeared in the June 2011 edition of Canadian Insurance Top Broker magazine.