Puna Lava Zone: Placement, Percentage Deductibles, and a Backdating Request
Alana owns a $450,000 home in lower Puna, in a state-designated lava zone. Her carrier nonrenews her homeowners policy, citing volcanic activity and reinsurance costs; the letter arrives 45 days before expiration. Her mortgage lender requires continuous property coverage. She has a $1,000,000 personal umbrella, a 20-year-old roof, and no claims. Her expiring policy carried a hurricane deductible of 10% of Coverage A, which she says she “never agreed to.” The agent also learns that Alana let a prior policy lapse for 20 days last year, and she now asks the agent to “date the new policy back” so the lender does not see a gap.
1. Describe how the agent should approach placement, and what Alana must understand about the coverage she will likely get.
Read the worked answer
The voluntary market has signaled it will not write this risk, so the agent should document the declinations and go to Hawaii's residual market property mechanism (the Hawaii Property Insurance Association), the joint underwriting association created to make basic property insurance available where voluntary insurers will not.
What Alana must understand before signing:
- It is a basic property program, not a replacement for an HO-3. Coverage is narrower, and common features of her old policy - broad perils, replacement cost on contents, water backup, scheduled jewelry - may be absent or optional. She may buy back some of it by endorsement.
- Liability does not travel with it. The HPIA program is property-focused, so her personal liability protection comes from the umbrella, and an umbrella typically requires underlying liability limits. She may need a stand-alone liability or dwelling liability policy to keep her $1,000,000 umbrella from operating as a first-dollar layer.
- The mortgagee clause must be correct on the new policy, or the lender will force-place far more expensive coverage.
- The 20-year-old roof will drive either a roof exclusion or an actual-cash-value settlement on the roof; that should be disclosed, not discovered at claim time.
- Lava is a real peril here, unlike on mainland forms where earth movement exclusions are read broadly; confirm what volcanic perils the program actually covers.
The agent should present this as a coverage redesign, not a renewal, and document the declination of each option.
2. Alana disputes the hurricane deductible. Quantify it, explain when it applies, and assess the agent's disclosure obligation.
Read the worked answer
Exposure: 10% of $450,000 = $45,000 out of pocket, per hurricane occurrence - 45 times the flat $1,000 she may be imagining.
How it works: a percentage wind/hurricane deductible is triggered by an event-based condition (typically a named storm, or a hurricane watch or warning issued for the state or county), not by the size of her damage. The percentage applies to the dwelling limit and, on many forms, only to the hurricane-caused portion of the loss; damage from a separate peril in the same storm can be handled under the flat deductible. The practical trap is a modest claim: a $20,000 roof loss under a hurricane trigger pays nothing, because the deductible exceeds the damage.
Disclosure: a deductible is a material term of the contract. The agent's job is not to win the argument about whether she "agreed" - a signed application and a declarations page showing the percentage is the answer to that - but to prove the conversation happened. Best practice: a written deductible comparison at every renewal, standard versus percentage, with her acknowledgment. Going forward, she should price the retention: $45,000 is money the lender will not advance and the mortgagee clause will not cover, so it needs to be planned for like any other large exposure.
3. Alana asks the agent to backdate the new policy to eliminate the coverage gap. Evaluate the request and outline the correct response.
Read the worked answer
The request must be refused. Backdating a policy to cover a period when no coverage existed, or when no underwriting decision had been made, is a misrepresentation of a material fact. It exposes three parties:
- The agent: license discipline, and personal exposure for a claim the insurer would have declined; knowingly falsifying effective dates is the kind of conduct that ends a career.
- The insurer: the policy could be rescinded for material misrepresentation, leaving Alana with nothing at exactly the moment she needs coverage.
- Alana: a false statement on an application is itself a misrepresentation, and it is the sort of thing that surfaces in a claim investigation.
Correct response:
- Bind coverage as of the actual date the carrier accepts the risk - no earlier.
- Disclose the gap to the lender rather than concealing it; lenders routinely accept a short documented gap plus evidence of a new policy, whereas concealment can trigger force-placed coverage and loan issues.
- Close the gap prospectively: get the application in immediately, since 45 days is ample time if the agent starts today.
- Check whether the prior 20-day lapse triggers a prior-insurance surcharge or ineligibility at the residual market, and tell the client before submission rather than after a decline.
- Put the refusal and its reason in the file in writing.