Chip Merlin | Property Insurance Coverage Law Blog | September 23, 2019
Insuring to value is becoming an increasingly discussed topic with so many buildings underinsured. I noted this problem in a recent post, Do I Have Enough Insurance? Underinsured Homes Are Epidemic.
I was with Amy Bach at a United Policyholders fundraising evening on Saturday night. It reminded me that that United Policyholders has been fighting this problem for a very long time. The issue was a fundamental reason for the founding of United Policyholders over twenty years ago:
UP has been working hard to help solve the underinsurance crisis for over two decades. Educating and guiding underinsured loss victims through this website, publications and Roadmap to Recovery workshops and communications, and working to change the laws that bar consumers from holding insurers and agents responsible for lulling them into a false sense of security.
UP is fighting for underinsured consumers in courts and legislatures. In its recent decision to uphold the California Department of Insurance Commissioner’s regulation requiring insurers to provide more accurate estimates of home replacement costs, the California Supreme Court cited UP’s amicus brief and survey finding nearly 75% of disaster victims were underinsured. With the regulation reenacted by the Court, homeowners should have more certainty about their policy coverage, and litigation between policyholders and insurers should be reduced as a result.
UP is educating consumers to get second opinions on dwelling replacement values when insuring their homes and offering strategies to underinsured loss victims.
A reference book on the issue, Commercial Fire Underwriting, has little guidance about how one should go about insuring to value and determining a Replacement Cost Determination:
Determination of Values. It is essential that underwriters be able to determine the values of properties to be insured, at least as an approximation. They cannot watch for underinsurance or overinsurance if they do not know the values.
A starting point is the cost to construct a similar building or to secure the personal property. Appraisals may be necessary, but average costs per square foot may be adequate for some buildings.
Depreciation should be applied unless the insurance is written on a replacement cost basis. Underwriters need to know how actual cash value is computed in the states where insurance is written.
When reviewing policies which have been on the books for some time, underwriters must determine if property values have been adjusted to remain in line with current costs. A reputable building cost index may be helpful in this calculation.
To me, it seems like the industry is paying lip service to a very important underwriting requirement and simply suggest vague ballpark approximations. If more states follow California’s requirements about insuring to value, as noted in, California Passes Law Requiring Insurance Companies Take Specific Measures To Periodically Review The Estimated Replacement Cost Of Structures Insured Under Residential Property Insurance Policies, my prediction is that we will start seeing more ads for services which make a much more professional study of property insurance valuations at the time of underwriting rather than waiting until after the loss to see if the valuation guess was correct.
One British Columbia firm, Integral Building Services, recently sent me the following advertisement for valuation services:
UNDERWRITING SURVEY REPORTS
Underwriting reports provided are loss control surveys which will include supplemental reports of underwriting information with respect to specific occupancies when required: Commercial Occupancy – Restaurant; Solid Fuel Appliance; Farm Outbuildings… The reports are intended to be an underwriting tool verifying the use of the building, exposures in the building and exposures surrounding the building. The surveys are noninvasive, based on a visual inspection of the property and information provided by the insured or the insured’s representative. Recommendations are provided based on conditions found at the time of inspection and address loss prevention issues, as well as improving safety or enhancing protection.BUILDING APPRAISAL REPORTS
An Underwriting Appraisal Report (UAR) is a building replacement cost analysis which provides an accurate estimate of the amount of insurance required to replace each structure and/or amenity exactly as it stands on the day the report is prepared. The appraisal provides a separate value for: Replacement Cost, New; Bylaws and Code Upgrade; a combined Emergency Service, Stability, Security, Abatement, Deconstruction, Demolition, Debris Removal, Catastrophe, Reproduction Cost, New evaluation. The UAR provides all the required amounts for policy limits and sub-limits. When required the report can also include Occupancy Design Fixtures: Restaurants – Commercial Kitchen Cooking Equipment; Theatres – Theatre Seating, Stage Equipment; Churches – Organs, Chimes, Carillons, ……DEPRECIATION REPORTS
These reports are designed to assess the condition and age of the components of the building so the owners can ensure that there are sufficient funds available to address any repair or replacement required. The reports provide a reserve funding schedule that is amortized over 20 to 30 years, depending upon which amortization period applies. The reports provide the estimated life expectancy (in years) of all common areas for any type of property, including Strata properties, and assess: the Roof System; the Exterior Wall System; Interior Finishes, Basement Finishes; Mechanical Systems; Electrical Systems; Common Amenities; and Landscaping. The reports also address additional expenses: Maintenance and Upkeep expenses; Projected Future Depreciation Report Costs; Insurance Deductibles; Projected Engineering and Geotechnical Services to Ensure the Integrity of Aging Building components.
This company published an article on the issue, Insuring To Value, that goes into far more detail on the issues of insuring to value. The article warns that real estate and market value appraisals are not the basis for determining an insurance to value analysis required to properly insure a building as required under a property insurance policy. It further warns against using the generic models of average price used by many in the insurance industry.
Policyholders are not construction experts. Few have an education or knowledge about how to determine what the full cost to replace as required under the insurance policy. Insurance agents are not being adequately trained about how to go about this important issue although they know about it and are selling policies often as a guess as to what the proper amount of insurance should be sold. My guess is that the industry is going to spend a lot more time on the issue and more companies like Integral Building Services will be paid to make this important analysis at the point of sale and renewal.