In the aftermath of the devastating Southern California wildfires of October 2003, claim adjusters went to work in an area where an estimated 3,631 structures were destroyed. In many cases the only remaining indication of a house was its concrete slab. Uncovering the house’s remnants and documents could be a difficult task. Uncovering a problem with the home’s original insurance valuation however, would be all too easy.
The California Department of Insurance reported that of about 3,000 total loss homeowner insurance claims, 676 consumer complaints were filed, with almost half of those involving underinsurance complaints. While the problem of underinsurance can catch homeowners and agents by surprise, some claim adjusters who are frequently required to comment on insurance-to-value on their routine claim inspections could see this problem coming long before the wildfires swept through the area.
Claim adjusters, especially independent adjusters, frequently wonder what happens to the risk information contained in their narrative reports to carriers. In addition to commenting on the desirability of a risk, adjusters frequently detail square footage, type of construction, and comment on valuation. It doesn’t take long for an adjuster working for a particular insurance company client to detect a pattern of underinsurance on the coverages. This pattern can act as an early warning system for carriers before the next disaster strikes. However, after detailing and commenting on the risk and valuation in report after report, the question becomes, is anyone at the company listening? If so, is the information getting passed along to the underwriting department?
Observers of long term trends in catastrophe claims in California note one major constant that links catastrophes such as the Oakland fires, Malibu fires, Laguna Beach fires, Northridge earthquake, and Southern California wildfires. Namely, underinsurance. Because of the nature of wildfires and catastrophes in general, a concentrated disaster will expose flaws in home valuations. How could the same issue transcend time and location and manage to arise during each successive catastrophe? Here are some theories from a claims-person’s perspective:
Human Nature: As long as there are insurance premiums to pay, people will find ways to reduce their premiums, often at the risk of being underinsured.
Competition: Some insurance carriers (and/or agents and brokers) may be motivated to underprice competitors by undervaluing the properties they insure.
Lack of Communication: There remains a persistent disconnect between the underwriting and claims departments at some carriers.
Technology: There is nothing wrong with either quick-calculations or long-form calculations for determining a home’s valuation, as long as the calculating tool is accurate and updated. A commitment to updated valuation instruments would go a long way toward staying ahead of the underinsurance problem.
Remodeling: A substantial number of homeowners have completed remodeling projects recently.
Construction Costs: In an ever-rising realty market such as California, construction cost factors will rise along with property prices.
Code Upgrade Coverages: Sub-limits may give rise to an underinsurance shortfall.
Independent insurance adjusters often find that their clients are “all over the map” when it comes to their homeowner property valuations.
There is no question that some carriers simply get this issue right and therefore don’t run into underinsurance issues following a catastrophe.
There are, however, carriers that can’t seem to find a consistent strategy to deal with insurance to value, or have captive agents that may struggle with valuation figures that the companies provide. Independent adjusters find that it shows up in home valuations that are difficult to comprehend and that do not match the claim adjuster’s post-claim calculations.
The likely outcome of an underinsurance issue after a wildfire? That depends on the factors that went into the original coverage valuation. Errors by the carrier or the captive agent may lead to some reformation of the policy. Errors on the part of a non-captive agent or broker may end up with their E&O carrier. But the claim of a homeowner that specifically requested or insisted on the written limits will most likely result in no payment beyond the limits (or extended limits) as outlined in the policy.
And unless things in our industry change substantially, we’ll be hearing about this issue again after the next catastrophe…
Maribeth Danko is the president of SeaCliff Claims Group LLC, an independent adjusting firm in Huntington Beach, Calif. She can be reached at email@example.com.