Your article makes a key point- Replacement Cost means the cost to replace the home with new materials of like kind and quality- “on the date of the loss”. Why then are insurers and their agents being permitted to “require” homeowners purchase inflated amounts of insurance equal to the estimated worst case scenario cost to rebuild a structure “after it has been damaged”?
These inflated Reconstruction Cost estimates are often 30-50% greater than the structure’s Replacement Cost. The cost of the foundation and debris removal, clearly an “after the loss” cost, should not be included but most insurers include those costs too. A follow up article should address this “deceptive” industry practice which requires consumers to purchase more insurance and pay higher premiums than the policy terms require.
Before the 1991 Oakland-Berkeley Hills Firestorm, CA HO policies had unlimited, guaranteed replacement cost coverage, meaning that those homes around the Caldecott Tunnel area were replaced/rebuilt to whatever they cost to replace/rebuild in 1991. This event is what led to the lower total payouts of Extended Replacement Cost Coverage HO Policies in CA. Yes, different carriers put different percentages (usually about 120%-150% over Coverage A), for competitive reasons, with inflation guard, but it’s still less coverage v the old unlimited amount
But my question remains, should insurers be permitted to “require” homeowners to purchase inflated Reconstruction Cost limits and pay inflated premiums when the policy terms “require ” only Replacement Cost (which is often 30-50% less)?
To qualify for Replacement Cost coverage, the policy terms require only 80% of Replacement Cost “prior to the loss”. Insurers are implying Replacement Cost equals the inflated hypothetical Reconstruction Cost and that is just wrong. If they want to require higher required limits, amend the policy terms, don’t simply ignore them and hope nobody says anything.
I guess they’re damned if they and damned if they don’t. If they (CA HO carriers) allow choice, and people take the 80% co-insurance, then the carriers (or agents & brokers, via their E & O) can be sued for inadequate coverage. If they force the Extended Replacement Cost coverage, then they can be blamed/sued for excessive coverage. I think they’ve made the decision that it is better to go with too much coverage v too little. I think they were fortunate to be able to scale back from Unlimited to Extended in 91; in today’s political climate it may not have been allowed.
Very interesting article and great points raised by Frank A. Lombard and SacFlood. On the point made of the 80% replacement cost, let me share with you part of a discussion I had with an underwriter a lifetime ago when I was a broker. I tried to have that underwriter agree to provide a prorated premium refund to any client that had a claim (within a policy year) and their sum insured at the time was deemed to be adequately more than that 80% allowance. We all know underwriters hate making payments. However, the refund would be calculated based on the difference of SI between the 80% and the actual SI. Without going into all the intricacies here, an unanswered question was “What happens when there is a total loss, does the Underwriter still pay up to the 80% and refund the pro-rated premium difference?”
Maybe these thoughts expressed are the reasons I am no longer a broker!!!!!…However, it initiated a discussion that was something for the marketers to look into. I cannot say if it continued after my sojourn ended.
The point I was trying to make was insurers are not suggesting or recommending homeowners purchase higher limits, they are “requiring” homeowners to purchase limits (Reconstruction Cost) in excess of those required by the policy terms (Replacement Cost). To me, that is simply an “unfair and deceptive practice” and excess premiums insurance consumers have paid should be returned to them.
If a homeowner wants to purchase higher limits, that’s fine with me, it’s just not fair for insurers to “require” limits be purchased based on inflated Reconstruction Cost estimates when the policy terms state Replacement Cost..
April 30, 2018 at 9:05 am
Eddie Hall says:
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I fight this battle every day. The replacement cost guides required by the companies are usually more than the replacement cost but the underwriters consider the guide as the gospel. There is even a disclaimer with the guides that states this may not be the exact replacement cost but is a guide. The true replacement cost is what a contractor will re build the house with like quality materials. If three contractors give you a replacement cost is can vary as much as $50,000 on the average home. I frequently have single family dwellings built for rental. The replacement cost guide of the insurance companies will calculate a replacement cost of $140.00 per square foot. I’ve had contractors that say they can rebuild for $90.00 per square foot. But, you are wasting your time trying to reason with an underwriter. Another thing I would like to know is why each company’s replacement cost guide is different. For example, I had a house insured with company A and they required $178,00 coverage. A few years later I replaced the coverage with company B and their replacement cost guide came to $158,000 but I insured it for $178,000. I got a memo form the company that their replacement cost guide only came to $158,000 so I would have to adjust the amount of coverage. I asked the underwriter why the difference in company A and B and they said well companies use different criteria in their replacement cost guide. I said so what your are telling me is that if a home insured with company B is a total loss and the contractor goes to home depot to get the materials he will be charged a different price depending on what company insures the house. I got no response. Another thing that tries my patience with companies is being required to complete their replacement cost guide but the home office sends an inspector out and he comes up with a different replacement cost. Example, I recently insured a house and the replacement cost guide come to $169,000. The insured said that is exactly what he needed. The home office sends me a memo that their replacement cost shows it should be insured for $200,000. So, I have to increase to $200,000. I don’t know what I am talking about but the home office does. I lose the insured because they don’t want $200,000 and they go to another agent and they can insured for $169,000. The longer I am in the insurance business the more cynical I am getting. Most of the insurance companies are hypocrites.
I submit the guides used by insurers don’t estimate the “Replacement Cost” (the current cost to build a similar structure “prior to it sustaining any damage”), insurers instead use an inflated estimate of what it “might” cost to rebuild the structure after it has been damaged- often referred to as Reconstruction Cost. Reconstruction cost estimates assume a lot of “maybes”. “Maybe” there will be higher than normal labor or material cost, “maybe” there will be difficult site conditions, “maybe” there will be bad weather. etc. Some companies use more “maybes” that others so their estimates can widely vary. Agents, regulators and consumers should hold insurers to their policy terms which “require” amounts of insurance based on Replacement Cost – not some inflated estimate of Reconstruction Cost which for most consumers only generate increased premiums. Potential differences between Replacement Cost and the actual cost to rebuild following a loss are best addressed with Guaranteed or possibly 150% Extended Replacement Cost endorsements usually available at a nominal cost..
Your article makes a key point- Replacement Cost means the cost to replace the home with new materials of like kind and quality- “on the date of the loss”. Why then are insurers and their agents being permitted to “require” homeowners purchase inflated amounts of insurance equal to the estimated worst case scenario cost to rebuild a structure “after it has been damaged”?
These inflated Reconstruction Cost estimates are often 30-50% greater than the structure’s Replacement Cost. The cost of the foundation and debris removal, clearly an “after the loss” cost, should not be included but most insurers include those costs too. A follow up article should address this “deceptive” industry practice which requires consumers to purchase more insurance and pay higher premiums than the policy terms require.
Before the 1991 Oakland-Berkeley Hills Firestorm, CA HO policies had unlimited, guaranteed replacement cost coverage, meaning that those homes around the Caldecott Tunnel area were replaced/rebuilt to whatever they cost to replace/rebuild in 1991. This event is what led to the lower total payouts of Extended Replacement Cost Coverage HO Policies in CA. Yes, different carriers put different percentages (usually about 120%-150% over Coverage A), for competitive reasons, with inflation guard, but it’s still less coverage v the old unlimited amount
But my question remains, should insurers be permitted to “require” homeowners to purchase inflated Reconstruction Cost limits and pay inflated premiums when the policy terms “require ” only Replacement Cost (which is often 30-50% less)?
To qualify for Replacement Cost coverage, the policy terms require only 80% of Replacement Cost “prior to the loss”. Insurers are implying Replacement Cost equals the inflated hypothetical Reconstruction Cost and that is just wrong. If they want to require higher required limits, amend the policy terms, don’t simply ignore them and hope nobody says anything.
I guess they’re damned if they and damned if they don’t. If they (CA HO carriers) allow choice, and people take the 80% co-insurance, then the carriers (or agents & brokers, via their E & O) can be sued for inadequate coverage. If they force the Extended Replacement Cost coverage, then they can be blamed/sued for excessive coverage. I think they’ve made the decision that it is better to go with too much coverage v too little. I think they were fortunate to be able to scale back from Unlimited to Extended in 91; in today’s political climate it may not have been allowed.
Very interesting article and great points raised by Frank A. Lombard and SacFlood. On the point made of the 80% replacement cost, let me share with you part of a discussion I had with an underwriter a lifetime ago when I was a broker. I tried to have that underwriter agree to provide a prorated premium refund to any client that had a claim (within a policy year) and their sum insured at the time was deemed to be adequately more than that 80% allowance. We all know underwriters hate making payments. However, the refund would be calculated based on the difference of SI between the 80% and the actual SI. Without going into all the intricacies here, an unanswered question was “What happens when there is a total loss, does the Underwriter still pay up to the 80% and refund the pro-rated premium difference?”
Maybe these thoughts expressed are the reasons I am no longer a broker!!!!!…However, it initiated a discussion that was something for the marketers to look into. I cannot say if it continued after my sojourn ended.
The point I was trying to make was insurers are not suggesting or recommending homeowners purchase higher limits, they are “requiring” homeowners to purchase limits (Reconstruction Cost) in excess of those required by the policy terms (Replacement Cost). To me, that is simply an “unfair and deceptive practice” and excess premiums insurance consumers have paid should be returned to them.
If a homeowner wants to purchase higher limits, that’s fine with me, it’s just not fair for insurers to “require” limits be purchased based on inflated Reconstruction Cost estimates when the policy terms state Replacement Cost..
I fight this battle every day. The replacement cost guides required by the companies are usually more than the replacement cost but the underwriters consider the guide as the gospel. There is even a disclaimer with the guides that states this may not be the exact replacement cost but is a guide. The true replacement cost is what a contractor will re build the house with like quality materials. If three contractors give you a replacement cost is can vary as much as $50,000 on the average home. I frequently have single family dwellings built for rental. The replacement cost guide of the insurance companies will calculate a replacement cost of $140.00 per square foot. I’ve had contractors that say they can rebuild for $90.00 per square foot. But, you are wasting your time trying to reason with an underwriter. Another thing I would like to know is why each company’s replacement cost guide is different. For example, I had a house insured with company A and they required $178,00 coverage. A few years later I replaced the coverage with company B and their replacement cost guide came to $158,000 but I insured it for $178,000. I got a memo form the company that their replacement cost guide only came to $158,000 so I would have to adjust the amount of coverage. I asked the underwriter why the difference in company A and B and they said well companies use different criteria in their replacement cost guide. I said so what your are telling me is that if a home insured with company B is a total loss and the contractor goes to home depot to get the materials he will be charged a different price depending on what company insures the house. I got no response. Another thing that tries my patience with companies is being required to complete their replacement cost guide but the home office sends an inspector out and he comes up with a different replacement cost. Example, I recently insured a house and the replacement cost guide come to $169,000. The insured said that is exactly what he needed. The home office sends me a memo that their replacement cost shows it should be insured for $200,000. So, I have to increase to $200,000. I don’t know what I am talking about but the home office does. I lose the insured because they don’t want $200,000 and they go to another agent and they can insured for $169,000. The longer I am in the insurance business the more cynical I am getting. Most of the insurance companies are hypocrites.
I submit the guides used by insurers don’t estimate the “Replacement Cost” (the current cost to build a similar structure “prior to it sustaining any damage”), insurers instead use an inflated estimate of what it “might” cost to rebuild the structure after it has been damaged- often referred to as Reconstruction Cost. Reconstruction cost estimates assume a lot of “maybes”. “Maybe” there will be higher than normal labor or material cost, “maybe” there will be difficult site conditions, “maybe” there will be bad weather. etc. Some companies use more “maybes” that others so their estimates can widely vary. Agents, regulators and consumers should hold insurers to their policy terms which “require” amounts of insurance based on Replacement Cost – not some inflated estimate of Reconstruction Cost which for most consumers only generate increased premiums. Potential differences between Replacement Cost and the actual cost to rebuild following a loss are best addressed with Guaranteed or possibly 150% Extended Replacement Cost endorsements usually available at a nominal cost..