This rather lengthy article should have been written with, at least, an opening paragraph that explains the process variances of the components of value of a business entity. But, it has value in what it discusses in more detail. Carry on, IJ writers and guest writers.
The problem with all of this analysis is that the actual replacement cost can not be determined accurately until the home is rebuilt. A very recent news article indicated that the cost of lumber has increased to such extent that it is affecting the cost of building new homes. The cost of materials and labor cannot be determined until there is a loss. In Northern CA in the Santa Rosa area some 3,000 structures were destroyed. Contractors coming in from out of state with their crews drastically increased the labor costs. As it turns out many of these structures were under insured. The onus is on the homeowner to make a reasonable estimate of the replacement cost, and hope that he has guessed correctly in the event of a loss.
I trust you, and most other insurance consumers, desire coverage on your home which will repair or replace your home to like new condition should it be damaged or destroyed. The policy you purchase should provide those terms. Do any of these quotes do that, provide Replacement Cost coverage without a specific limit- Guaranteed Replacement Cost? Anything less should be unacceptable.
If you review closely the quotes you have received I trust you will find these valuations are not based on your home’s Replacement Cost (current cost to build before loss has occurred) but your home’s Reconstruction Cost- each insurer’s estimate of what it might cost to repair or rebuild your home after it has been damaged. These estimates can vary wildly based on which post- loss assumptions each insurer has selected. Shouldn’t insurers be questioned why they are requiring amounts of insurance in excess of those indicated in their rate filings and policy terms?
Yes, there are differences in the software insurers are using but in my experience (fee-based insurance advisor to consumers) they are all using inflated Reconstruction cost valuations, some more inflated than others. That should be a blog topic worthy of discussion.
Frank, you mentioned “guaranteed replacement cost”. In many states, carriers do not offer this type of home policy. I can see why. It is similar to the same reason a life insurance company does not offer to sell an unlimited death benefit policy for the price of a $10,000 burial policy. The limit of coverage will have an actuarily sound rate behind it. Otherwise, homeowners would insure a $1million dollar home for a $10,000 coverage limit and rate, and expect the carrier to cough up $1million at claim time…
No one is suggesting a $1 million home be insured for $10,000 but GRC has been around for 30+ years, it’s not a new concept. Policyholders are required to maintain 100% Replacement Cost limits(instead of the normal 80%) and pay a nominal additional premium. In return, they are covered for the “potential” difference between the current Replacement Cost and the often unpredictable actual post-loss Reconstruction Cost Some insurers may not offer this coverage but others do. I have to question thought process of the insurers who don’t. The insurance industry is far better able to address this exposure than individual homeowners. If rates prove to be inadequate, increase the rates but don’t abandon the individual insurance consumer.
But let’s be fair, don’t require consumers to purchase inflated Reconstruction Cost limits when the policy only requires them to maintain Replacement Cost limits. And offer Enhanced, Extended or Guaranteed Replacement Cost endorsements when these coverage extensions are available.
Well enhanced and extended replacements cost endorsements are available. If any agent in any state can still offer Guaranteed Replacement Coverage. I would like to see a response. Not available in CA.
The question should not be “Are Guaranteed Replacement Cost endorsements available?” The question should be why aren’t GRC endorsements available? In all states? Insurance consumers should be unable to purchase the coverage they need to rebuild their homes following a storm or wild fire?? The insurance industry should be better equipped to handle this “surge” pricing problem than Joe and Mary Homeowner.
In Massachusetts (and I’m sure many other states), insurers are permitted to “require” homeowners to purchase inflated Reconstruction Cost limits before they are even eligible to obtain GRC or Extended Replacement Cost endorsements. Now tell me; that should be considered an acceptable practice? That is just plain wrong!
GRC is available in all 50 states, it just depends upon the insurance company. In my experience only the high net worth carriers offer this in all 50 states. We have 3 that offer it in all 50.
Plus, after the 1991 Oakland-Berkeley Hills Firestorm, California changed from Unlimited Guaranteed Replacement Cost Coverage to Extended Replacement Cost Coverage. the problem is that different carriers have different percentages. Some use, 120%, or 125%, or 150%, etc. So, even if they all agree on the same cost estimator (such as MSB), and even if their quotes all show the same Coverage A Dwelling Amount, the Claims Adjusters for those respective carriers would all pay out different amounts to rebuild, based on their particular carrier’s Extended Replacement Cost Percentage, which gives an additional percentage of coverage over and above what the Coverage A Dwelling Amount states.
Another variable to throw in, leading to an even greater variance in the range of possible replacement cost amounts. The Industry in each State should agree on both a standard cost estimator as well as a standard percentage (if the carriers in that state use Extended Replacement Cost Coverage). Insurance Regulators, are you listening, reading, learning?
Are you saying the State of California would not let insurers offer or consumers purchase GRC endorsements? Or did the insurers arbitrarily decide to no longer offer this coverage homeowners in California desperately needed?
Would this be the major reason 3000 Santa Rosa homeowners have discovered they are “underinsured”? I would think more professional insurance agents would have comments to add to this discussion.
Today I encountered this very issue with the Homeowners renewal for my daughter. A year ago we helped her purchase an 8 year old home for $156,000. The RC was calculated at that time at $250,000. The renewal increased the limit by 14% to $285,000. When I questioned the limit I was advised Cincinnati Ins Co calculated an RC of $388,000 (!), but agreed to lower the limit to $285,000. I sent them information from the same builder showing the cost of a similar NEW home in a nearby development is only $226,900 and that includes the land, excavation costs, etc. The account manager is requesting they reconsider the limit but advised me most likely they will NOT agree.
Also, before we decided to go with Cincinnati, Auto Owners provided their RC estimate at $222,000! So, Cincinnati’s RCE was 75% higher!
Valuation- that is the focus of this discussion and your experience is an example of the question I raise. If you ask those insurers to share the actual valuations with you, you will find they have estimated the “Reconstruction Cost” of your home not the “Replacement Cost” of the home. Why are insurers being permitted to require policyholders to maintain “inflated” Reconstruction Cost limits when the policy and rate filings require only Replacement Cost? In most cases, all this practice does is increase the premium homeowners are required to pay. Some or all of that extra premium; hundreds if not thousands of dollars; would be better spent on GRC or Extended Replacement Cost endorsements.
These terms (Reconstruction Cost and Replacement Cost) have significantly different meanings, why are insurers being allowed to substitute one for the other? Insurers (and their agents) and regulators owe consumers an explanation and a refund if they have been overcharged. You are just one example, there are millions of others.
Lauren,
If the RC estimate generated at the time of purchase was on the appraisal done for the lender, neither the market value nor the cost approach are for insurance purposes. Similarly, the builder’s estimate of current tract development new construction cost $227K isn’t he correct basis either, but it’s close enough to cast doubt on the $388K RC estimate.
It would cost more to rebuild one house after a fire than builder’s cost when building several at once, but your builder’s estimate has some offsetting expenses included that wouldn’t be repeated (land acquisition).
You should be able to take the builder’s specs to the local agent and have them plug all the details (not just the minimum fields required) to check the RC estimate. There will be inputs for square footage, number of fireplaces, grade of cabinets, but nothing too technical.
Yes, it will be a “reconstruction” based estimate, which is the appropriate basis for insurance purposes. The variance you’re seeing between carriers RC estimates is likely the level of detail they’re putting into the RC calculation. Sometimes they pull building information from tax assessor databases, and that may not be accurate.
Old Dog, if reconstruction cost- an estimate of the cost to repair or rebuild following a loss, is the appropriate insured value, why does the policy require only replacement cost? Lauren should purchase the replacement cost value and the guaranteed replacement cost endorsement. And as the policy says the replacement cost calculation should not include the cost of the foundation.
If the insurance policy intended to require the reconstruction cost, the policy would say so. Consumers are being deceived into purchasing inflated amounts of insurance and I suggest that is an unfair practice. But I will listen to other informed opinions.
I suggest reading article in Property Insurance Law Observer from Jan 2017: “California Supreme Court Upholds Replacement Cost Estimate Regulation (For Now)”.
My take-away is that court acknowledges estimates are imperfect, but they should try and make sure they align with contract expectations. That would be “reconstruction” rather than “new construction”. The definition of “replacement cost” varies between industries and context.
If the coverage excludes foundations, then so should the RC estimate. Claims experts and contractors have told me that foundations are difficult, if not impossible, to salvage, so I recommend buying the endorsement if the coverage isn’t already included in the base form.
As for the availability of unlimited GRC, I think it would be difficult for treaty underwriters, regulators, and investors to sign off without a very strong set of data and valuation validation procedures, especially in CAT exposed areas. The extra level of validation costs would need to be built into the premium, making the product less competitive. It’s certainly worth asking your local agent, but it may not be available in many areas or for all size policies.
I have read that decision and I believe it doesn’t change the home insurance policy language which clearly states replacement cost for required amount of insurance purposes is determined “ prior to a loss” and the replacement cost calculation should not include the cost of the foundation. It seems to me insurers have to abide by their own policy terms, if they want to change them, I’m all In but until they do, they have to live with what the policy and rate filings state. That is replacement cost means replacement cost not the inflated arbitrary reconstruction cost.
It would appear there should be some response to the suggestion I read the California Replacement Cost regulation. Correct me if I’m wrong but that regulation seems to say if an insurer wishes to offer an opinion as to the replacement cost of a home, that opinion must include ” the expenses that would reasonably be incurred to rebuild the insured structure in its entirety”.
That regulation to me does not appear to grant insurers permission to “require” homeowners purchase amounts of insurance in excess of those required by an insurer’s policy’s terms and rate filings which refer to Replacement Cost “prior to a loss”; not after. The current Replacement Cost New (not the inflated Reconstruction Cost) with an GRC endorsement should be more than adequate and cost consumers significantly less. Is my thought process flawed?
This rather lengthy article should have been written with, at least, an opening paragraph that explains the process variances of the components of value of a business entity. But, it has value in what it discusses in more detail. Carry on, IJ writers and guest writers.
The problem with all of this analysis is that the actual replacement cost can not be determined accurately until the home is rebuilt. A very recent news article indicated that the cost of lumber has increased to such extent that it is affecting the cost of building new homes. The cost of materials and labor cannot be determined until there is a loss. In Northern CA in the Santa Rosa area some 3,000 structures were destroyed. Contractors coming in from out of state with their crews drastically increased the labor costs. As it turns out many of these structures were under insured. The onus is on the homeowner to make a reasonable estimate of the replacement cost, and hope that he has guessed correctly in the event of a loss.
I trust you, and most other insurance consumers, desire coverage on your home which will repair or replace your home to like new condition should it be damaged or destroyed. The policy you purchase should provide those terms. Do any of these quotes do that, provide Replacement Cost coverage without a specific limit- Guaranteed Replacement Cost? Anything less should be unacceptable.
If you review closely the quotes you have received I trust you will find these valuations are not based on your home’s Replacement Cost (current cost to build before loss has occurred) but your home’s Reconstruction Cost- each insurer’s estimate of what it might cost to repair or rebuild your home after it has been damaged. These estimates can vary wildly based on which post- loss assumptions each insurer has selected. Shouldn’t insurers be questioned why they are requiring amounts of insurance in excess of those indicated in their rate filings and policy terms?
Yes, there are differences in the software insurers are using but in my experience (fee-based insurance advisor to consumers) they are all using inflated Reconstruction cost valuations, some more inflated than others. That should be a blog topic worthy of discussion.
Frank, you mentioned “guaranteed replacement cost”. In many states, carriers do not offer this type of home policy. I can see why. It is similar to the same reason a life insurance company does not offer to sell an unlimited death benefit policy for the price of a $10,000 burial policy. The limit of coverage will have an actuarily sound rate behind it. Otherwise, homeowners would insure a $1million dollar home for a $10,000 coverage limit and rate, and expect the carrier to cough up $1million at claim time…
No one is suggesting a $1 million home be insured for $10,000 but GRC has been around for 30+ years, it’s not a new concept. Policyholders are required to maintain 100% Replacement Cost limits(instead of the normal 80%) and pay a nominal additional premium. In return, they are covered for the “potential” difference between the current Replacement Cost and the often unpredictable actual post-loss Reconstruction Cost Some insurers may not offer this coverage but others do. I have to question thought process of the insurers who don’t. The insurance industry is far better able to address this exposure than individual homeowners. If rates prove to be inadequate, increase the rates but don’t abandon the individual insurance consumer.
But let’s be fair, don’t require consumers to purchase inflated Reconstruction Cost limits when the policy only requires them to maintain Replacement Cost limits. And offer Enhanced, Extended or Guaranteed Replacement Cost endorsements when these coverage extensions are available.
Well enhanced and extended replacements cost endorsements are available. If any agent in any state can still offer Guaranteed Replacement Coverage. I would like to see a response. Not available in CA.
The question should not be “Are Guaranteed Replacement Cost endorsements available?” The question should be why aren’t GRC endorsements available? In all states? Insurance consumers should be unable to purchase the coverage they need to rebuild their homes following a storm or wild fire?? The insurance industry should be better equipped to handle this “surge” pricing problem than Joe and Mary Homeowner.
In Massachusetts (and I’m sure many other states), insurers are permitted to “require” homeowners to purchase inflated Reconstruction Cost limits before they are even eligible to obtain GRC or Extended Replacement Cost endorsements. Now tell me; that should be considered an acceptable practice? That is just plain wrong!
Guaranteed Replacement Cost Coverage not available in Texas, at least not that I have seen in almost 20 years in the business.
GRC is available through at least two carriers in my office in California.
GRC is available in all 50 states, it just depends upon the insurance company. In my experience only the high net worth carriers offer this in all 50 states. We have 3 that offer it in all 50.
Plus, after the 1991 Oakland-Berkeley Hills Firestorm, California changed from Unlimited Guaranteed Replacement Cost Coverage to Extended Replacement Cost Coverage. the problem is that different carriers have different percentages. Some use, 120%, or 125%, or 150%, etc. So, even if they all agree on the same cost estimator (such as MSB), and even if their quotes all show the same Coverage A Dwelling Amount, the Claims Adjusters for those respective carriers would all pay out different amounts to rebuild, based on their particular carrier’s Extended Replacement Cost Percentage, which gives an additional percentage of coverage over and above what the Coverage A Dwelling Amount states.
Another variable to throw in, leading to an even greater variance in the range of possible replacement cost amounts. The Industry in each State should agree on both a standard cost estimator as well as a standard percentage (if the carriers in that state use Extended Replacement Cost Coverage). Insurance Regulators, are you listening, reading, learning?
Are you saying the State of California would not let insurers offer or consumers purchase GRC endorsements? Or did the insurers arbitrarily decide to no longer offer this coverage homeowners in California desperately needed?
Would this be the major reason 3000 Santa Rosa homeowners have discovered they are “underinsured”? I would think more professional insurance agents would have comments to add to this discussion.
Today I encountered this very issue with the Homeowners renewal for my daughter. A year ago we helped her purchase an 8 year old home for $156,000. The RC was calculated at that time at $250,000. The renewal increased the limit by 14% to $285,000. When I questioned the limit I was advised Cincinnati Ins Co calculated an RC of $388,000 (!), but agreed to lower the limit to $285,000. I sent them information from the same builder showing the cost of a similar NEW home in a nearby development is only $226,900 and that includes the land, excavation costs, etc. The account manager is requesting they reconsider the limit but advised me most likely they will NOT agree.
Also, before we decided to go with Cincinnati, Auto Owners provided their RC estimate at $222,000! So, Cincinnati’s RCE was 75% higher!
This is CRAZY!
Valuation- that is the focus of this discussion and your experience is an example of the question I raise. If you ask those insurers to share the actual valuations with you, you will find they have estimated the “Reconstruction Cost” of your home not the “Replacement Cost” of the home. Why are insurers being permitted to require policyholders to maintain “inflated” Reconstruction Cost limits when the policy and rate filings require only Replacement Cost? In most cases, all this practice does is increase the premium homeowners are required to pay. Some or all of that extra premium; hundreds if not thousands of dollars; would be better spent on GRC or Extended Replacement Cost endorsements.
These terms (Reconstruction Cost and Replacement Cost) have significantly different meanings, why are insurers being allowed to substitute one for the other? Insurers (and their agents) and regulators owe consumers an explanation and a refund if they have been overcharged. You are just one example, there are millions of others.
Lauren,
If the RC estimate generated at the time of purchase was on the appraisal done for the lender, neither the market value nor the cost approach are for insurance purposes. Similarly, the builder’s estimate of current tract development new construction cost $227K isn’t he correct basis either, but it’s close enough to cast doubt on the $388K RC estimate.
It would cost more to rebuild one house after a fire than builder’s cost when building several at once, but your builder’s estimate has some offsetting expenses included that wouldn’t be repeated (land acquisition).
You should be able to take the builder’s specs to the local agent and have them plug all the details (not just the minimum fields required) to check the RC estimate. There will be inputs for square footage, number of fireplaces, grade of cabinets, but nothing too technical.
Yes, it will be a “reconstruction” based estimate, which is the appropriate basis for insurance purposes. The variance you’re seeing between carriers RC estimates is likely the level of detail they’re putting into the RC calculation. Sometimes they pull building information from tax assessor databases, and that may not be accurate.
Old Dog, if reconstruction cost- an estimate of the cost to repair or rebuild following a loss, is the appropriate insured value, why does the policy require only replacement cost? Lauren should purchase the replacement cost value and the guaranteed replacement cost endorsement. And as the policy says the replacement cost calculation should not include the cost of the foundation.
If the insurance policy intended to require the reconstruction cost, the policy would say so. Consumers are being deceived into purchasing inflated amounts of insurance and I suggest that is an unfair practice. But I will listen to other informed opinions.
I suggest reading article in Property Insurance Law Observer from Jan 2017: “California Supreme Court Upholds Replacement Cost Estimate Regulation (For Now)”.
My take-away is that court acknowledges estimates are imperfect, but they should try and make sure they align with contract expectations. That would be “reconstruction” rather than “new construction”. The definition of “replacement cost” varies between industries and context.
If the coverage excludes foundations, then so should the RC estimate. Claims experts and contractors have told me that foundations are difficult, if not impossible, to salvage, so I recommend buying the endorsement if the coverage isn’t already included in the base form.
As for the availability of unlimited GRC, I think it would be difficult for treaty underwriters, regulators, and investors to sign off without a very strong set of data and valuation validation procedures, especially in CAT exposed areas. The extra level of validation costs would need to be built into the premium, making the product less competitive. It’s certainly worth asking your local agent, but it may not be available in many areas or for all size policies.
I have read that decision and I believe it doesn’t change the home insurance policy language which clearly states replacement cost for required amount of insurance purposes is determined “ prior to a loss” and the replacement cost calculation should not include the cost of the foundation. It seems to me insurers have to abide by their own policy terms, if they want to change them, I’m all In but until they do, they have to live with what the policy and rate filings state. That is replacement cost means replacement cost not the inflated arbitrary reconstruction cost.
It would appear there should be some response to the suggestion I read the California Replacement Cost regulation. Correct me if I’m wrong but that regulation seems to say if an insurer wishes to offer an opinion as to the replacement cost of a home, that opinion must include ” the expenses that would reasonably be incurred to rebuild the insured structure in its entirety”.
That regulation to me does not appear to grant insurers permission to “require” homeowners purchase amounts of insurance in excess of those required by an insurer’s policy’s terms and rate filings which refer to Replacement Cost “prior to a loss”; not after. The current Replacement Cost New (not the inflated Reconstruction Cost) with an GRC endorsement should be more than adequate and cost consumers significantly less. Is my thought process flawed?