Burand’s Agency E&O Blog: Tip #38

Inflation Factors on Personal Lines Property. Some personal property forms lack automatic inflation adjustments that increase the structural limit annually. Usually these are dwelling forms, but not always.

In any given year, the difference is usually so minor that the E&O risk is minor. But over time, these properties, if maintained well, become grossly underinsured. I have seen books of dwelling policies where coverage was 25 percent to 50 percent less than replacement cost. One solution is for the agency to complete a new insurance to value calculation regularly and then adjust coverage appropriately. Whether the review is conducted annually or every few years just depends on the agency’s risk tolerance and whether the agency wants to discuss small increases or large increases.

Another possible solution is to advise the insured, in writing, their policy lacks this automatic adjustment so that over time, they likely will be inadequately insured. If they want to increase the probability of being properly insured, they should contact the agency to have a replacement cost calculation completed.

One other consideration is that if another company offers automatic inflation guard, the agency likely should notify the insured that other options exist, even if the price is considerably more.