Current Replacement Costs

[inshru2]

I am finding that with the short sales and foreclosures here in California that often the replacement cost for a dwelling is sometimes 2 - 3 times above the purchase price. Do you think this could be a problem - insuring above the purchase price? I remember when I started the business insurance companies looked at this a potential for a moral hazard. Probably not the case any more but just wondering.

[Big Dog]

Absolutely. It's in your best interest to advise the insured, in writing, that the cost to rebuild the home is greater than the price paid. Should a loss happen, the insured will look to you, and your E&O insurance, to make up the difference.

Having written proof that you've advised the insured of the disparity, and noting that they choose not to insure the home to the proper replacement cost, will be your best defense.

[d's insurance store]

At the point of sale, many buyers of insurance want the absolute cheapest coverage available. At the point of claim, the accusations and finger pointing begins as to why coverage is deficient, and usually it points back to the evil agent, who if only had properly informed the client and given a choice, would have chosen more deluxe coverage.

Oh, the commissions and premium I've lost out on with prospects who insist on undervaluing property and finding an agent who is hungrier than myself who will compromise in search of a sale.

My favorite saying is 'everything's fine until there's a claim'.

This won't solve your problem, but that's how I see it...

[jimmyr1978]

Here in the Midwest, we haven't seen real estate price depreciation like those on the coasts. However, most of my commercial P&C clients are making the same arguments - our carriers increased values by 6% while their market values decreased by 10%+.

We are fortunate enough to have an internal loss control department at our regional agency, and they provide building valuation services. If an insured is persistent about ACV, we show our clients ACV v. RC values - and then tell them to take RC or sign a waiver (holding us harmless, with definitions and claim examples) if they want ACV. Of course, very few commercial carriers will even write ACV policies, and no broker worth their salt would write one either. If you do, you better follow suit and get your insured to sign what amounts to a hold harmless should a claim arise and they turn to your E&O for coverage.

[nixonjf]

So long as you are substantiating the replacement cost estimate (reconstruction basis not new construction) with some credible source, the replacement cost exceeding the marke value shouldn't be an issue.

"Cost Approach" estimates from real estate appraisers are commonly based on "new construction" costs and are not adequate for insurance purposes.

As a underwriter, If I found a big variance between estimated reconstruction cost and the requested limit, I would start asking questions. If there's an issue with the property's quality (high or low), you want to be the one bringing it to the underwriter's attention - not the other way around, or your credibility for future transactions would be impacted.
My advise, if you think there's a moral hazard - don't present it to the market, just walk away.

I agree with others that, in almost all cases, writing ACV on any building that's in-use is asking for trouble.
The signed waiver may help you and your lawyers prevail in final judgement, but you're still setting yourself up to have to defend: time and $$$ that will eventually adversely impact your business. It's a gamble.

Nationally there is a growing inventory of vacant and distressed homes (plumbing gutted for copper and vandalized).
Estimating the reconstruction cost of properties in that condition would be a challenge and likely more work to figure out than is justified by the potential premium, I suspect most markets would simply decline.

I'd like to think these distressed properties get picked up in the E&S market, but many likely get covered by goverment risk pools and get subsidized by my tax dollars.

[ED3771316]

Best way to avoid an E & O issue (RC vs REP) is to show them coverage both ways. Let them pick their coverage. Have them sign a waiver that they are declining Replacement Cost.

This way, they get options, you CYA.

[DarrenR]

You need to explain to your insureds that the fluctuation in the value of real estate is primarily a fluctuation in the value of the land, not the structure. Just because the value of the house they are buying is 15% less than it would have been a year ago doesn't mean that it costs 15% less to rebuild the house.

[tinkerbell]

Most carriers we deal with will not insure for less than the reconstruction value. We use a home cost estimator program which the carriers require before they will bind. Some carriers send outside inspection co's to the risks. The issue you will run into in the event of a loss to an underinsured risk is the co-insurance clause contained in the contract.

We also explain the difference between market value and RV. If the prospect is not receptive to insuring at RV, we decline to write the cov.