Property Insurance - Agreed Amount

[scott]

I am in the middle of about 150 different insurance bids (slight exaggeration) and one thing is standing out, agreed amount.

First, coinsurance is a penalty. Having the coinsurance penalty in a property insurance program never helps the insurance buyer.

Agreed amount removes the penalty. It is a good thing for insurance buyers.

I am amazed at how many agents deliver proposals with a coinsurance penalty. There are maybe 1 in 1,000 accounts that should not have agreed amount - from the insureds perspective.

I no longer provide bid specifications when I am getting competitive quotes for a client. I let the agent design the insurance program so I can see what kind of insurance brain an agent has. Proposing a policy with a coinsurance penalty does not impress me.

In my blog - http://www.InsuranceAssuranceBlog.com I have advised insurance buyers to call their agent and ask if their property insurance has a coinsurance penalty. This single mistake is so basic as to be almost a litmus test to determine if an agent is looking out for his client's interests.

[wlunday]

Scott, you are correct in some circumstances. On most, I fear, you are way off-base.

When I'm in the field visiting with clients about the replacement cost for a building, unless it's relatively new they don't have a clue. I have found that most of the carriers' raters are assigning appropriate replacement costs for these structures, if the producer does his job right. The raters are simply a tool. It's like telling a CPA he's stupid or lazy for using a calculator instead of a pencil!

As for the co-insurance clause, you're right... it is there for the benefit of the carrier. Not the insured. However, again, if the producer does the right job it is not ever a problem. It allows the carrier protection from unscrupulous producers (and insureds) who would under value a property just to secure a less expensive premium... and then claim bad-faith against the carrier when a claim does occur.

Carriers have priced these offers at a what they feel is appropriate for the risk. The co-insurance clause is really a double-edged opportunity. With the carriers I use, if I use their rater properly I transfer the risk of under-insuring the building to the carrier. Not me or the client. We've all seen too many cases where the client is "penny-rich and pound-poor".

So, in some specific cases you may be right, but in general... I don't think so. What's everybody else think?

Swymmer

[scott]

Swymmer,

If a competing agent comes into one of your accounts and finds coinsurance, she will use it against you.

What you contend are the reasons for coinsurance will ring hollow to your client - they are focused on their self-interest, not that of the insurance company.

The agents I mentor will be jumping all over you with this and other coverage differentiators:

-business income issues
-lack of per location aggregates
-low deductibles
-pollution exclusions
-low (or no) employee dishonesty coverage
-inadequate umbrella limits
-specific property coverage
-lack of annual review meetings
-poor claims management
-inadequate experience modification review

At best (for you), you will have some explaining to do. At worst, you will lose the account.

In fact, in most cases (using my methods) you won't even know you have a problem until you are notified of the BOR or the request for cancellation arrives in your mail.

(To Others - thanks for the emails - for and against. While I like getting private messages, the community benefits from the public postings here. Go ahead and send me a private note but post here too.)

[nixonjf]

I agreed that it's a worthwhile goal for the agent/insured to try and get the potential for coinsurance penalties and inadequate limits removed.

However, it's not simply a matter of asking for (or demanding) the endorsements.
The agent/insured need to provide the underwriter current credible estimates of their insurable values.

Too many property insurance submissions are sent to market with poor quality addresses, misclassified risks, missing/inaccurate basic COPE, and/or grossly under-reported values.

If the underwriter resists providing blanket and agreed amount, there's probably a reason.

I advise risk managers to ask to see the outbound submissions and the responses from the underwriters.
Is the agent/broker reluctant to show that information?
How many declinations /policy restrictions were related to the submission quality?
What would be the return on the investment to provide a superior quality submission?

Regards,

John Nixon
http://www.asperta.com

[Island Girl Agent]

If only every carrier we do business with would offer agreed value clauses, life would be simple. But the reality is...they don't. We do the best we can to obtain the broadest coverage possible for the client, but the carriers over here still call the shots and they are not as open-minded about coverage issues as mainland carriers have been...not sure why. And believe me, I've tried.

[wlunday]

Hi Scott.

How did you manage to segway from a one-topic discussion (co-insurance) to all the stuff listed below:
business income issues
-lack of per location aggregates
-low deductibles
-pollution exclusions
-low (or no) employee dishonesty coverage
-inadequate umbrella limits
-specific property coverage
-lack of annual review meetings
-poor claims management
-inadequate experience modification review

Nixon (& I) agree that it is a worthy cause to have a stated value contract, but in reality it doesn't work that way. And, as I do my job right... stay on top of the account and visit regularly with the insured about any concerns and changes to the risk, I don't forsee you or anyone else stepping into the account with a BOR.

Scott, it's a stretch for you to insinuate that I (or any other agent) wouldn't pay attention to the list above just because the property portion of the policy has a co-insurance clause.

I actually use the co-insurance clause as a sales-helper, but in a different way than you. I share the fact that the clause exists, and explain how and why the carrier's cost rater creates a value for the building. In 30 years of being in business, I have yet to have a problem with this issue. Sure, I've had many people tell me the R/C value is too high for the actual building, but generally that's because they are thinking ACV instead of R/C. When we talk it out they generally understand.

In addition to being attentive to the list above, my office also offers employee benefits, and being in a small town we participate in the local chamber of commerce, fairs, teach an "insurance" class at the local high school and go to church with many of our clients. It's not a big agency, only about 4 million of P/C premium and the related L & H stuff. Maybe my clientele is quite different than the cases you work on. Anyway, I stand by my comment... you are correct in some circumstances.

Swymmer

[jimmyr1978]

Scott,

Agree with you completely. The problem is that most agents are not educating their insured's on the dangers of under-valuation, coinsurance penalties, blanket coverage, deductible choices, etc. Today, I'm sending a quote that is higher than my competitors, but I fully expect to win, per the insured's verbal agreement to my previous price indication.

Currently, the insured has 80% coinsurance and only $100 per sf on JMS construction, 3 stories, full build-out apartments (cabinets, flooring, fixtures, etc). Our Loss Control Department inspected, ran a Marshall & Boeck, and came up with closer to $150/sf replacement cost. The insured is a developer and didn't believe $150 was reasonable - but did agree that $125/sf was closer to reality than $100. Through negotiations, I was able to secure Agreed Amount at the $125 level. Our property rate is lower, but we've increased the schedule by several million dollars to hit the carrier's ITV requirements, making our proposal 15% higher than the incumbent's renewal. If there was a partial loss and the incumbent uses Marshall & Boeck, there is a potential for a good-size penalty. I told the prospect to ask his current broker about what would happen if they found him to be underinsured - the response was, "I'm looking into it." The insured indicated that the agent didn't seem to understand the dangers of 80% coins when the valuation was so off from industry-standard software.

Finally, the insured did not have blanket coverage, plus had a $2500 Per Building deductible. We blanketed everything, increased the AOP deductible to $5,000 but made it per occurrence. Since wind/hail is a common loss here in the Midwest, the catastrophe exposure for the insured is reduced since there are 30 buildings. The insured has the cash flow to handle a $5,000 deductible for a one-time fire loss, but not the cash flow to fix 30 roofs after a major hail storm at $2500 deductible each ($75,000 total).

Our industry gets a bad reputation because there are too many agents not educating insureds on simple matters like these. You can win accounts on coverage/terms instead of price if you spend 15 minutes reviewing the out-of-pocket expenses of insuring a property one way versus another. Unfortunately, too many agents - sorry, captives, but you're typically the guilty ones - act as quote processors instead of risk advisers.

Of course, there will be some insureds who simply don't care and will take a crappy ACV policy or are okay with their agent mis-representing operations to secure a lower GL quote. Come claim time, they will completely forget that you tried to educate them on the dangers of ACV, coinsurance or mis-representation. They will blame you, and most likely, ask your E&O fund to make up for any denied claims or coverage gaps.

[nixonjf]

Funny thing about all those good buddy contractors and brother's-in-law who swear they can rebuild for cheap, like baby pidgeons I can never find them after the loss.

And how come those reporters can never find the hopping mad insureds who realize they over-reported their values and paid too much premium?

[kevinraz]

Hello all:

I agree with the post above that talked about lousy submissions. As a former Hartford UW who handled medium property risks I grew tired of poor & inadequate information on property submissions. If a risk had more than a dozen or so locations there was not one agent who provided proper COPE and RC info on all locations. Get a telcom or something similar with 100+ locations and maybe I'll just get info on the top 5 and they ask for blanket & agreed on the rest. I can't adequately gauge my exposures so it's hard to justify the penny rate you want.

It also seemed that the bigger the broker, the lousier the submission. Loved it when I got 1990 version Acord forms sent to me...

If you really want to do a good job you must provide adequate info on all locations. This involves the insured knowing what they have and they also generally do not keep good track of inventory and values. I was amazed when I was asked to put up $50mm in property limits and to only have good info on perhaps $35mm of that, for instance. A million dollar loss at a small location is just as bad as a million dollar loss at a big building. Either way I'm gonna have some 'splainin to do about seven figures going out the door.

And another biggie on these: if you are going to ask your UW to "throw in flood and EQ" they absolutely must know what values are at each location. Reinsurance treaties are pretty tight on these so I have to know what's at stake at each location.

Most major carriers no longer have a coinsurance penalty, folks. For sure Hartford does not, pretty sure Travelers and Chubb as well for middle market stuff. If you are putting large limits property with a regional carrier who still has coinsurance you might want to think about your program, then again Hartford used to have good financials, what do I know?

I used this as a big sales tool. It was fairly easy to knock down a competitor if they had coinsurance in their program for anyone who had more than $10mm or so in property limits, somewhere around there they start to get a little more savvy about their property insurance needs.

Kevin Raz, AU, CIC

[stingley]

From a claim handler perspective, the agents who fail to take the appropriate time to explain the difference between ACV and RC, as well as market value, are inviting huge problems when a large loss occurs. I recently had the pleasure of trying to explain to a "mathematically challenged" policyholder how their building insured for an ACV amount of $50,000 with a replacement value of $125,000 and an 80% coinsurance penalty that was just appraised for a recent refi at $40,000, that their $20,000 water loss was only going to result in a claim payment of $10,000, less their deductible.

Policyholders fail to take into account that the sum of the cost of labor and materials to reconstruct their structure have no bearing on what it will sell for in today's market. In this instance, the policyholder went to the agent prior to the loss because they were consistently late with their premium payments and the agent's response was to lower the limit of coverage so they could obtain a premium they could afford to make. Nothing I said, no matter how simply I attempted to explain it (without throwing the agent under the bus) could convince that insured that we weren't ripping them off. As the adjuster, I was the "bad guy" for not paying the entire claim, but the agent should have been flogged for this shoddy attempt at customer service.

[captive no more]

I am dealing with this right now on an account I inherited. I have a retail building insured for $200,000, purchased 2 years ago for $150,000. They just had a fire, gutting about 1/4 of the building. The inexperienced agent who wrote this (then quit) based the value on purchase price plus improvements they made, at 100% co-insurance. Needless to say, the adjuster and insured are both in a tizzy!

Based on square footage and using low replacement cost values, this is a $800-900,000 replacement cost value building. When I explained RC vs ACV to the insured, they said they can't afford to insure a building in a small rural town (population 1500) for more every month than the mortgage payment. Nor can they afford to only have part of a claim paid and have to pay the balance out of pocket. They even said if they were going to insure it for almost a million dollars, they would make sure the next fire burned it to the ground & they would retire in AZ on the money.

We run into this a lot with both homes and commercial property in our area. People don't want to insure their house for $100,000 when they only paid $20,000! They feel if it burns, they can buy the one next door for cheaper than what it would cost them to insure this one!

[nixonjf]

You've got a $1,000,000 building and you only want to insure it for $250,000.
No problem (for the right market).
Underwriters can rate against the exposure ($1MM) and go to an XOL table to see what the primary 25% should go for.
You just can't call the the $250K the replacement cost.

[jimmyr1978]

Scott,

Agree with you completely. The problem is that most agents are not educating their insured's on the dangers of under-valuation, coinsurance penalties, blanket coverage, deductible choices, etc. Today, I'm sending a quote that is higher than my competitors, but I fully expect to win, per the insured's verbal agreement to my previous price indication.

By the way, I bound this account the day after writing this. The insured told me he appreciated the thorough review of his current policies and the recommendations. He thought he was getting a good deal, but had no clue what ACV meant. Now, he knows to always ask for RC, and if he needs to cut costs, increase the deductible.

And if you want to give an underwriter the best commercial/condo/apartment submission they've ever seen, complete the spreadsheet found on the link below for every real estate submission:

http://www.distinguished.com/products-p ... ppform.htm

It takes time to sit down with the insured to complete this, but it is worth it.

[18patrick9482]

Agreed Value is an absolute must whenever possible and we have 98% of our insureds with agreed value on policies where coinsurance is an option. It's still important to attempt to insure to the right value as the greatest limit paid in a total loss is the policy limit. We also want to continue to have credibility with our carriers.
We have the insured sign a statement of values every year whether or not coinsurance is an option because it helps the insured analyze their values and signing the statement helps some of the insureds give a more seriousness look to the values.
No matter how accurate we believe the insurance carrier ITV or insured estimated values are at the time the policy is written, building construction and contents values can be wromg or simply change dramatically during the year. Think of property claim inflation after Hurrican Andrew and Katrina.
This can be especially true in Business Income where sales can take off.
In the past 18 years, we have had at least 6 claims where a significant coinsurance claim was avoided with agreed value.
Most recently, a media business had 2 large projects increase sales during the middle of their policy year. Critical equipment was stolen creating lost business. A $35,000 claim check was issued, but when we pointed out that agreed value was in place, another check was issued for an additional $35,000.
Agreed value will help the insured be protected at the time of loss and help the agent retain the account which will likely be lost if the insured has a sizable coinsurance claim.