Insured to replacment cost or use extended endorsment

[etimer]

Ok let's get it out of the way -- a guaranteed replacement policy is as rare as a unicorn.

The policy's today expect you to insure to replacement value and that is why they want the completed RCE.

So I have a customer policy that has $623,000 on coverage A. The value was set my the MSB cost estimator. I ran another on-line build estimator and came close enough at $597,000.

So customer goes out and shows the policy to a competitor and they do a quote with coverage A at $430,000 with a 50% coverage extended limits coverage.

I hear the competitors sales math ---

With an extended limits endorsement of 50% of $430,000 it gets the dwelling up to what you now have.

Ran this idea by several different agencies that I know --- just to be sure my head was on straight. Yes the math works out but the insurance companies want coverage A to be at replacement value and than the extended limits is a just in case cushion. I know the people at the other agencies, one has 27 years experience, the other has 20 years and me ....been licensed since 1984. Perhaps this is a new way to sell?????

In the above example coverage A cost is $858 and the endorsement is $51. Insurance companies aren't stupid --- well at times that can be debatable.

Is the example using the extended coverage trying to game the insurance company, hoping that the inspector won't say anything at the policy inspection. Maybe there won't even be an inspection and they get by with it?

The example doesn't even get into the lower limits on personal property, etc.

[HarrisburgAgent]

With this scenario, I like to think that the customer doesn't have any issues with coverage limits. They simply need to file a pretty easy E&O claim against the agency they worked with to be made whole in the event they have a claim, whether a total loss, or even a partial claim where they get whacked with co-insurance. However, if the other agent did a legitimate replacement cost estimate and came in with a lower figure, they are probably alright.

The ISO verison of SPECIFIED ADDITIONAL AMOUNT OF INSURANCE FOR COVERAGE A – DWELLING reads:

To the extent that coverage is provided, we agree to provide an additional amount of insurance in accordance with the following provisions:

A. If you have:

1. Allowed us to adjust the Coverage A limit of liability and the premium in accordance with:

a. The property evaluations we make; and

b. Any increases in inflation; and

2. Notified us, within 30 days of completion, of any improvements, alterations or additions to the building insured under Coverage A which increase the replacement cost of the building by 5% or more;

the provisions of this endorsement will apply after a loss, provided you elect to repair or replace the damaged building.

I would argue that if the company doesn't disagree with the valuation within the underwriting period, they would have a tough time trying to get out of providing the extended limits, but you still might have an issue with the other coverage limits as you mentioned.

[jtownagent]

I fully agree with Harrisburg Agent.

The intent of this endorsement is to provide additional protection to the client that wants to be covered at full repalcement value, in the event of unforseen increases in building cost (Labor or materials) that occur during the policy term. This normally happen when there is a catasrophe affecting many at once creating shortages in materials and labor. Inflation guard should also be attached, as another endorsement, to address normal inflationary increases.

Deliberate misrepresentation of the decription of a building to lower the replacement valuation could easily be documented after a claim and used against the entity that produced it. Keep in mind that the insurance company may pay the claim for the insured, based on the actions of its agent, but then subrogate against the same agent for misrepresentation. If done intentionally, your E&O carrier may deny coverage under the E&O policy. WHY WOULD ONE WANT TO PLAY THIS GAME?

[d's insurance store]

WHY WOULD ONE WANT TO PLAY THIS GAME?

The game is 'played' in order to put up a sale, it's that simple. New producer/agent? Under pressure to put a number on a sales board? Manager looking for a number? Take your pick.

There's no defense for this business practice for those of us who follow proper guidelines and value our good rates with the E&O carrier. I think once in my career I lost an account to this practice and the client suffered a total loss and I could gloat and smile that none of this was my problem. I'd be lying if I said it didn't feel good.

[yoyowordup]

So your policy has $623,000 + 50%? So your total potential payout for coverage A is substantially higher.

MSB/Boeckh are all over the place. Their software is tweaked differently for different companies so if Company B is willing to write the property at $400k + 50%, there may never be an issue (if not inspected and no claim happens).

I really like having 50% extra because I have no idea how much it would really cost to build a house. I just know that it's ALWAYS more than you expect.

There are always going to be agents that play games, but this one seems to be very dangerous. If it were an agent in my office I would certainly have a firm discussion. You better be able to show me that the MSB/Boeckh you did works out to $400k and that coverage A is accurate.

[texasproducer]

Honestly I just tell my client to not skimp on coverage. You're going to save a couple hundred dollars on premium and risk your home being underinsured by a $100,000 to $200,000. That could be financially catastrophic for their family. I find that sharing articles from reliable sources helps remind people that insurance isn't just about the price but about protecting your family and assets. This article from CNN is pretty informative:

http://www.cnbc.com/id/48863062#.

[etimer]

call me Subject A
1. I am at $620,000 plus 25% not plus 50% ---

call them Subject B
2. They are at $430,000 plus 50% ---

I had this discussion on another forum. One agent comes on and says in a competitive situation he finds an insurance company that doesn't require a replacement cost estimator and does the same thing as subject (lowers coverage A and adds extended limits.

So I typed to the agent what my personal Travelers homeowners contract states. It is on an HO 04 20 form and I suspect that many other companies are using the same language. Can't say what the Mutual Companies say about it?

Additional Replacement Cost Protection

(Applies only when loss to the dwelling exceeds the Coverage Limit of liability shown in the Decelerations)

To the extent that coverage is provided, we agree to provide an additional amount of insurance in accordance with the following provisions.

a. If you have

(1) Allowed us to adjust the Coverage A limit of liability and the premium in accordance with:

(a) The property evaluations we make; and
(b) Any increases in inflation; and

Could Subject B have placed their prospect into a possible 80/20 calculation as noted in the Loss Settlement Clause?

So the Additional Replacement Cost Protection will only be called upon if the insured "Allowed us to adjust the Coverage A limit of liability and the premium in accordance with: (a) The property evaluations we make; and (b) Any increases in inflation;". To me it is rather clear that the insurance company wants coverage A to be at a certain value which is most assuredly a replacement value.

So the agent on the other forum (would try write a policy with non-replacment values) received several posts, telling him that he was willing under-insuring a client. If he was willingly and knowingly doing it there was a possible E&O issue. He was told that he should go to the insurance contracts he sells in such a manner and see what it says about the extended limits endorsement. His final words to me were -- "." It's one thing to blatantly "break" rules & it's another to be realistic. Fear mongering geezer

I am confident that the insurance company's expect that coverage A is to be the amount that is expected to pay to replace the dwelling after a total fire. The extended coverage is meant to be a just "in case" -- just in case there was a recent Katrina and plywood prices were through the roof. The pricing reflects it. In the quote from Subject B the dwelling premium for $430,000 is $858; the premium for 50% extended limits ($215,000) is $51. Clearly the insurance premium reflects that the $215,000 extended limits coverage will / should never be called upon except in an emergency.

I'm thinking how it is how Excess Liability is not meant to be the coverage first called upon in a claim and therefore the lower premium reflects it.

The way Subject B has the quote designed is that Extended Limits will always be needed after a catastrophic to meet the needed replacement cost.

I don't want to give the name of the agency but it is an agency name that is known throughout the country. It seems that whenever I see a competing quote from the certain agency the dwelling limits are always low. Not a little lower but my hundred of thousands of dollars. The agency is in many cities and it doesn't matter which city I see the quotes come from, the story is always the same.

Although the insurance companies normally want the MSB replacement form with the MSB math, I also do my own calculations using an on-line building site http://www.building-cost.net/. Because the on-line link is for new building, you have to remove a few things like digging the foundation. But on the flip side the cost of the new foundation is about equal to the clean-up costs after a catastrophic fire so it is a wash. The on-line calculation comes very close to the MSB --- MSB is usually higher.

In the competing agent's e-mail it says,

"if home has a security system (for burglary and/or fire) an additional discount is available"

Funny how there is an "if" but the quote includes a discount for a security system.

This stuff brings up the hard job of discussing esoteric legal jargon with a client, language that is within the insurance contract. In this situation the client is an extended family member and what I really want to ask him is "do you not trust my professional opinions?" "You are willing to go to someone that in all likelihood won't be sitting in that agency chair next year over my 30 years of experience." You are willing to gamble the house on $350 a year?"

[etimer]

Interesting article but one thing I don't agree on and that is when Hunter said -- ""Hopefully you're shopping among the lowest-priced companies," says Hunter. "There could still be a 25 percent price difference."

Searching for the lowest price is what gets people into troubled areas such as that I mentioned in this thread. People simply do not read the insurance contract and even if they do, many people don't understand the language. So people who search for the lowest price may not be getting the coverage they need. It also leads to commoditizing the insurance and makes the agent more like an order taker. For a years I've know of Hunter and Belth being industry watch dogs. I never agreed 100% with either of them. I once talked with Belth on the telephone about a life insurance comment he made, to have him explain his position. Over the phone Belth seemed like a very nice guy.

Honestly I just tell my client to not skimp on coverage. You're going to save a couple hundred dollars on premium and risk your home being underinsured by a $100,000 to $200,000. That could be financially catastrophic for their family. I find that sharing articles from reliable sources helps remind people that insurance isn't just about the price but about protecting your family and assets. This article from CNN is pretty informative:

http://www.cnbc.com/id/48863062#.

[etimer]

Ha! The guy that called me a fear mongering old geezer just posted.

"I have plenty of real estate investors who choose to under-insure their portfolio & take the risk of coinsurance penalties based on the premium savings & the makeup of their properties. So under-insuring can serve a particular situation."

I sure hope he has those investors sign papers that say they know they are under insured and are willing to accept the risk.

How much are they under-insuring?

I'm wondering what kind of investors will accept the possible loss of many thousands to save a few hundred?

Maybe some of these "under-insured" buildings are the ones I see in the inner city that burnt and was never re-built?

[agent14]

I have a friend that is a large loss adjuster for a top 3 US carrier. He is one of the adjusters that goes out in the event of a total loss. I have asked him this same question. His answer: They scrutinize the coverage A dwelling coverage amount at claim time, to make sure it is insured at replacement cost. If it is not at RC, they do not extend the ERC, or the extended replacement cost endorsement. So the agents that are underinsuring homes, betting that the ERC will kick in no matter what, had better have a very good E & O policy in place. His words, not mine.

IMHO: Any agent that is greedy enough to make a $150 commission, and value that over properly insuring a house and risking their livelihood, is well deserving of what they get.

[HarrisburgAgent]

If it is not at RC, they do not extend the ERC, or the extended replacement cost endorsement.

I would be interested how the standard 80% RC in the ISO HO3 coverage form which states:

3. Loss Settlement. Covered property losses are
settled as follows:
a. Property of the following types:
(1) Personal property;
(2) Awnings, carpeting, household appliances,
outdoor antennas and outdoor equipment,
whether or not attached to buildings; and
(3) Structures that are not buildings;
at "actual cash value" at the time of loss but not
more than the amount required to repair or
replace.
b. Buildings under Coverage A or B at replacement
cost without deduction for depreciation, subject to
the following:
(1) If, at the time of loss, the amount of insurance
in this policy on the damaged building is 80%
or more of the full replacement cost of the
building immediately before the loss, we will
pay the cost to repair or replace, after
application of deductible and without deduction
for depreciation, but not more than the least of
the following amounts:
(a) The limit of liability under this policy that
applies to the building;
(b) The replacement cost of that part of the
building damaged; or
(c) The necessary amount actually spent to
repair or replace the damaged building.
The replacement cost will not exceed that
necessary for like construction and use on the
same premises; regardless of whether the
replacement building or repaired building is
located on the same or a different premises.
(2) If, at the time of loss, the amount of insurance
in this policy on the damaged building is less
than 80% of the full replacement cost of the
building immediately before the loss, we will
pay the greater of the following amounts, but
not more than the limit of liability under this
policy that applies to the building:
(a) The "actual cash value" of that part of the
building damaged; or
(b) That proportion of the cost to repair or
replace, after application of deductible and
without deduction for depreciation, that part
of the building damaged, which the total
amount of insurance in this policy on the
damaged building bears to 80% of the
replacement cost of the building.
HO 00 03 02 05 Includes copyrighted material of Insurance Services Office, Inc. with its permission


...would be applied with the extended limits coverage A endorsement.

When doing the calculations to assess whether the home has replacement cost with the 80% rule, do you simply use the coverage A amount on the declarations page? Or do you multiply it by the extended limits percentage and then do the calculation? I don't see where this is addressed, and therefore would argue that the carrier would be obligated to provide the higher limit.

While I don't disagree with the end result of

They scrutinize the coverage A dwelling coverage amount at claim time, to make sure it is insured at replacement cost. If it is not at RC, they do not extend the ERC, or the extended replacement cost endorsement.

, how is the carrier contractually getting out of this if they have the standard ISO coverage language? The ISO endorsement providing the additional coverage limits doesn't saying anything about co-insurance...

[rcenters]

I am not experienced with personal lines, so I can't speak from experience, but I am interested in this topic...

So, I googled and selected the first ERC endorsement I could find, which happened to be:

http://www.mutualofenumclaw.com/site/fe ... urrent.pdf

Don't know who that insurance company is, but they say to receive the coverage you must "insure the dwelling to 100% of replacement cost as of the date this endorsement becomes effective". I found other ERC endorsements that only say you must "insure to 100% replacement cost", presumably they intended to mean as of the effective date of the policy (i.e. the last renewal date) but just didn't actually say that.

Anyway, it would seem to me that ERC, at least based on the 2-3 endorsements I just read, is only intended to cover you for unforeseen increases in replacement cost that occurred after your last renewal...in other words, you must review your values every year and insure-to-value at each renewal. Now, if due to anomalies in MSB or whatever valuation you use, if it turns out that you only insured to 98 or 99% of replacement cost, will the insurer deny the ERC endorsement because of such a trivial difference? That's a question for experienced claims adjusters...you tell me! But as written on paper, it seems to give them the ability to do so.

Edit: Presumably, if there was a loss 5 months into the policy year, the adjuster would do research to make sure you insured to 100% of the date of the last renewal. Otherwise, to force you to be insured to 100% of RC at the exact date of loss, wouldn't make any sense, because then you would not need ERC if your limit was already 100% of the loss's value...

[etimer]

Maybe this section

(1) If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the

Then what has already been mentioned --

he ISO verison of SPECIFIED ADDITIONAL AMOUNT OF INSURANCE FOR COVERAGE A – DWELLING reads:

To the extent that coverage is provided, we agree to provide an additional amount of insurance in accordance with the following provisions:

A. If you have:

1. Allowed us to adjust the Coverage A limit of liability and the premium in accordance with:

a. The property evaluations we make; and

b. Any increases in inflation; and

2. Notified us, within 30 days of completion, of any improvements, alterations or additions to the building insured under Coverage A which increase the replacement cost of the building by 5% or more;

the provisions of this endorsement will apply after a loss, provided you elect to repair or replace the damaged building. >>

Bottom line is this --- you have agents that for the sake of a commission will cut corners....just don't do it. If someone comes in with a policy that shows $620,000 on the dwelling, why would someone quote the dwelling at $430,000? It will only cause them grief and heartache all for a $150 commission. If someone is so desperate for that commission, that they would place their entire lively hood on the line, there are some issues that need to be addressed in their financial plan.

If it is not at RC, they do not extend the ERC, or the extended replacement cost endorsement.

I would be interested how the standard 80% RC in the ISO HO3 coverage form which states:

3. Loss Settlement. Covered property losses are
settled as follows:
a. Property of the following types:
(1) Personal property;
(2) Awnings, carpeting, household appliances,
outdoor antennas and outdoor equipment,
whether or not attached to buildings; and
(3) Structures that are not buildings;
at "actual cash value" at the time of loss but not
more than the amount required to repair or
replace.
b. Buildings under Coverage A or B at replacement
cost without deduction for depreciation, subject to
the following:
(1) If, at the time of loss, the amount of insurance
in this policy on the damaged building is 80%
or more of the full replacement cost of the
building immediately before the loss, we will
pay the cost to repair or replace, after
application of deductible and without deduction
for depreciation, but not more than the least of
the following amounts:
(a) The limit of liability under this policy that
applies to the building;
(b) The replacement cost of that part of the
building damaged; or
(c) The necessary amount actually spent to
repair or replace the damaged building.
The replacement cost will not exceed that
necessary for like construction and use on the
same premises; regardless of whether the
replacement building or repaired building is
located on the same or a different premises.
(2) If, at the time of loss, the amount of insurance
in this policy on the damaged building is less
than 80% of the full replacement cost of the
building immediately before the loss, we will
pay the greater of the following amounts, but
not more than the limit of liability under this
policy that applies to the building:
(a) The "actual cash value" of that part of the
building damaged; or
(b) That proportion of the cost to repair or
replace, after application of deductible and
without deduction for depreciation, that part
of the building damaged, which the total
amount of insurance in this policy on the
damaged building bears to 80% of the
replacement cost of the building.
HO 00 03 02 05 Includes copyrighted material of Insurance Services Office, Inc. with its permission


...would be applied with the extended limits coverage A endorsement.

When doing the calculations to assess whether the home has replacement cost with the 80% rule, do you simply use the coverage A amount on the declarations page? Or do you multiply it by the extended limits percentage and then do the calculation? I don't see where this is addressed, and therefore would argue that the carrier would be obligated to provide the higher limit.

While I don't disagree with the end result of

They scrutinize the coverage A dwelling coverage amount at claim time, to make sure it is insured at replacement cost. If it is not at RC, they do not extend the ERC, or the extended replacement cost endorsement.

, how is the carrier contractually getting out of this if they have the standard ISO coverage language? The ISO endorsement providing the additional coverage limits doesn't saying anything about co-insurance...

[etimer]

If you do the RCE that the given insurance company accepts, send the figures to underwriting, insurance company accepts and adjusts coverage A accordingly and the premium in accordance with the evaluations then the insurance company most fulfill the contract.

The problem would arise if there is no initial RCE, no basis for initial coverage A adjustment or premium adjustment then there would be a cat fight at claim time.


"1. Allowed us to adjust the Coverage A limit of liability and the premium in accordance with:

a. The property evaluations we make; and

b. Any increases in inflation; and"

If people don't follow the rules they could get a visit from Mr. Attorney.

http://www.sfbadfaithlawyer.com/CM/Arti ... owners.php

I am not experienced with personal lines, so I can't speak from experience, but I am interested in this topic...

So, I googled and selected the first ERC endorsement I could find, which happened to be:

http://www.mutualofenumclaw.com/site/fe ... urrent.pdf

Don't know who that insurance company is, but they say to receive the coverage you must "insure the dwelling to 100% of replacement cost as of the date this endorsement becomes effective". I found other ERC endorsements that only say you must "insure to 100% replacement cost", presumably they intended to mean as of the effective date of the policy (i.e. the last renewal date) but just didn't actually say that.

Anyway, it would seem to me that ERC, at least based on the 2-3 endorsements I just read, is only intended to cover you for unforeseen increases in replacement cost that occurred after your last renewal...in other words, you must review your values every year and insure-to-value at each renewal. Now, if due to anomalies in MSB or whatever valuation you use, if it turns out that you only insured to 98 or 99% of replacement cost, will the insurer deny the ERC endorsement because of such a trivial difference? That's a question for experienced claims adjusters...you tell me! But as written on paper, it seems to give them the ability to do so.

Edit: Presumably, if there was a loss 5 months into the policy year, the adjuster would do research to make sure you insured to 100% of the date of the last renewal. Otherwise, to force you to be insured to 100% of RC at the exact date of loss, wouldn't make any sense, because then you would not need ERC if your limit was already 100% of the loss's value...

[agent14]

An ISO form is one thing. But many carriers do not write the ISO form, but instead will write a state specific form, and therefore have their own proprietary ERC wording. So an ERC endorsement wording can vary from state to state. As others have said already, if you don't cut corners on insuring at 100% replacement cost, then you will be able to sleep at night.

Not meaning to slam captive agents out there, but I have seen plenty of captive agents that are intentionally writing a policy for as little coverage A dwelling amount as possible to cheat on rate, and adding the ERC thinking that they are covering their bases. I suppose they are very desperate to write the business. Little do they know, that in reality they have their pants down around their ankles should a large loss happen.