As is so often the case in articles such as this, the “value” under discussion is never really defined, although here it is alluded to in a circular way.
This is important because I often find insurance agents who mis-understand what value we are talking about with homeowners policies and most property policies in general.
While there are other possible ways to value and insure property, depending on special circumstances, 99% of the time the proper valuation is “Replacement Cost”, defined as the cost to rebuild or replace the property “as it stands”, i.e. without including any improvements that made be required by new building codes, etc.
In most coastal states, cost to upgrade to current code is usually added to all policies automatically, in other states agents should be aware of the need for this coverage for older homes, i.e., they have to be aware of the provisions of their building codes.
Imagine an insured who insures only for the cost to rebuild their home as it stands, then finds out there is another $50,000 required to bring the house up to current code. This wouldn’t be covered unless “law and ordinance” coverage were added.
Far to many agents, instead of insuring to replacement cost, insure instead to market value which has no bearing whatsoever in property insurance (except perhaps rare exceptional cases). Market value is virtually always what the homeowner thinks of, and it is the agents job to make sure they properly understand.
The problem that is being resolved with this “ban” is the situation where the mortgage amount if higher than the Replacement Cost or the ACV of the building and the mortgagee insists on an amount of insurance that is equal to the amount of the mortgage (i.e., a building valued at $200,000., with a market value including land of $350,000., and a mortgage of $275,000. We prohibited mortgagees from doing this in NJ many years ago by regulation. Unfortunately, when the agent associations weren’t looking the reg was allowed to expires.
We weren’t enen aware that this was happening until banks started buying insurance agencies. Then the greedy b*stards started steering mortgagees to their in-house agencies, until someone figured out that they were paying premiums for additional but uninsured values. Gotta tell ya that RC coverage is worth it especially in older neighborhoods where the assessed values lag behind new construction costs. But for the most part, agents are the ones who called foul on this; most are competent enough to explain the difference between market value, ACV and Replacement Cost.
yes, many know and are able to explain the difference, but many are not, and the article does nothing to make it any clearer.
They say “For example, a homeowner with a $150,000 home on a $50,000 piece of land was often required to obtain a $200,000 homeowners’ insurance policy” which is clearly talking market value, not replacement cost (what’s the insurable replacement cost of land?)
Instead, they should have said “the market value is…and the insured was required to buy $200,000 of insurance, when they should have been required to buy insurance based on the replacement cost of the building, which may or may not have any relationship to it’s market value (here in Fl. there currently is no relationship – I’m insuring my home for a fair amount more than it’s current market value.”
As is so often the case in articles such as this, the “value” under discussion is never really defined, although here it is alluded to in a circular way.
This is important because I often find insurance agents who mis-understand what value we are talking about with homeowners policies and most property policies in general.
While there are other possible ways to value and insure property, depending on special circumstances, 99% of the time the proper valuation is “Replacement Cost”, defined as the cost to rebuild or replace the property “as it stands”, i.e. without including any improvements that made be required by new building codes, etc.
In most coastal states, cost to upgrade to current code is usually added to all policies automatically, in other states agents should be aware of the need for this coverage for older homes, i.e., they have to be aware of the provisions of their building codes.
Imagine an insured who insures only for the cost to rebuild their home as it stands, then finds out there is another $50,000 required to bring the house up to current code. This wouldn’t be covered unless “law and ordinance” coverage were added.
Far to many agents, instead of insuring to replacement cost, insure instead to market value which has no bearing whatsoever in property insurance (except perhaps rare exceptional cases). Market value is virtually always what the homeowner thinks of, and it is the agents job to make sure they properly understand.
The problem that is being resolved with this “ban” is the situation where the mortgage amount if higher than the Replacement Cost or the ACV of the building and the mortgagee insists on an amount of insurance that is equal to the amount of the mortgage (i.e., a building valued at $200,000., with a market value including land of $350,000., and a mortgage of $275,000. We prohibited mortgagees from doing this in NJ many years ago by regulation. Unfortunately, when the agent associations weren’t looking the reg was allowed to expires.
We weren’t enen aware that this was happening until banks started buying insurance agencies. Then the greedy b*stards started steering mortgagees to their in-house agencies, until someone figured out that they were paying premiums for additional but uninsured values. Gotta tell ya that RC coverage is worth it especially in older neighborhoods where the assessed values lag behind new construction costs. But for the most part, agents are the ones who called foul on this; most are competent enough to explain the difference between market value, ACV and Replacement Cost.
yes, many know and are able to explain the difference, but many are not, and the article does nothing to make it any clearer.
They say “For example, a homeowner with a $150,000 home on a $50,000 piece of land was often required to obtain a $200,000 homeowners’ insurance policy” which is clearly talking market value, not replacement cost (what’s the insurable replacement cost of land?)
Instead, they should have said “the market value is…and the insured was required to buy $200,000 of insurance, when they should have been required to buy insurance based on the replacement cost of the building, which may or may not have any relationship to it’s market value (here in Fl. there currently is no relationship – I’m insuring my home for a fair amount more than it’s current market value.”