Don’t Count on Home Insurance to Cover Cost of Rebuilding: Viewpoint

By Liam Denning | April 12, 2019

  • April 12, 2019 at 9:38 am
    SWFL Agent says:
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    I think a big part of the problem is that replacement cost estimates use current “new construction” cost data as a guideline and this is unrealistic. National home builders are building homes at a pretty fast pace, work crews are moving from home to home, materials are purchased in bulk with deliveries scheduled according, etc. When one home burns down, the homeowner can’t take advantage of these economies of scale.

    • April 12, 2019 at 12:32 pm
      SacFlood says:
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      That (“new construction” cost data), and the fact that different carriers use different percentages for their own Extended Replacement Cost coverage endorsements. Plus, now, with AAA / CSAA and others creating HO-3 Policies which EXCLUDE FIRE, and the “solution” (or “wrap”) being the CA FAIR Plan, which does NOT have any Extended Replacement Cost coverage, can cause the same home to have a huge possible range of “correct” coverage written on it, from zero Extended Replacement Cost coverage to 120% to 125% to 130% to 150% to 175%. We need more consistency. We need a standard/benchmark. Dep’t. of Ins., pls.?

    • April 12, 2019 at 1:24 pm
      Agency says:
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      SWFL, this may be a factor, however the biggest factor in under-insuring the replacement of a property is to win the account on price. Yes many insurance agents are looking at winning the account vs. giving the right insurance coverage, some are further convincing their prospects and client that this is enough because of extended replacement costs provisions. I have seen apartment building being insured for 50% of replacement cost that were recently insured. The typical insurance agent nowadays says “we will beat your price” and not “let’s look at your coverages to make sure you are properly insured.” Most people with assets would not object to having their coverages reviews and being counselled on appropriate coverage. However I believe their are few reason this is not done. Number one is to book the account as soon as possible without ruining their shot on winning it. Secondly many agents just lack knowledge on coverages. Lastly and we are seeing this more, some are just not socially inclined, rather they email the quote and just wait for a yes or no. These are the biggest abusers of winning on rates because that is all they have to sell. The bottom line is, for many it’s takes too much time and too much risk to explain it that they think they will ruin their chances or waste their time. This is not the case and often wins short term clients because in due time, the lack of maintaining the account with quality service catches up and the policyholder leaves.

      • April 12, 2019 at 4:46 pm
        CarrierGuy says:
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        I wish I had a nickel for every time an agent has said, “We don’t write with your carrier because your RCE is too high – higher than my other carriers, so you get beat on premium.” But are you writing inadequate coverage just to get the deal done?

        Agents not only seem to trust RCEs, they trust the LOWEST one – and this report would seem to indicate that that’s not nearly good enough to protect our policyholders.

    • April 16, 2019 at 9:41 am
      David Helms says:
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      Precisely. In a tract home environment, not only will materials be less, but the labor is more efficient in that they are more familiar with the few designs in the development along with reduced set up time and better logistics.

  • April 12, 2019 at 1:53 pm
    Insureguy says:
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    The other major problem that no one wants to address is the consistency of the valuation data. The writer indicated that he got several different estimates of value ranging from $500k to $1 Mil. This is one area where some industry standardization needs to be adopted. Instead of MSB being a per carrier product, it should be more like LexiNexis, where everyone pulls from the same data and the cost to insure should be the same from carrier to carrier. Yes, the data should be regionalized/localized, but the lack of oversight here is adding to the problem. Of course, the uneducated consumer will go for the cheapest price, but unfortunately there are too many agents willing to undercut their competition because “their carrier calculated a lower replacement cost.” How is that serving the public? I’m not one for additional regulation, but there are some things in our business that should be designed with better consistency in mind.

    • April 12, 2019 at 2:18 pm
      CO_yeti says:
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      I’ve done many many residential replacement cost estimates and that variance is due to user inputs. Either the person asking questions/inputting the data doesn’t understand construction terms or they rush through or they are gaming the program.

      This is 100% an agent problem as they are the ones licensed and paid to give coverage recommendations.

      • April 12, 2019 at 8:00 pm
        InsNerd says:
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        Coverage recommendations, yes. Limit selection, however, is 100% on the insured. Consumers need to take responsibility for the choices they make. From the agent and/or carrier they choose, to the limits on the policy. I can’t count the number of times prospects want to argue about “replacement cost” so they can save $25 a year. Stupid.

      • April 15, 2019 at 12:06 pm
        CL PM says:
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        CO_yeti – I was with you until the last sentence. I’ve been on the carrier side for 30+ years and refuse to put all the responsibility on our agents. Carriers need to provide accurate tools, proper agent training and underwriting fortitude to do the right thing for our uninformed consumers. This challenging issue is shared by agents, underwriters, product managers, actuaries, and claims staff.

  • April 12, 2019 at 2:25 pm
    Jack says:
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    You think it’s a problem now? Wait for the real S to hit the fan.
    A couple of things:

    1. Discuss the cost to rebuild with the client, then make the estimator (that’s right I said estimator) calculate what you need it to based on a real conversation with the client. Your carriers don’t use the “estimator” to rebuild the home. Think about it and keep in mind the disclaimer on the “estimator”. It basically says “we ain’t guaranteeing jack” but you can use it.

    2. Most policies say that if the home is not insured to a certain % of the actual cost to rebuild, you don’t get your extended replacement cost coverage. So you guys using that to say “you got enough coverage” are really hurting your clients. Buy some really good E&O!

    3. Here’s the real kicker. The builders with insurance carriers are GROSSLY under insuring the homes to keep premiums down so people can get the loans. Talk about a conflict of interest. They like to quote the dwelling at what it cost the builder instead of actual rebuild. When we have a cat loss here in SC, I know for a fact people are going to be screwed by their “builder’s agent’s carrier”. I’ve even sent emails to top level executives at ASI to have at a later date for the class action that will take place.

  • April 12, 2019 at 2:54 pm
    Jack says:
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    “In many respects, the wildfires expose the true costs of climate change and how they intersect with people’s choices about where and how they live; choices often made out of necessity or made at a time when phrases like “global warming” seemed utterly abstract. Mitigating wildfire risk is, of course, central to addressing this, but so is reform of insurance, society’s ingenious method of pooling risk. Pushing the industry to provide better incentives for, say, hardening homes and communities must be a priority for California – and, indeed, any other state facing rising risks from a changing climate. Making those risks, and their costs, crystal clear to consumers would be a good start.”

    What utter double speak. You complain about premiums in one sentence, tell us the sky is falling in another, want the insurance industry “pushed” in another. What next? Free insurance?

  • April 12, 2019 at 4:06 pm
    MT agent says:
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    The contractor in the area is the only one who knows the replacement cost. I feel it is up to the insured to know what it would cost to repair or replace with like kind and quality and set their insurance value accordingly.

    • April 15, 2019 at 12:09 pm
      CL PM says:
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      I don’t think your statement about contractors holds true in the catastrophe arena. Even local contractors don’t understand how / when surge pricing may kick in. Contractor input certainly helps, but it is not the be all end all.

  • April 12, 2019 at 4:51 pm
    CarrierGuy says:
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    I’m just about sick to death of certain IJ reporters sliding in some comment about “climate change” into every darn article. There’s no link reliably demonstrated to tie wildfires to the unproven effects of “climate change.” There is ample proof that these wildfire losses are tied to inadequate forest management practices (and that’s right from the State of California) and the rapid encroachment of building homes in wilder areas. It’s beautiful to live surrounded by trees, up until those trees burst into flames.

    • April 12, 2019 at 6:54 pm
      Craig Cornell says:
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      Right with you C.G. Let me know the next time IJ publishes ANY article that expresses how damn hard climate science really is, and how uncertain it all is.

      Just another publication destroying their own image of integrity with religious devotion to the Scary Monster. 30 year old know-nothing writers preaching about subjects they don’t even begin to understand.

      (How about it, Andrew. Let’s see an article on, say, how climate scientists know almost nothing about the impact of clouds on climate change. You game, Andrew? Let’s hear how a 2% increase or decrease in cloud cover worldwide – the formation of which is a complete mystery to scientists – would increase or decrease global temperature by a great deal.)

      • April 16, 2019 at 1:57 pm
        What? says:
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        The formation of clouds is a complete mystery to scientists? You can’t be serious. Are you serious?

        • April 16, 2019 at 4:36 pm
          Rosenblatt says:
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          He is serious. And let’s not forget that this is an insurance website — regardless of man’s influence (or lack thereof) in our changing climate, we NEED to know how it’s changing to, at least, improve our knowledge about our future risk.

          Also, this is not a climate journal or a science journal – it’s an insurance journal. We might as well go over to universetoday.com and ask them incessantly why they post all those articles about Space-X rockets touching down without explaining every time just how distracting it is to auto drivers.

          • April 16, 2019 at 9:47 pm
            Craig Cornell says:
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            Did you read the article, clown? The writer of the article had to bring climate change Scary Monsters into the story in the last paragragh with ZERO connection cited other than the writer’s religious belief.

          • April 17, 2019 at 8:43 am
            Rosenblatt says:
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            Andrew G. Simpson says: “If you or anyone else can’t make your point without insulting another person’s intelligence, morals, ethnicity, character or other trait, then please don’t post it.”

          • April 18, 2019 at 11:28 am
            Craig Cornell says:
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            Rosenblatt: “regardless of man’s influence or lack thereof in our changing climate, we NEED to know how it’s changing . . .”

            News flash: there is no connection between home replacement values and climate change established in the article EXCEPT the article writer’s association – without any connection at all – in the last paragraph. The article writer did NOTHING to establish a connection or to – as you put it – explain what we “need to know how it’s changing . . .”

            Typical goal post moving, Rosenblatt. If this is not a climate journal, what the hell is an insurance writer doing referencing Climate Change in an article on valuation?

            And you think THAT is not insulting, Mr. Civility Cop?

        • April 16, 2019 at 9:46 pm
          Craig Cornell says:
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          Clearly, you know nothing. The formation of clouds locally is understood. Warm water and vapor in the atmosphere, etc.

          But the global aggregation of clouds and the chances they will expand or shrink based on predictions of warming or cooling in different spots around the world at the same time? Scientists are clueless how to predict same.

          You may have noticed that accurate weather predictions locally run about 10 days out; that is primarily because of the inability to predict cloud behavior world wide.

          And the ability to predict global cloud impact on climate change? Not possible. AT ALL. In fact, many scientists believe a warming planet will be offset by greater cloud cover due to that warming. Which will do what? Cool the planet by blocking sunlight.

          Keep that in mind the next time some dope drops the “settled science” nonsense on you. You can choose to be fooled or not.

  • April 14, 2019 at 6:49 pm
    Pete Hamel says:
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    Not sure how Global Warming started this fire?.

  • April 15, 2019 at 9:08 am
    Trump's fault says:
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    Just kidding.

    This issue is a problem in every state and with every company. I went from working for one of the large nationals to one of the large regionals and the regional did their own home inspections (through a company). To me, it was a monkey off my back because it was mostly their burden to make sure the home was rebuilt. As noted above these estimators seem to be way too high, but I have seen agents goldbricking to get premium.

    I always take the Coverage A and divide by the living space sq feet and see if it appears reasonable for local costs, along with an allowance for debris. The 20% or more over is always a good addition as well.

    I just want to be able to get a good night’s sleep, without worrying about total losses or coinsurance clauses!

    It’s another example of how the fierce price competition prevents a level playing field across the industry. There’s nothing that makes you squirm more than 3 autos and a home on the line when they tell you your home quote is not competitive, and you know it’s incorrect with the current insurer –

    • April 15, 2019 at 11:48 am
      Agent says:
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      A few years back, I wrote a nice home for about $1million based on completed value furnished by the reputable builder. The company sent out their high value inspector 1 month later and he wrote a report that the home had to be increased by $250,000 to satisfy Replacement Cost. After we furnished the complete Builders Report, they backed off. Now, the value is based on 4% increased value on each renewal and that is fine by me.

  • April 15, 2019 at 11:57 am
    Actuary says:
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    Another issue is coverage A automatic inflation amounts. It’s all well and good to get the replacement cost correct at new business but you have to keep it there for the life of the policy. Companies like Verisk and CoreLogic have a pretty robust way to come up with inflation factors by relatively granular geographic area and they can be pretty significant (5%-9% in some areas).

    These numbers are supportable but it is very difficult for a company that tries to be responsible to compete with a carrier that has 0%-3% constant factors. When you have a 7% inflation factor and your competitor has 2%, every renewal is like a rate increase since insureds want to know why their premium went up so much so agents dutifully re-quote and inevitably find the PH a lower rate somewhere. An insured getting a 0% increase to Cov A will most likely not shop around.

    • April 16, 2019 at 9:30 am
      David Helms says:
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      Agree. The carrier trying to protect the insured with adequate inflation adjustments ultimately is punished with lower retention and the agent incurs the expense of remarketing or losing the business to a competing agent usually along with the rest of the account.

  • April 16, 2019 at 9:23 am
    David Helms says:
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    As a former large loss property adjuster, I can say around 70% of my total dwelling losses were underinsured by around 15% under usual circumstances. In cat situations, it could be much higher due to demand surge inflation. In some cases, even homes with Extended Dwelling coverage were not adequately covered. This problem is decades old.

  • April 16, 2019 at 4:21 pm
    Roger McCluney says:
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    David said it best. The loss is evaluated at the time of the loss. “Surge inflation” is difficult to plan for. I am insured by USAA. My Coverage A includes extended replacement cost. I wanted to increase my limit. USAA insisted that I was over insured. I had to fight to have my limit increased. Imagine that. USAA was indicating that I would not be paid for over insuring.
    Anyone else have a problem with increasing the limit on Cov. A?

  • April 17, 2019 at 1:28 pm
    Teresa says:
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    One of the most difficult things I do, is trying to convince insureds or applicants that their limits of coverage may be too low. Either they want to keep the price down because they don’t believe they will ever have a claim, or they genuinely feel it is too high and don’t want to pay for limits they feel will never be paid.



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