What About Other Types of Replacement Cost Valuation?

Recently we discussed what replacement cost valuation was and how it is calculated. Today I want to discuss extended replacement cost and how it provides for additional coverage in the event of a regional or national emergency. The value is usually represented by a percentage of the building value such as 25% or 50% extended replacement cost which would mean that the insurance carrier would provide and additional 25% or 50% replacement cost value to keep the insurance coverage within the actual cost of replacement. So if your building is insured for $100,000 and you have extended replacement cost of 25% the insurance carrier will provide for an extra $25,000 in replacement cost coverage: $100,000 X 25% = $25,000 + $100,000 = $125,000.

 

Extended replacement cost is not intended as a cure for underinsuring your building. According to the terms of your insurance policy you are obligated to maintain replacement cost on your building to a certain percentage of the actual replacement cost such as 80%, 90% or even 100%. If you recall, this is co-insurance and we discussed this in our last blog.

 

When Hurricane Katrina struck New Orleans the vast amount of rebuilding actually led to shortages of building materials regionally and around the United States. And, depending on your proximity to Louisiana it may have been very difficult to find licensed contractors who were not already on the job rebuilding. If you were unfortunate to have had a loss or a complete loss of your building during that time frame there was a real possibility that the cost to rebuild would have exceeded your replacement cost value. That means that you would have had to pay the difference.

 

Extended replacement cost steps in during crises such as the one described to ensure that there is enough coverage even during a regional catastrophe. Think of the terrible tragedies where an entire community is destroyed by a tornado or multiple communities completely destroyed by a hurricane or fire. There will be shortages of materials and qualified contractors and the cost to repair or replace your home and business will increase dramatically.

 

Discuss the insurance needs of your building with your agent to make certain that you have enough coverage now today and in the future. We hope that you never need to use the coverage but making certain that it is there will allow your family and your business to recover in the event of a crisis.

How Does the Insurance Company Calculate the Insurance Value of My Building or Home? Coinsurance

In our last blog entry we discussed types of valuations for insuring your building. One of the last subjects we covered was something called coinsurance. What is coinsurance and how does it affect my property insurance?

 

All valuation methods have coinsurance clauses in their contracts. Why this is important is the insurance carrier wants to make certain that the building or item they are insuring is insured to full value. If this wasn’t a consideration no one would insure a property item to full value but would expect to be reimbursed in the event of a loss at full value. In another words, a replacement cost valuation indicates that your building is valued at $500,000. You only insure the building to $100,000 but expect that in the event of a loss to be reimbursed for the full cost of $500,000. I know what you are thinking, that doesn’t even make sense! Why would someone insure their property for less than the value and expect to get a settlement at the full value? The truth is this happens all the time. In fact, most lawsuits are over valuation. There are a lot of reasons that owners may not select the full insurance value for their building and property and often it is simply a misunderstanding of valuation. Just like we discussed last week an owner who is convinced that the building isn’t worth any more than the tax assessed value or decides that the building isn’t worth anymore than a value a realtor told them could be shocked to find out that the actual cost to replace the building is far more. And, what happens over time? If you guessed that costs go up you would be right. So if it cost you to $400,000 to build your building twenty years ago does it make sense that it would still cost $400,000 to build it today? Of course not, but in many cases I find when working with clients that they haven’t checked their valuation in years and the coverage that they had stopped being adequate a long time ago. Unless you have inflation guard included in your insurance plan your valuation is static and will remain that way until your request the coverage changed.

 

Coinsurance applies when a building or property item is underinsured. Most insurance companies will require you to insure your building to 80%, 90% or 100% of replacement cost. If the actual cost to replace the building is more than the insurance that you carry by contract the insurance carrier can levee a coinsurance penalty. In the event of a total loss your inability to collect the full amount of replacement for the building can change what type of building that you end up with. However, in the event of a partial loss I believe that the coinsurance penalty is even more meaningful. Say that you had a partial fire loss to your $500,000 building. The damage was $150,000. Unfortunately, you have been insured for $350,000 which is only 70% of the true replacement cost of the building. Your insurance contract requires that you maintain a replacement cost value of at least 90%. Your claim will be subject to a 20% coinsurance penalty and you will not receive the full cost of the insurance settlement for the repairs. So, based on your $150,000 claim the carrier will use a coinsurance penalty of 20% which is $30,000. You will need to cover that plus you’re deductible.

 

This gets even more complicated when you have multiple buildings and values. The best way to make certain that you are adequately insured is to have a replacement cost valuation completed by your agent and company at least every two years. Ultimately, you the owner are responsible for selecting the correct insurance coverage however there are tools available to help you and your insurance agent can be a great resource in helping you to properly insure your building and its contents.

How Does the Insurance Company Calculate the Insurance Value of My Building or Home? Part II

The 2004 Cedar and Pine Ridge fires in California led to numerous homes lost to forest and brush fire. After the cleanup many of the homeowners were shocked to receive claim settlements of only a portion of the total loss to rebuild. The homeowners were under the impression that replacement cost of their home meant that they would get replacement cost at the time the home was destroyed by fire. Unfortunately, this just wasn’t the case. Many of the homeowners had insurance policies for their homes that went back 15, 20 and in some cases more than 30 years and had not made any changes to the replacement value of their homes. If you recall from last week’s blog I indicated that “Replacement Cost Value is a static value that represents the replacement value of the structure at one moment in time.” Over time the cost to rebuild or replace these structures increases however the insurance value did not. In the end there were lawsuits and the process lasted years. What is important to remember from this case is that in the end most of the suits were denied because the responsibility for making sure the structure is fully insured lays with the owner.

 

Insurance carriers use coinsurance clauses in their policy contracts to require the owner of the structure to insure to full replacement cost value. You can avoid a costly mistake in valuation by having your buildings replacement cost value updated at least every two years. You can also elect to have inflation guard set up on your policy to increase the replacement cost value of your building at a set inflationary value each year. And, you should have Extended Replacement Cost or Guaranteed Replacement Cost coverage added to your policy to ensure that spikes in the cost of materials and labor in the event of a national or regional catastrophe don’t increase the cost of rebuilding your building beyond the valuation set by your insurance contract.

 

In the next several blogs I will explain in more detail what coinsurance is and what it does. I will also cover how to get a replacement cost valuation and what the purpose of tools like inflation guard, extended and guaranteed replacement cost is.

How Does the Insurance Company Calculate the Insurance Value of My Building or Home?

I was working with a client this week on setting the replacement cost value for his home. We had an interesting discussion which led me to an idea for a series of blogs on valuation. The information is definitely not exciting but is critical for making sure that you are insured accurately and I will explain what can happen when you are not insured correctly!

 

Case law has developed over the past one hundred years to determine valuation of property such as your home, rental property and commercial buildings. It even extends beyond structures to the value of your diamond ring, your collection of antiques and other personal property. The laws regarding valuation are set by the insurance code of each state. In most states the responsibility for setting the correct valuation for insurance rests with the owner. However, if you don’t know how valuation is calculated how can you make certain you are insuring your property correctly?

 

Most building values are calculated today with Replacement Cost. There are other values available and we will discuss later in the series but we will focus on replacement cost as it is the valuation that is most widely used. Replacement Cost Value (also known as RCV) is simply what it would take to rebuild or replace a structure today with current labor costs and modern building materials. (RCV never includes the value of land).

 

Replacement Cost Value (RCV) is rarely the same as the retail value of the structure (example: the value your home could sell for). Replacement Cost Value is a static value that represents the replacement value of the structure at one moment in time. If a structure falls out of replacement cost value it will be subject to coinsurance penalties that would diminish what the insurance would provide to rebuild the structure or replace in the event of a total loss.

 

A good insurance agent will carefully consider the building characteristics of your structure and will use a replacement cost value formula to arrive at a replacement cost for your structure. This value should always be considered a recommendation as the final decision on value will always lay with the owner of the structure. In next week’s blog I will discuss more on how the insurance carrier calculates replacement cost and introduce a couple of important insurance terms such as coinsurance which can greatly affect the final insurance settlement.

Creating a Wildfire Defensible Space for Your Home

We have seen so many tragedies this past year due to wildfire’s particularly in the western portion of the United States. Taking steps now to protect your home from fire risk is a great way to lower the chance of loss when wildfire threatens the next time. I found an excellent article on the web provided by CalFire. I thought it was so well written and so important that I wanted to share with you. Visit the site at: http://www.readyforwildfire.org/defensible_space

Everyone should consider their wildfire risk regardless if they have faced wildfires in the past. In so many instances, fires have occurred in the past three years where wildfires traditionally had not been a problem. We have noted wildfires in the southeast, Texas, southwest and most all of the western states. In this case, an ounce of fire prevention is worth far more than a pound of cure!

Protect Yourself, Important Steps in an Auto Accident

One of my clients recently had an auto accident. He was at an intersection in a lane that went straight. The other party was on his right and turned left into his vehicle. They traded license and insurance information at the scene of the accident just like they were supposed to do.

 

My client was alone in his car and the other party was alone in their car. Shortly after the accident the other party claimed that my client was at fault and was supposed to turn left and instead went straight. My client informed me that was simply untrue and he was in a lane that was straight ahead and the other party made an illegal left hand turn.

 

In the end, the insurance carriers for my client and the other party agreed to just pay their own client claims because there was no way to prove who was at fault. So, problem solved right?

 

Not exactly, had the other party been found at fault it would have been their insurance that would have paid for the damage to my client. Instead, my clients insurance paid for the damage to his own vehicle which was considered an at fault accident. What is the big deal? Well, an at fault accident in most states will stay on your record for five years and you get to pay more insurance premium because of that. Needless to say my client was really upset and felt this was unfair. Some of you will say that you have accident forgiveness with your insurance carrier. That is nice and means that your insurance carrier won’t surcharge you for your first accident however that won’t protect you from the loss of a claims free discount which for most insurance companies is significant. With or without accident forgiveness you’re going to pay more.

 

Regardless who is at fault insurance is incredibly important to fix your car, fix the other party’s car if you were at fault and pay for your medical bills and the other party’s medical bills. I want all of my clients to be safe and to avoid accidents if they can. If you do have an accident, that is why we have insurance and it will be there to help when you need it. However, if you were not at fault I need some additional information to fight for you.

 

In addition to trading license and insurance information I want you to take photos. Odds are your phone takes pictures. Even the oldest cell phones have a camera. I realize that having an accident is traumatic and when it happens it is easy to forget but when it is safe to do so take photos of the accident scene. Take photos of where you were and where your vehicle is now. Take photos of the damage to your car and the damage to the other car. Take photos of the license plate on the other vehicle and of the driver of the other car and any passengers. The more information that you have will help your insurance claim and protect you if the other driver was at fault.

 

I had an accident (my first) this year. I not only took photos of the accident but my phone allows me to take video as well. I had the other driver on video saying that he wasn’t paying attention, he was texting and didn’t see me until it was too late. End of story, he was at fault. And, yes his insurance carrier tried to indicate that we shared blame until I played back the audio from the video with their client apologizing and indicating that he wasn’t paying attention. That was that, they accepted full responsibility.

Is Insurance A Big Fat Waste of Money?

I had a call yesterday from a gentleman that was looking to replace his business insurance. He was incensed that the premiums had gone up and was venting to me about how unfair the insurance community was and how insurance was a big scam to take his money. He has gone 30 years without a claim and all that money was wasted. He could have gone all that time without insurance and would be thousands of dollars richer.

 

As an insurance professional I do get calls from people who are frustrated and I do understand the frustration. And, the industry that I represent doesn’t always reflect compassion and clearly outline what insurance does and does not do. The confusion grows to anger especially when the insurance is mandated by government, a lender or another business that you need to do business with.

 

I used the following example to explain: I asked the caller if he had a home and he said yes. I asked him what the replacement cost value of his home was approximately and he said about $625,000. I asked him if he had a loan on the home and he said yes so I then stated that he probably had to have insurance on the home and he said yes and don’t get him started on the cost of homeowners insurance! I asked him approximately the cost of his homeowners insurance and he said $750. So I said you have been paying that premium for about how long on your home and he said 21 years. I said you have never had a claim and he said that was correct and all that premium he has paid over 20 years has just gone down the drain, in fact he could have burned the money and would have gotten the same value. So, I added, just to make sure that I understand you have paid about $750 per year for 21 years and never received any benefit from a claim? He said that was right. So, he had paid out $15,750 over 21 years (maybe a little less as the premium was lower 21 years ago).

 

Now it just so happened that our agency had a client whose home burned to the ground and was valued at $550,000. He had been with the company that insured him for less than 5 years and the insurance company paid the full replacement cost to rebuild the home and picked up the cost to haul away the debris from the ruined home and picked up the cost to build to current building code. In addition, the insurance company provided funds to find a temporary place for the client and his family to live. The total cost was about $600,000. The client was only out $1,000 for his deductible and the sum of his insurance payments to the insurance company for less than 5 years was $3,750. But if we use the example the caller had provided me then he could have paid for 21 years and $15,750. If our client was faced with paying $15,750 over 21 years to recoup $600,000 and his family’s financial health would he consider the $15,750 a fair investment? I guarantee you that he would and so would anyone else in the same situation.

 

There are two frames of mind when considering insurance: One, it’s an expense that costs me or, Two, it’s an investment in my family’s plan for developing wealth and protecting our assets. In the end I didn’t change the callers mind but it reminded me why I protect my clients and why I look to find value for them and why I prefer to work with clients who understand how insurance works for them and not against them.