11 May Are Your Property Accounts Still Adequately Insured?
Insurance to value is a frequent topic for industry articles. Why, you ask? Due to current economic conditions, many properties may be significantly undervalued and thus underinsured. This includes both personal and commercial lines.
What if I told you that some insurance experts have commented that there is a definite possibility that more than 60 percent of homes and 70 percent of commercial buildings are undervalued? This is the general perspective in recent articles written by both GenRe and The Wall Street Journal. How could this happen? An analysis shows that the cost of building materials is now significantly more than 12 months ago.
Some of the statistics include:
- Lumber costs are up 50-100 percent
- Labor costs are up 8 percent
- Crude oil (a major component of paint, roof shingles, and flooring) up 80 percent in just the last six months
- Prices for granite, insulation, concrete block, and brick are at record high price levels
- Apartment construction costs are up to $9,000 per unit
- Recent hurricanes have impacted the production and availability of PVC leading to increased costs
These are certainly very alarming statistics that could result in inadequate property limits at the time of a loss. Every year, E&O Plus program claim statistics show that property issues involving both personal and commercial lines are a leading cause of E&O claims. With values higher in commercial property, those losses can undoubtedly be more significant.
Carriers will often apply an increased property limit factor at renewal time. Based on the above statistics, the bottom line from this calculation may not be enough. This means that virtually every agency probably has property clients in which values are not sufficient. At the time of a loss, this could result in severe claim issues.
With regards to the determination of limits, the key issue centers around the question of: “Whose duty is it to advise regarding appropriate limits?” E&O Plus takes the fundamental premise that the client should choose their own property values, with agents/brokers, outside appraisers, and various valuation services offering information that clients can reference. Should a problem arise, this position provides an element of protection for the agency. It is suggested that a property disclaimer be provided annually to commercial accounts. Agencies should also have a requirement that clients sign any applicable statement of value forms. This is a key audit question.
Valuing contents has long been an issue primarily due to the lack of standard industry-wide tools available to evaluate most contents exposure. Clients should play a significant role in the valuation of their contents.
Issues such as the following have been noted:
- Machinery and equipment reconstruction costs may be significantly more expensive as replacement parts may no longer be available
- Discounts and concessions that are no longer available from suppliers / OEMs (Original Equipment Manufacturer)
To add to the issue, some articles raise serious concerns that the various industry valuation tools may be outdated and not reflect current conditions. Do they reflect replacement cost or reconstruction cost? There is a significant difference. Reconstruction cost includes “additional expenses related to repair and restoration contractors’ fees, the construction process itself, the location of the property, demolition costs and debris removal.” These factors create a valuation that is higher than new construction.
Agencies should discuss this topic with clients and educate them on the issue. Having a discussion will help minimize the problem if the client suffers a loss that is not adequately covered.