05 Nov Property – Who Is Making the Decision?
Client accountability. As you have hopefully noticed in many of these blogs, client accountability should be a key element of your agency’s culture. To a large degree, it is up to the client what coverage they buy and what they don’t. Client accountability is a key issue when clients are deciding what limits they should buy coverage for, such as umbrella, management liability, auto, etc. But what about property — who is responsible for deciding those limits?
The property question is a key issue, especially considering that claim statistics note that commercial property is one of the leading lines of commercial E&O claims. Some recent stats indicate it is in the top 3 for percentage (number of claims) and #1 for dollars incurred. Inadequate limits at the time of loss are a major issue that causes E&O claims. So, “Whose duty is it to advise regarding appropriate limits?” The basic premise centers on clients choosing their own property values.
It is very common for agents/brokers to play a role by providing the client with input from sources such as various valuation services. While this is quality information for the clients to reference, the providers of these tools can’t guarantee the results because the real “replacement cost” is not known until the loss occurs and the structure is rebuilt. It should always be suggested that the client consults with outside appraisers and contractors. The combination of these tools should assist the client in making a more educated decision. A recent Insurance Journal cited total reconstruction costs in the U.S. rose by 5.2% from July 2023 to July 2024.
The following is a suggested disclaimer to be included annually on agency proposals:
Due to increased construction costs, please review your limits to ensure accurate values. We strongly suggest that the (Named Insured) discuss current replacement costs with a local general contractor or obtain a formal property appraisal. Insureds are responsible for determining the appropriate amount of property insurance. Thus, it is vital to have a current and accurate insurance appraisal on hand to set property insurance limits and minimize the financial risk of an insufficient limit in the insurance policy.
Replacement cost estimators (RCE) are tools developed by third parties to assist the insurance industry in developing the ESTIMATED replacement cost. Even the providers of these tools cannot guarantee the results because the real replacement cost is unknown until the loss occurs and the structure is rebuilt.
If the coverage limit is written/proposed on a co-insurance basis, the agency proposal should include the definition of co-insurance. Including examples of how this could impact a claims settlement is also suggested, as this will help the client better understand the consequences of underinsuring the exposure. If the coverage involves a Statement of Values form, the client should be required to sign the document.
These best practices could play a very key role in the event of a property loss where it is alleged that the limits were inadequate. Is this the procedure in your agency?