Transcript Replacement Cost - Insurance Community University

Property Valuation
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This class is being recorded
• Available in the University
• Does NOT qualify for CE if not taken
during a scheduled class
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Your Instructor Today
Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRIS
President and Co-Founder of
The Insurance Community Center
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California Department of Insurance
New Regulation on Valuation
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The Regulation is Long Overdue
• The discussions began as far back as
2005 when SB 2 was added to Section
1749.85 to the California Insurance
Code (CIC).
• The regulation is in response to the
“chronic” problem of underinsurance
most notably in the area of residential
properties.
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The Regulation is Long Overdue
• The State Insurance Commissioner,
Steve Poizner, initially proposed these
regulations as a result of major wildfires
most notably in the San Diego area that
destroyed 1600 homes and a reported
35,000 claims according to the L. A.
Times.
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The Regulation is Long Overdue
• A major issue following the loss was
underinsurance and who should be held
responsible. Many homeowners
publically complained that they felt they
had been mislead by their insurers.
• United Policyholders, an insurance
consumer group, called on the
commissioner to take action.
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The Regulation is Long Overdue
• California courts have ruled that
homeowners have the primary
responsibility for ensuring that they
have enough insurance on their
property.
• Insurers are brought into the actions
because they are supplying the
valuation tools that they require be
completed for acceptance
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The Regulation is Long Overdue
• The agent certainly has been held
responsible but errors, omissions,
negligence are not that easy to prove
• The regulation is a heightened
responsibility on the agent/broker
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An Agent is the Eyes and Ears of the
Company they represent
AND
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Polling Question #1
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Polling Question #2
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Overview (2188.65 and 1749.85)
• (b) On or after June 27, 2011, every California
resident fire and casualty broker-agent and personal
lines broker-agent who has not already taken a
homeowners' insurance valuation training course
must satisfactorily complete one three-hour training
course on homeowners' insurance valuation meeting
the requirements of this section prior to estimating
the replacement value of structures in connection
with, or explaining the various levels of coverage
under, a homeowners' insurance policy.
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Overview (2188.65 and 1749.85)
• For resident broker-agents, this requirement
shall be part of, and not in addition to, the
continuing education requirements of
Insurance Code section 1749.3. The
homeowners' insurance valuation training
course needs to be taken only once in order to
satisfy the requirements of this subdivision
• http://www20.insurance.ca.gov/epubacc/REG
/151771.htm
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Overview (2188.65 and 1749.85)
• This class must only be taken once and
does qualify for three hours of CE
• An individual who no longer has to take
CE in California due to their age still
MUST take this class if they are involved
in residential insurance
• The regulation is for California resident
fire and casualty broker-agent and
personal lines broker-agents ONLY
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Overview (2188.65 and 1749.85)
• If individuals who primarily write
commercial lines also offer advice and
provide any information on estimations
on residential insurance then they
should attend this class, as well to avoid
any future problems
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Section 2695.182. Documentation of
Person Making Estimate
• This section is VERY important and
discusses the new requirements for
documenting estimations. The section
should be read in its totality,
communicated to the entire office staff
and procedures should be put in place
for compliance and monitoring of the
systems. We will discuss some of the key
requirements later in the course.
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Polling Question #3
Do you have an area in your agency
management system where you store
the underwriting questions you asked
about the home before you wrote the
coverage?
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Polling Question #4
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Course Objective
• Be able to differentiate between a
homeowners policy and a dwelling property
form
• Be able to estimate the value of an insured’s
property by having basic knowledge of its
value
• Know the valuation principles and methods
• Know the value of the components of a
dwelling to access its replacements cost or
value
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Course Objective
• Have the ability to recognize other
factors influencing the replacement cost
• Have knowledge of endorsements used
in relation to the insuring of
replacement costs of
homeowners’/dwelling policy; and,
• Understand the process used in
determining the value of an insured’s
property
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No Two Homes Are Exactly Alike
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No Two Homes Are Exactly Alike For
Sure
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Property Valuation
• “Value is a matter of opinion”, according
to a New Jersey court. “Not only in the
eyes of the courts is value
indeterminate, but appraisers differ in
their opinions and contractors bidding
on the same job vary widely in their cost
estimates”.
» Practical Risk Management
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Property Valuation
Practical Risk Management
• “Further, values for insurance purposes
differ significantly from values for other
purposes”.
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Differences between Homeowners
and Dwelling Property Policies
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Insurance Policies
• A dwelling is considered a residential
property of up to four units, whether
occupied by the insured or not
• There are several forms of insurance for
residential properties
• The type of policy that should be
written on a residence depends on the
underwriting considerations discussed
in this course
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Insurance Policies
• A Homeowner’s policy is for a dwelling that is owner
occupied
• In general the major considerations that determine
the type of policy to be issued include:
–
–
–
–
–
Type of Residence
Ownership
Occupancy
Age, Condition and Protection
Values
• Insurance Companies all have different eligibility
requirements for different insurance forms
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Insurance Policies
Difference in property coverage
forms
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DP Forms Available
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Reasons to Write the
Dwelling Fire Program
• Home does not qualify for a Homeowners
Policy
• Residence is NOT owner-occupied
• Residence is in a designated brush hazard area
• Residence is under construction
• Home is vacant
• Differences in property coverages available on
the DP series necessitates different coverage
levels and valuation triggers
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Reasons to Write the
Dwelling Fire Program
• Residence value is less then the minimum or
maximum allowable by the company
• Residence is a “seasonal” or secondary
• Residence is not up to the “physical”
standards
• Residence may be owned in a name different
from the “home owners” such as a
partnership, joint venture or corporation
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Reasons to Write the
Dwelling Fire Program
• The insured may prefer having their
home issued on a Dwelling Program
because:
– The insured might not want or need the full
range of homeowners coverages
– The Homeowners Program might be more
expensive than the insured chooses to pay
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California FAIR Plan
• The California FAIR plan policy is written
on a DP 1 basis
• The policy is written on an ACV basis
and Replacement Cost is optional on the
Dwelling
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CEA
(www.earthquakeauthority.com)
• Dwelling coverage - The coverage limit is
the insured value of your home stated
on your companion homeowner policy.
• Additional Coverages
Limited Building Code Upgrade
In most California communities,
repairing or rebuilding a home after an
earthquake must be done according to
current building codes.
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CEA
(www.earthquakeauthority.com)
• In addition to providing funds for repairing or
replacing your home, the CEA base policy
includes an additional $10,000 in Building
Code Upgrade coverage. Option to Increase
Building Code Upgrade Coverage
For policies that renew or become effective on
or after July 1, 2006, homeowners can choose
to increase Building Code Upgrade coverage
by an additional $10,000, for a total Building
Code Upgrade coverage limit of $20,000.
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CEA
(www.earthquakeauthority.com)
• Your CEA policy excludes some items from
dwelling coverage. A partial list of items that
are not covered includes:
• Detached garages and most other structures
that are not part of the dwelling
• Land damage (other than $10,000 in coverage
for land stabilization)
• Swimming pools and spas
• Awnings and patio coverings
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CEA
(www.earthquakeauthority.com)
•
•
•
•
Fences, landscaping, and irrigation systems
Antennas and satellite dishes
Patios and decks
Walkways and driveways not needed for
pedestrian or disabled access to your home
• Certain decorative or artistic items such as
mirrors, chandeliers, stained glass, or mosaics
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California Earthquake Authority
(CEA) Section 10081
• That coverage may be provided in the policy of
residential property insurance itself, either by
specific policy provision or endorsement, or in a
separate policy or certificate of insurance which
specifically provides coverage for loss or damage
caused by the peril of earthquake alone or in
combination with other perils.
• http://www.leginfo.ca.gov/cgibin/displaycode?section=ins&group=1000111000&file=10081-10089.4
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Homeowners
• Homeowners Policies are the premier
policy for the owner of a home who
occupies it as their residence.
• It is a package policy of Property and
Liability and includes a lot of enhanced
coverages and numerous endorsements.
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Homeowners
• Every company has their own eligibility
and their own form and endorsements
• ISO provides a guideline for
homeowners coverages
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Homeowners Forms Available
Homeowners
Basic Form
HO 0001
Not widely
used
Homeowners
Broad Form
HO 0002
Not widely
used
Homeowners
Special Form
HO 0003
Coverage
A, B, C, D
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Homeowners Forms Available
Contents Broad
Form
HO 0004
Coverage
C,D
HO 0005
Coverage
A, B, C, D
HO 0006
Coverage
A, C, D
Homeowners
Comprehensive
Form
Homeowners
Unit Owners
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Homeowners Forms Available
Homeowners
Modified
Form
HO 0008
Coverage
A, B, C,D
HO 04 81 05 96 Actual Cash Value
Changes the valuation on all building losses to ACV.
Endorsement used for homeowners who do not want to carry
enough insurance to comply with valuation provision
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What Types of Properties Are Insured On A
Homeowner’s Policy
• A Single Family Dwelling
• A Multiple Family Dwelling (1-4 units)
• A Townhouse Unit
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Basic Concepts of Property
Valuations
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Loss Settlement Provisions
• Loss Settlement Provisions are contained in
each type of property policy
• Loss Settlement Provisions in terms of how it
applies indicates how a loss will be settled
and on what basis:
– Valuation trigger
– What will happen if there is underinsurance
– What will happen if the insured does not
repair or replace
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What effect does underinsurance have
on a settlement
• Insurance companies require that a home
be insured to replacement cost in order
for them to qualify for a homeowners
policy
• Estimators are required as minimum
indicators of coverage
• In the event of underinsurance the
insured will NOT receive the total loss that
they claim
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What effect does underinsurance have
on a settlement
• There is no “coinsurance” requirement on
a Homeowners Policy but there is an
“Insurance to Value Clause”
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Insurance To Value Clause on a
Homeowners Policy
Buildings covered under Coverage A or B at
replacement cost without deduction for
depreciation, subject to the following:
a. If, at the time of loss, the amount of
insurance in this policy on the damaged building
is 80% or more of the full replacement cost of the
building immediately before the loss, we will pay
the cost to repair or replace, after application of
any deductible and without deduction for
depreciation, but not more than the least of the
following amounts:
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Insurance To Value Clause on a
Homeowners Policy
(1) The limit of liability under this policy that
applies to the building;
(2) The replacement cost of that part of the
building damaged with material of like kind and
quality and for like use; or
(3) The necessary amount actually spent to
repair or replace the damaged building.
If the building is rebuilt at a new premises, the
cost described in (2) above is limited to the cost
which would have been incurred if the building
had been built at the original premises.
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Polling Question #5
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Loss Settlement Provisions
–
–
–
–
Market Value—Fair Market Value
Jefferson Decision
ACV
Replacement Cost
• Under normal situations
• Under catastrophic situations
– Reproduction Cost
• Historical buildings
– Inflation Guard
– Functional
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Market Value/Fair Market Value
• A term used in the Real Estate industry to
represent the price a property can be sold
at based on what the market will pay at any
given time.
• The price at which the property is being
sold normally includes the land value and
area consideration.
• This is NOT appropriate to determine the
amount of insurance to be carried.
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Bank Requirement Changed
2009 California Civil Code Section 2947-2955.5:
Article 2. Mortgage of Real Property
http://law.justia.com/codes/california/2009/civ/29
47-2955.5.html
• 2955.5. (a) No lender shall require a
borrower, as a condition of receiving or
maintaining a loan secured by real
property, to provide hazard insurance
coverage against risks to the improvements
on that real property in an amount
exceeding the replacement value of the
improvements on the property.
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Actual Cash Value (ACV)
• There is NO specific definition of this word in the
insurance policies
• It is broadly interpreted to mean the cost to repair
or replace the property with material of like, kind
and quality minus depreciation.
• The insured need not repair or replace the
damaged property to be indemnified on the
contract-- it is a cash settlement and a “holdback”
in terms of allowing for the full Replacement
Cost.
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Actual Cash Value (ACV)
– Physical deterioration
– Functional obsolescence
– Economic obsolescence due to causes
independent of the property
– Effective age as compared with other
properties considering renovations
and reconstruction
– Future life expectancy
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Replacement Cost less Depreciation of
age, wear and tear
• Factors that enter into depreciation
– Age
– Usage
– Wear and Tear
– Obsolescence
• Depreciation guides are available through
some insurance companies AND there
are sites that have important information
such as: www.claimspages.com
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Depreciation (Holdback)
• There is a requirement under the
Replacement Cost provision of a
Homeowners Policy to actually repair or
replace or they will HOLDBACK the
additional dollars available under the Loss
Settlement Provision.
• The policy reads as follows:
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Depreciation (Holdback)
We will pay no more than the actual cash value of the
damage until actual repair or replacement is complete. Once
actual repair or replacement is complete, we will settle the
loss as noted in 2.a. and b. above.
However, if the cost to repair or replace the damage is both:
(1) Less than 5% of the amount of insurance in this policy
on the building; and
(2) Less than $2,500;
we will settle the loss as noted in 2.a. and b. above whether
or not actual repair or replacement is complete.
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Depreciation (Holdback)
• You may disregard the replacement cost
loss settlement provisions and make claim
under this policy for loss to buildings on
an actual cash value basis. You may then
make claim for any additional liability
according to the provisions of this
Condition D. Loss Settlement, provided
you notify us, within 180 days after the
date of loss, of your intent to repair or
replace the damaged building.
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Jefferson Decision vs. ACV
• Since 1970 California has been referred
to as a “Fair Market Value” State or a
Jefferson Decision State.
• The case is Cheeks v. California Fair
Plan.61 Cal.APP.4th423 (1998)
• In the case, Cheeks’ home was severely
damaged in the Northridge Earthquake
of l994
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Jefferson Decision vs. ACV
• It was insured on a policy with the California
Fair Plan that promised: “Covered property
losses are settled at Actual Cash Value at the
time of loss, but not more than the amount
required to repair or replace the damaged
property.”
• Cheeks sued, contended that the ACV of his
home, based on its market value, was more
then the insurer’s estimate
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Jefferson Decision vs. ACV
• The basic test is what would a willing
buyer pay for a property irrespective of
land consideration
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Replacement Cost
• This is the cost to repair or replace the
property with materials of "like, kind and
quality" without depreciation.
• Replacement cost is based on what it
would cost to replace the structure on the
same premises and for the same purpose
without the requirement to do so.
• Replacement cost would be different
based on different types of structures;
construction; square footage; upgrades
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Replacement Cost
• Replacement Cost applies to different types of
structures including
– Dwelling
– Detached Garage
– Detached buildings other than garages
– Structures such as swimming pools, cabanas,
etc
• CIC Code 10102 has language
precluding the use of Guaranteed
Replacement Cost
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Replacement Cost CIC Section 2051
and 2051.5
• 2051.5. (a) Under an open policy that
requires payment of the replacement cost
for a loss, the measure of indemnity is the
amount that it would cost the insured to
repair, rebuild, or replace the thing lost or
injured, without a deduction for physical
depreciation, or the policy limit, whichever
is less
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Replacement Cost CIC Section 2051
and 2051.5
• If the policy requires the insured to repair,
rebuild, or replace the damaged property
in order to collect the full replacement
cost, the insurer shall pay the actual cash
value of the damaged property, as defined
in Section 2051, until the damaged
property is repaired, rebuilt, or replaced.
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Replacement Cost CIC Section 2051
and 2051.5
• Once the property is repaired, rebuilt, or
replaced, the insurer shall pay the
difference between the actual cash value
payment made and the full replacement
cost reasonably paid to replace the
damaged property, up to the limits stated
in the policy.
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Replacement Cost CIC Section 2051
and 2051.5
• (c) In the event of a total loss of the insured
structure, no policy issued or delivered in this
state may contain a provision that limits or denies
payment of the replacement cost in the event the
insured decides to rebuild or replace the property
at a location other than the insured premises.
However, the measure of indemnity shall be
based upon the replacement cost of the insured
property and shall not be based upon the cost to
repair, rebuild, or replace at a location other than
the insured premises.
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Replacement Cost
• There is, however, the requirement to
actually rebuild, repair, or replace in order
to be indemnified on the contract.
• Is the insured required to build at the
same site?
• Is the insured required to build the same
home/building?
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Replacement Cost and Different
Types of Structures
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•
•
•
•
Dwelling
Attached Garage
Detached Garage
Carport
Fence
Patios
Greenhouse
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•
•
•
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•
Swimming Pools
Jacuzzis
Gazebos
Guest Houses
Barns
Fire pits
Docks
Tennis Courts
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Additional costs associated with
single or custom home
• Estimators only provide basic information
and “estimates” of value
• Broker/Agents should always inspect a
home, take pictures and do an on site
evaluation for any costs associated with
customization
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Is that a house or a Garage?
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Size and Type of Attached Garage
• Garages vary in type, size, usage and
construction (specialty finishes)
• Often times the garage is overlooked in
the overall valuation and must be
considered as a separate line item
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Replacement Cost and Different
Types of Structures
• Homeowners Estimators are only as good
as the questions we ask your insured
• We must identify ALL structures that they
have to include in the value and insure
properly
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Other Costs relating to evaluating
Replacement Cost
• Cost of demolition and debris removal
– The policy is silent on Demolition and
would be construed to be covered
under “Replacement Cost”
– Debris Removal is included in a
Homeowners Policy but the limit of
insurance MUST include the costs
associated with the coverage
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Debris Removal
• This expense is included in the limit of
liability that applies to the damaged
property. If the amount to be paid for the
actual damage to the property plus the
debris removal expense is more than the
limit of liability for the damaged property,
an additional 5% of that limit is available
for such expense
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Debris Removal
And if there are any Pollutants??
And there probably are!
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Other Costs relating to evaluating
Replacement Cost
We will also pay your reasonable expense,
up to $1,000, for the removal from the
"residence premises" of:
(1) Your trees felled by the peril of
Windstorm or Hail or Weight of Ice, Snow
or Sleet; or
(2) A neighbor's trees felled by a Peril
Insured Against under Coverage C;
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Other Costs relating to evaluating
Replacement Cost
• Other costs that must be included when
considering the amount for Replacement
Cost would be:
– Architect’s Plans
– Engineering Studies
– Building Permits
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Replacement Cost and Additional
Living (CIC 2051.5)
• (2) In the event of a covered loss relating to a
state of emergency, as defined in Section 8558 of
the Government Code, coverage for additional
living expenses shall be for a period of 24
months, but shall be subject to other policy
provisions, provided that any extension of time
required by this paragraph beyond the period
provided in the policy shall not act to increase the
additional living expense policy limit in force at
the time of the loss. This paragraph shall become
operative on January 1, 2007.
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Functional Replacement Cost Loss
Settlement - HO 05 30 10 00
• Allows for functionally equivalent building to
replace the original structure.
• Buildings under Coverages A or B are
eligible.
– Must be insured at least 80% to functional
value.
• Must contract to rebuild within 180 days of
loss.
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Polling Question #6
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Reproduction Cost
• This is the cost to reproduce with identical
types of materials rather than a functional
equivalent.
• It is used for special types of construction
where reproducing the structure
identically is necessary based on its
value, function, or aesthetic quality.
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Reproduction Cost
• If you own an historic building, whether it is a
stately home or an ancient cottage, a standard
policy from a general insurance provider could fall
well short of expectations if you need to make a
claim. If your building is also listed, it is protected
by law, limiting repair options and making some
higher costs unavoidable: it is the responsibility of
the owner to insure it properly.
www.buildingconservation.com
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Polling Question #7
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California Residential Property
Insurance Disclosure Statement
California Insurance Code (CIC) 10102
http://www.leginfo.ca.gov/cgibin/displaycode?section=ins&group=1000
1-11000&file=10101-10107
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California Residential Property
Insurance Disclosure Statement
• This is a disclosure required by California
Law under section 10102 of the Insurance
Code
• For policies issued on or after July 1,
1993, the agent or insurer shall obtain the
applicant's signature acknowledging
receipt of the disclosure form within 60
days of the date of the application
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California Residential Property
Insurance Disclosure Statement
• There is a checkmark required on the
Disclosure Form indicating the following
valuation triggers
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Actual Cash Value
Replacement Cost Value
Extended Replacement Cost
Guaranteed Replacement Cost
• With limited building code upgrade
• With unlimited/full building code upgrade
– Building Code Upgrade
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Components of a Structure
Necessary to Estimate Replacement
Cost
Including a discussion on how the various
components contribute to Fire Hazard
Identification
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One of the Best Lessons in
Construction
Laguna Fires October 1993
http://www.finehomebuilding.com/howto/articles/fire-resistant-details.aspx
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100
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Laguna Fires
• That was the scene in October 1993
after a fire storm destroyed nearly 400
homes in Laguna Beach, California. The
fires started several miles inland and
swept to the sea at a brisk 2 mph to 4
mph, consuming increasingly thick
vegetation along the way.
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Laguna Fires
• Frequently, the flames boiled 50 ft. or 60 ft. into the
air, and they reached temperatures of 2,000°F or
greater
• The most obvious question homeowners, builders,
architects and code officials asked as they combed the
rubble for clues was how did a precious few
structures survive such an inferno while houses on all
sides vanished in the fire? What they learned was a
number of lessons that likely will work their way into
local building codes and should help to reduce the
damage of future fires.
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Laguna Fires
• The home of To Bui and Doris Bender
was called a "miracle house" by the Los
Angeles Times because of its dramatic
survival in a neighborhood almost
totally devastated by the fire. Why did
this trilevel structure and a few others
like it survive while neighbors' homes on
all sides, sometimes no more than 10 ft.
or 15 ft. away, burned to the ground?
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Laguna Fires
• "It's in the details," Bui insists. He knows
about such details. Originally from
Vietnam, he lived and worked as a
structural engineer in Germany for more
than 10 years. There, the predominant
building materials are concrete, stone,
brick and steel. "In Germany, structures
are designed to last hundreds of years,"
he said. "I built my house to last."
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Types of Basic Building Construction
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Types of Construction
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Tilt Up
Cinderblock
Wood Frame
Brick & Masonry
Metal Frame
Insurance Community University
• Superior Construction
– Non Combustible
– Masonry Non
Combustible
– Fire Resistive
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Types of Foundations
• Determining the types of foundations is
very important for purposes of loss
settlement and determination of value
• If a foundation is cracked due to
excessive heat, for example in a fire, then
the loss is considered a constructive total
loss and the foundation must be replaced
• Often times the foundation may not be up
to code such as in the example of the
Oakland Fires
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Types of Foundations
• Type of Foundation
– Depending on when and where a house was
built, the foundation may be made of stone,
brick, preservative-treated lumber, concrete
block, or poured concrete. By far the most
common material for foundations is concrete
– There are three types of conventional
concrete foundations: poured concrete,
concrete block, and post-and-pier. Size and
acceptable types are regulated by building
codes
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Foundations and the Homeowners
To determine the amount of insurance required to equal 80%
of the full replacement cost of the building immediately
before the loss, do not include the value of:
(1) Excavations, footings, foundations, piers, or any other
structures or devices that support all or part of the building,
which are below the undersurface of the lowest basement
floor;
(2) Those supports described in (1) above which are
below the surface of the ground inside the foundation walls,
if there is no basement; and
(3) Underground flues, pipes, wiring and drains.
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Roofing Materials
• Roofing Materials are very important in
terms of fire hazard
• Many older types of roofs are no longer
acceptable, such as wood shake, due to
their susceptibility to fire.
• Example is the Laguna Fires where the
roofs caught on fire and created
explosions that was a major cause in
spreading the loss to other homes.
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Roofing Materials
• Roofing materials can be a significant cost factor
in replacement of homes
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Shingles—Asphalt, Shingles Architectural
Wood Shake, Wood Victorian Scallop
Tile—Clay Concrete
Tar & Gravel
Slate
Tin
Copper
Foam
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That’s a roof?
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113
That’s a roof?
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Siding Materials
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Stucco
Stone Veneer
Cement Fiber
Wood Clapboard
Brick Veneer
Cedar Shingle Siding
Engineered Wood Siding
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Hazards
There are checklists that are
useful to help identify hazards
and mitigate them such as:
www.befiresmart.com/protect
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Slope
• The Slope on which a home is built enters
into the per square footage replacement
cost.
• As relates slope, various schemes for
rating fire hazard have been developed
• Five elements chosen by many agencies
are: vegetation, canopy cover, slope,
aspect, and elevation
• Slope and Other Fire Hazard Considerations
http://grayback.com/applegate-valley/fireplan/how-freq.htm
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Slope and Other Fire Hazard
Considerations
• Vegetation directly influences rate of
spread,
• Canopy cover and ladder fuels are
closely related when it comes to hazard
rating. A greater percentage of ladder
fuels means a greater likelihood of a
surface fire moving into the crown canopy,
increasing the difficulty of suppressing the
fire.
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Slope and Other Fire Hazard
Considerations
• Gravity dictates that many if not most
things travel downhill faster than uphill.
As the slope becomes steeper, fire
increases in speed. On flat terrain, the
spread of fire relies more on wind.
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Slope
• Slope is graded in the following broad
categories
– Flat to Slight
– Moderate
– Steep
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Age of the structure or the year it
was built
• The age of the structure is important for
valuation from a couple of aspects
– Building could be substantially out of
code
– Building may be able to be built as it
was prior to the loss
– The building my be “historical” or have
unique building items that must be
included in Replacement Cost
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CAT Losses make a big difference
San Diego Fires 2007
Oakland Fires
Laguna Beach Fires
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Oakland Fires 1991
The destructive Oakland fires were an eye-opener
when it came to rebuilding costs in the Bay Area.
With the steep slopes in the Oakland hills, the bill
came in at $400 per square foot rather than the
$100 national average. www.paloaltoonline.com
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Effects of Catastrophes on
Replacement Cost
• Under Normal Situations Repair and Replace
• Following a CAT loss the costs of construction
can sky rocket
– Cost of permits
– Change in building codes
– Supply and demand (Building Supplies)
– Fuel Charges
– Inability to replace at the same site—
especially a consider in flood prone areas
– Construction Labor Sources
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Review of Significant Endorsements
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Guaranteed Replacement Cost
Extended Replacement Cost
Inflation Guard
Building Ordinance
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Polling Question #8
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Guaranteed Replacement Cost
• The limit of insurance is suspended on
the described property.
• In the event of a total loss, the recovery is
the actual amount of the loss.
• In the event of a partial loss, the policy
pays replacement cost or ACV if the
property is not replaced.
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Guaranteed Replacement Cost
• Many homeowner policies prior to 1991
provided this enhanced coverage.
• In the aftermath of a catastrophic fire in
the Berkeley Hills above Oakland, most
homeowner policies revised this
provision.
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CIC Code as relates Guaranteed
Replacement Cost 10102
• Significant misuse of the “Guaranteed
Replacement Cost Endorsement” and
Extended Replacement Costs have
resulted in law suits following losses.
• Specifically the term Guaranteed was
misused leading the insured to believe
that the full cost of replacement was
“guaranteed” without restriction.
According the code makes specific
reference to this.
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Guaranteed Replacement Cost
Section 10102 of CIC
• e) No policy of residential property insurance may be
initially issued on and after January 1, 1993, as guaranteed
replacement cost coverage if it contains any maximum
limitation of coverage based on any set dollar limits,
percentage amounts, construction cost limits, indexing, or
any other preset maximum limitation for covered damage
to the insured dwelling. The limitations referred to in this
section are solely applicable to dwelling structure
coverages. Endorsements covering additional risks to the
insurer's dwelling structure coverage may have internal
limits as long as those endorsements are not called
guaranteed replacement cost coverage.
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Polling Question #9
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Extended and Guaranteed
• Misuse of Extended Replacement Cost
AND Guaranteed Replacement Cost does
NOT remove the obligation to insure to
value and it is inappropriate and harmful
to an insured to underinsure their property
and rely on either of these endorsements
as remedies.
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Extended Replacement Cost
• Most homeowner policies today provide
coverage for the dwelling at an increased
percentage of the specified amount on
the policy.
• This provision has in the past been misused in setting value
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Extended Replacement Cost
• Commonly at 125% of the specified amount.
• Requires the home to be insured to 100% of
the insurance company’s replacement value.
• Must report any remodeling or additions that
increase the reconstruction cost above $5,000
or 5%, whichever is less.
• What does it really mean anyway?????
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Catastrophe Coverages and Types of
Replacement Cost
• Following a Catastrophe loss there will be
increased costs of construction due to such
issues as: construction labor, building supplies,
fuel, transportation issues and permit restriction.
• All of these can contribute to demand surge and
the cost of rebuilding
• Replacement Cost estimators do not take into
account these increased costs
• This is the purpose of the Extended
Replacement Cost Endorsement
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Inflation Guard
• An Inflation Guard is usually a built in feature
on a Homeowners and Commercial Property
Form.
• The Inflation Guard may appear as a
percentage on the Declarations Page
• The intent of the Inflation Guard is to provide
coverage during the policy period to increase
by a percentage for inflation of building
costs.
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Inflation Guard HO 04 46
• For an additional premium, the limits of
liability for Coverages A, B, C and D will
be increased annually by
%*,
applied pro rata during the policy period.
• *Entries may be left blank if shown
elsewhere in this policy for this coverage.
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Building Ordinance
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Polling Question #10
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Regulate Everything About “How” A
Building Is To Be Constructed
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Plumbing
Electrical
Structural support
Grading
Sloping
Roofing
Parking Spaces
Set Backs
Insurance Community University
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Flooring
Insulation
Landscaping
Signs - placement,
size and type
• Materials used vs.
Occupancy
• ADA
• Miscellaneous
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Sprinkler Code
• California State Fire Marshal Information
Bulletin
• http://osfm.fire.c.gov
• http://osfm.fire.ca.gov/pdf/firemarshal/
taskforcefinalrepord.pdf
• Section R313 and R313.3
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Building Code Upgrades
• Building Code upgrades deal with the
size and construction of the entire
structures and separately for the
square footage of the living space.
Valuation must be done to determine
the amount necessary under the
Building Ordinance Endorsements
• This is not only important for older homes
but is part of insurance company’s
eligibility.
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Building Code Upgrades
• If a home is over a certain age then it
must have required upgrades which
would include such items as
electrical, plumbing, and roofing.
The company is specifically asking
these questions to mitigate the fire
exposure and exposure to other
types of losses.
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Building Code Upgrades
www.bsc.ca.gov
Building codes regulate how a building has to be
reconstructed following a loss.
• Types of construction and costs attached thereto
can vary based on many factors:
• Size of the building and at what point it must be
sprinklered.
• Number of stories and nonstandard interior wall
heights is a factor.
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Building Code Upgrades
www.bsc.ca.gov
• There is a point with damage, when
the building must be ripped down
and replaced in its entirety rather
than simply repairing damage.
• There are always additional costs
associated with building a custom
home.
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Building Code Upgrades
www.bsc.ca.gov
• Geographic location in terms of set backs,
brush hazard and proximity to other
hazards
• Construction costs differ tremendously
based on where the home is being built.
This differs state by state and city by
city.
• Cost of demolition and debris removal
are often written for a separate limit from
the increased cost of construction.
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Homeowners Policy
• Section I – Exclusions
• We do not insure for loss caused directly or
indirectly by any of the following. Such loss is
excluded regardless of any other cause or event
contributing concurrently or in any sequence to
the loss.
• Ordinance or Law, meaning enforcement of any
ordinance or law regulating the construction,
repair, or demolition of a building or other
structure, unless specifically provided under this
policy.
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Building Ordinance Issues
• Tearing down undamaged dwelling
• Removing Debris
• Building the home as to updated building
codes
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Ordinance or Law
• You may use up to 10% of the limit of
liability that applies to Coverage A for
the increased costs you incur due to the
enforcement of any ordinance or law
which requires or regulates
– This is new to the 2000 series.
– This can be increased with the HO 04
77 Ordinance or Law Increased
Amount of Coverage.
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CIC Section #10103
• (5) Whether the policy provides coverage for the
increased costs of repairing or replacing damage
to the insured dwelling caused by a covered loss
because of building ordinances or laws
regulating the repair. In the event that no
coverage is provided for repairs that result from
new building ordinances or laws, the insurer shall
include in no less than 10-point typeface the
following statement: "THIS POLICY DOES NOT
INCLUDE BUILDING CODE UPGRADE
COVERAGE."
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CIC Section #10103
• In the event that the policy does include
code upgrade coverage, it shall either: (1)
State this on the declaration page, and
denote any applicable limits. (2) State this
on a separate disclosure form attached to
the declarations page, if the separate
disclosure form meets the following
standards:
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Methodology of Determining Values
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Proprietary Valuation Tools
• Valuation tools provide a mere indicator of
minimum values. Agent/Brokers should
pay particular attention to individual home
components and values
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Insurance Company Evaluations On Line
Marshall Swift
www.marshallswift.com
Data Quick
www.dataquick.com
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Proprietary Valuation Tools
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Zillow
Real Quest
Netroline
Google Maps
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Why Values Are So Important
• Accurate values avoid
– Over insuring
– Under insuring
– Ultimately used to establish a fair premium
for the property at risk
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Responsibility
• Whose responsibility is it to establish
property values for the personal lines
client.
– The responsibility is the property owner’s not
the insurance agent or insurance company
– IF the insurance client asks to be “fully”
insured then a heightened responsibility
exists.
– The insurance agent has guidelines such as
estimators but these are only minimum limits
that should be carried
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How Are Values Established??
• Purchase Price of the home
– Insureds often want to insure for what
they purchased the property for
• Bank’s requirements
– Banks often want the insurance to equal
the amount of the loan
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Methodology of Determining
Value
• Prior Policies
– New buyers may assume the coverage
of the prior homeowner
• Property Owner
– Property owners typically only know
what they paid for the property or the
comps
– The property owner typically does not
understand how the policy will pay in the
event of a loss.
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Methodology of Determining Value
• Real Estate Appraisals
– Real estate appraisals are sometimes
done by insurance agents utilizing
independent companies. These
appraisals, while they cost money, are
a very good indicator of value
• Insurance Company’s Valuation Software
– Almost all insurance carriers provide
estimators through their portal
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Methodology of Determining Value
• Contractor’s and Expert’s estimates or
opinions
– The same comment applies here as
with independent appraisals
• Cost per square footage Estimates
– This is a beginning mark for
determining value
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Polling Question #11
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Documentation of Person Making
Estimate
• There are specific requirements in the DOI
Regulations relating to the requirements
of an individual who is making an
estimate on Residential Properties.
• All of this documentation must be in a
retrievable format
• The website should be consulted
• The regulations provide as follows
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Documentation of Person Making
Estimate (2695.182)
a) In the event an estimate of replacement cost is
provided or communicated by a licensee to an
applicant or insured in connection with an
application for or renewal of a homeowners'
insurance policy that provides coverage on a
replacement cost basis, the licensee shall
document and maintain in the applicant's or
insured's file the following information:
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Documentation of Person Making
Estimate (2695.182)
1. Status of person preparing estimate
2. Name, job title, address, telephone
number, license number of person
preparing estimate
3. Source of estimate
4. Copy of any reports, inspection reports,
contractor’s estimates
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Documentation of Person Making
Estimate
(b) In the event the estimate of
replacement cost is provided by a
licensee to an applicant or insured in
connection with an application for or
renewal of a homeowners' insurance
policy that provides coverage on a
replacement cost basis, the licensee shall
maintain in the insured's file the records
specified in subdivision
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Documentation of Person Making
Estimate
(g)(1) If a licensee communicates an estimate
of replacement cost to an applicant or
insured in connection with an application for
or renewal of a homeowners' insurance
policy that provides coverage on a
replacement cost basis, the licensee must
provide a copy of the estimate of
replacement cost to the applicant or insured
at the time the estimate is communicated.
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Section 2695.183. Standards for
Estimates of Replacement Value
• However, in the event the estimate of
replacement cost is communicated by a
licensee to an applicant to whom the
licensee determines an insurance policy
shall not be issued, then the licensee is
not required pursuant to the preceding
sentence to provide a copy of the
estimate of replacement cost.
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Section 2695.183. Standards for
Estimates of Replacement Value
• In the event the estimate of replacement cost is
communicated by telephone to an insured, the copy
of the estimate shall be mailed to the insured no later
than three business days after the time of the
telephone conversation. In the event the estimate of
replacement cost is communicated by telephone to an
applicant, the copy of the estimate shall be mailed to
the applicant no later than three business days after
the applicant agrees to purchase the coverage.
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Documentation of Person Making
Estimate
(c) Notwithstanding any other provision of
this Section 2695.182, this section shall
impose no duty upon a broker-agent to
obtain from the insurer and maintain any
information or document that in the
absence of this section would not come
into the possession of the broker-agent in
the ordinary course of business.
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Section 2695.183 Standards to be used
when a licensee estimates Replacement
Cost
• This section of the regulations is also found at:
http://www20.insurance.ca.gov/epubacc/REG/1
51771.htm
• The regulations deal with the requirements and
standards of communication of what must be
included in the estimation submitted to the
insured
• Follows is the regulation language
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Section 2695.183 Standards to be used when a
licensee estimates Replacement Cost
• No licensee shall communicate an estimate of
replacement cost to an applicant or insured in
connection with an application for or renewal of a
homeowners' insurance policy that provides coverage on
a replacement cost basis, unless the requirements and
standards set forth in subdivisions (a) through (e) below
are met:
(a) The estimate of replacement cost shall include the
expenses that would reasonably be incurred to rebuild
the insured structure(s) in its entirety, including at least
the following:
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Section 2695.183 Standards to be used when a
licensee estimates Replacement Cost
• (1) Cost of labor, building materials and
supplies;
(2) Overhead and profit;
(3) Cost of demolition and debris removal;
(4) Cost of permits and architect's plans; and
(5) Consideration of components and features
of the insured structure, including at least the
following:
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Section 2695.183 Standards to be used when a
licensee estimates Replacement Cost
(b) The estimate of replacement cost shall be based on
an estimate of the cost to rebuild or replace the
structure taking into account the cost to reconstruct the
single property being evaluated, as compared to the cost
to build multiple, or tract, dwellings.
(c) The estimate of replacement cost shall not be based
upon the resale value of the land, or upon the amount or
outstanding balance of any loan.
(d) The estimate of replacement cost shall not include a
deduction for physical depreciation.
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Section 2695.183 Standards to be used when a
licensee estimates Replacement Cost
• (e) The licensee shall no less frequently than
annually take reasonable steps to verify that the
sources and methods used to generate the
estimate of replacement cost are kept current to
reflect changes in the costs of reconstruction
and rebuilding, including changes in labor,
building materials, and supplies, based upon the
geographic location of the insured structure. The
estimate of replacement cost shall be created
using such reasonably current sources and
methods.
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Summary of Retention
• Prospects, applicants and renewals
– Name, position, license number , address,
telephone number
– Source of estimate and additional reports
– Copy to customer immediately
• If by phone – within three days
• If prospect, but not customer – no need to send
copy
• Five years retention
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Upcoming Classes
Upcoming
University/Paid CE
Classes
FREE to University Members
$50.00/charge for non university members
12/10
Crop
12/17
Equine
12/19 & 20th
Insight on Errors and Omissions
2014 1/9
Best Practices of Customer Service
THE 2014 CLASS SCHEDULE IS NOW PUBLISHED
Sign Up Early!!!
Join the University TODAY. www.insurancecommunitycenter.com
Click Join University at the top of the bar
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