Tech Talk: Is Your Client “Adequately Insured” in Today’s Inflationary World?
Irene Morrill CPCU, CIC, ARM, CRM, CRIS, MLIS, LIA, CPIW
VP Technical Affairs, MAIA
I don’t mean to be an alarmist, but in today’s inflationary-supply chain problem economy we really need to address current rebuild property values with our clients. The downside of subscribing to so many insurance and business e-newsletters is that there is a plethora of articles lamenting about construction cost increases and bemoaning potential underinsurance problems that I’m scared!
It is NOT “just inflation” which is 8.3% as of today (May 12th) . As always, the rise in construction costs far outflank normal CPI inflation. A May 6th article by The American Property Casualty Insurance Association (APCIA) identified that the cost of construction materials rose 44% from December 2019 to December 2021. Another great APCIA article is entitled “Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters. ResourcePro wrote a free whitepaper on “The Crisis of Underinsurance”. You should google it as well as the articles from APCIA to give you some ideas on how to discuss potential under-valuation with your clients.
Personal and commercial lines issues
If you use insurance company software valuation programs, how “current” are they with construction price increases. In personal lines homeowners and dwelling renewals are usually increased yearly by the carrier. What % of value is the company using to increase the building value yearly? Someone in your agency should ask each carrier this question. If they haven’t dramatically increased the construction values in the last year, then any new client is already underinsured! If the company states they HAVE increased their current construction values, it might be an interesting experiment to single out a few clients that have been with that carrier for a few years and see what the building value would be today using the carrier’s up-to-date construction valuation software!
The accuracy of commercial property valuation should also be addressed. Do you have commercial valuation software? How up to date are the materials values used? Does the carrier have a “load” for this pandemic/inflation/supply chain crises we are experiencing?
For both commercial and personal lines, have you asked any contractors that you insure what some ballpark construction cost per foot values are for the various types of construction? That discussion could be scary!
Important personal lines endorsements
Many of the articles recently written remind the agent to sell increased valuation endorsements.
The HO 05 08 Specified Additional Amount of Insurance Coverage A – Dwelling Massachusetts generally allows either a 1.25 or 1.50 increase at the time of loss. If you were selling the 1.25 factor, I’d increase it to 1.50. Also, the name of the endorsement is “key”, only Coverage A is increased, not Coverage B Other Structures, Coverage C Personal Property or Coverage D Loss of Use. Increased construction costs and supply chain issues will increase the repair/reconstruction cost of other structures on the premises as well as the dwelling. Will your client be adequately insured with the Coverage D Loss of Use limit if they suffer a supply chain issue and rebuild materials are not readily available? The Coverage D limit issue is compounded when insuring a 2,3 or 4 family home where loss of rental income in addition to the need for additional living expense can determine whether your insured will have the funds to pay the mortgage as well as live elsewhere during the extra time awaiting materials for reconstruction.
The Additional Limits of Liability for Coverages A, B, C D – Massachusetts HO 05 02 (ISO’s answer to guaranteed replacement cost without saying that dirty word) is a better endorsement in that Coverage A is increased to the necessary replacement value at the time of the loss in addition to increasing Coverage A, the endorsement automatically increases the Coverages B, C and D limits by the normal corresponding percentage of Coverage A relationships.
Beware of the restrictions in both these endorsements
At the onset of the Covid Pandemic before the supply chain problem when we were all hunkering down at home and doing home renovations, were these renovations communicated to the insurance agent? If not, both the HO 05 08 and the HO 05 02 void coverage under the endorsement if the insured did not notify the agent/carrier of
“improvements, alterations or additions to the building insured under Coverage A which increase the replacement cost of the building by 5% or more”
Also, neither of these endorsements address the Ordinance or Law issue. Both only “replace as was” – new for old – not current building construction requirements and the increased cost of performing them!
Ordinance or law issues
Whether commercial lines or personal lines, replacement cost means “what you had is what you get” – not necessarily what the building inspector says needs to be done. In the ISO personal lines policy – whether dwelling or homeowners we buy ordinance or law by purchasing a % of the building value in increments of 25%. I’m a firm believer of 100% or more depending on the particular issues of that client.
In commercial lines, whether BOP or CP, it’s a little more difficult. You must make sure you adequately value the building and then you have to consider the current additional expenses of demolition and increased cost of construction.
Every article that I have read warns of the dire need for ordinance or law coverage, and I wholeheartedly agree.
Inflation guard/automatic increase in insurance
If the homeowner client doesn’t qualify for one of the “glorified inflation guard” endorsements discussed above, then there is the old fashioned inflation guard endorsement HO 04 46. The dwelling policy calls it the “automatic increase in insurance” endorsement. You pick an inflation % rate. I would NOT pick the CPI rate of around 8% - I suggest something higher in alignment with construction cost increases.
The Commercial Property Building and Business Personal Property Form uses an “additional coverage” option that we show on the CP Declarations page. The ISO BOP policy includes some free inflation rate, but a higher rate can be shown on the BOP declarations page. Again, what inflation % to use!
Personal property issues
A number of the articles discussed addressing the business personal property coverage in the CP and BOP and the personal property limit in the HO or DP policy. According to the Bureau of Labor Statistics, the cost of personal furnishings such as living room or dining room furniture increased an average of 2% per month for a total change of 19.9% in a year! Good thing I don’t need or want any new furniture!!
One must “assume” that commercial business property values also need to be rethought! The client cannot determine values by what they paid a year or two ago. Remember we generally insure on a replacement cost basis which is TODAY’S insane costs – not last year’s cost!
I know discussions with clients take time ….
But it’s not like people don’t see what is going on around them. Forewarned is to be forearmed. At least you are mentioning the issue. I would hope that the industry doesn’t use the “weapon” of co-insurance in the CP or insurance to value in the BOP or the “underinsurance penalty” in the DP or HO to further aggravate the situation.
To be more adequately insured will increase company premiums, agent commissions and make the client’s life a lot easier at the time of a claim/loss.
As always, if you have any further questions, please feel free to email me, Irene Morrill, Vice President of Technical Affairs, at [email protected]
This article has been developed expressly for the members of MAIA. Reprint by other than members without the express permissions of the author is not permitted