Inadequate Replacement Cost – A Follow Up
Building material costs have increased dramatically during COVID because supply has not been able to keep up with demand for many reasons. As a result, IIABA's Risk Management department in conjunction with Swiss Re recently provided a sample letter agents could use to notify their clients that current replacement cost limits may be too low as a result of these dramatic increases.
Although it may be useful for agencies to warn their insureds of these potential underinsurance issues arising from COVID, however short term it might be, the agency must be cautious when addressing this situation. If an insured contacts the agency as a result of the notification, the agency should:
- Remember agency personnel are not licensed appraisers. Replacement cost estimators are just that, estimators (not guarantees).
- Confirm the edition/version date of the estimator being used to generate the replacement cost. The cost of building materials has risen quickly, if the edition date of the estimator is more than a couple weeks old, the value generated may still be too low. For instance, if the data being used to generate replacement cost is based on costs from last month, the developed value may still be too low by anywhere between 10 and 15 percent. Confirm the most recent edition is being used.
- Remember to run several valuations using multiple “grades" of construction (fair, average, superior, etc.). This should give a reasonable range of values.
- Remember the difference between market value and replacement cost. Market values are currently even more volatile than replacement cost values. Insurance values are not dependent on what a willing buyer will pay a willing seller (market value) but are based on the cost to rebuild the structure.
- Require the insured to pick the value they feel is appropriate (confirmed with a signature). The agent may consider recommending the insured hire an appraiser to develop the value.
- Disclaimer. Consider using a disclaimer on the estimator. “The replacement costs developed are for information only and are not guaranteed or to be considered an appraisal. Values used are at the sole discretion and the responsibility of the property owner."
Unfortunately, the uniqueness of COVID has not yet passed, especially in regard to ongoing insurance issues. While this incredible increase in building material costs may be “temporary," no one knows how “temporary" this situation will be. Prices may remain high for weeks or months following a return to “normalcy" within the supply chain.
Although agents are going beyond expectations by warning of this potential coverage limits problems and giving insureds the opportunity to address the issues, agents are not expected to provide expertise in areas where they are not licensed and/or trained. Apply the recommendations listed above when working with insureds regarding coverage limits.
Replacement cost estimators are simply a tool developed by third parties to assist the insurance industry in the development of the ESTIMATED replacement cost. Even the providers of these tools cannot guarantee the results because the real “replacement cost" is not known until the loss occurs and the structure is rebuilt.
If the developer of the tool cannot guarantee the results, neither can the agency utilizing the tool. Agents must guard against the temptation to provide the coverage limit for the insured.
Sample Letter for Information Regarding Increased Building Costs
E&O Risk Management and the Coronavirus (Covid 19)
By Swiss RE Corporate Solutions
You are all very aware of the events of the last several weeks and the Coronavirus. We are not health experts and there are many others more qualified to give you that advice. We CAN, however, give advice regarding how to reduce the likelihood of an errors and omissions exposure as a result of this event. We have already become aware of some attorneys who are trying to take advantage of this situation for monetary gain against insurance agents. Our advice during this event is no different from what we have said in the past. If your agency has developed good practices, you will be better positioned to avoid problems. Here are the practices of a good insurance agency:
• DON’T MAKE CLAIMS DECISIONS! Let the insurance carriers do that.
• DON’T ADVISE YOUR CUSTOMERS IF CORONAVIRUS related claims are COVERED OR NOT! Let the insurance carriers do that.
• If a carrier takes the position that losses arising from the Coronavirus are not, or may not be covered, do not engage in advocacy asserting that "We thought it was covered..." That will simply be used by your client to prove that you knew the client wanted coverage for perils like the Coronavirus, but you failed to procure coverage.
• Report all claims and potential claims to EACH AND EVERY CARRIER that could potentially have a policy that could apply. This includes CGL, Personal lines, Umbrella, Excess, Workers Compensation, Specialty and any other policy in place for your customers.
• USE THE RESOURCES PROVIDED TO YOU BY THE IIABA. Follow this link to the Coronavirus webpage. It is a valuable resource for you, your staff and your agency that provides many sources of information.
• Be empathetic, but don’t tell anyone that something is covered or not. You can continue to tell them you feel sympathy for all affected by the Coronavirus, but customers MUST report a claim to their insurance carrier to determine if there is any coverage for the event.
• Remember, if you executed an agency agreement with one or more insurance companies, you MUST report all claims or potential claims as required by that agreement, even if your customer tells you not to do so.
• Maintain vigilant contact with your insurance carriers to determine what action THEY want you to take.
• DOCUMENT DOCUMENT DOCUMENT!!! This continues to be the foundation of sound E&O risk management. DOCUMENT EACH AND EVERY TELEPHONE CONVERSATION, EMAIL, TEXT, TWEET, OR ANY OTHER TYPE OF COMMUNICATION WITH YOUR CUSTOMERS!
• Assume that any telephone conversation with your customers or carrier claims representatives ARE BEING RECORDED. While some states prohibit recording of telephone conversations without advising that they are doing so, IT DOESN’T STOP SOME PEOPLE FROM DOING SO.
• If you use social media for your business, make sure it is up to date! Do not make any promises that something may or may not be covered by insurance companies and policies.
• DO NOT GIVE ANY STATEMENTS, RECORDED OR OTHERWISE, WITHOUT FIRST CONTACTING YOUR E&O PROVIDER. The Swiss Re Corporate Solutions/Westport Insurance Company/First Specialty Insurance Company claims staff are available if you have any questions about any communications you receive.
• If you have a conversation with your customer that leads you to believe they may be fishing to make a claim against you, DO NOT HESITATE to contact our claims department.
• DON’T MAKE CLAIMS DECISIONS! DON’T ADVISE YOUR CUSTOMERS IF SOMETHING IS COVERED OR NOT! Let the insurance carriers do that. We know this was stated before, but it must be ingrained in your mind.
• If the Coronavirus ends up being declared a "catastrophe" by the ISO Property Claims Service, you may be eligible under your Westport policy for "Cat Extra Expense" benefits:
"CATASTROPHE EXTRA EXPENSE. We will pay up to $25,000 per catastrophe subject to a per POLICY PERIOD aggregate limit of $50,000 for the actual extra expenses incurred by you as a result of a catastrophe during the POLICY PERIOD beginning on the date of a catastrophe and for thirty (30) days thereafter. The extra expense incurred must be incurred by you only to assist in the insurance claims processing needs of your customer(s) who have been affected by the catastrophe. The catastrophe must be a declared catastrophe by the Property Claims Services. A $500 deductible for each catastrophe shall apply. Limits provided by this paragraph are part of and not in addition to the limits provided by this POLICY."
We hope that this will help you as this event progresses. If you should have any questions, please let us know.
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group ("Swiss Re") and/or its subsidiaries and/or management and/or shareholders.
Copyright 2020 Swiss Re
Download a Sample Letter for your Commercial Clients:
A periodic review of your agency's business practices can give you an understanding of what procedural breakdowns may be occurring within the agency. Included on this page is information on Agency E&O Audits (fee based) as well as Agency E&O Self-Assessments (free).
Consistency in practices and procedures regarding how business is done is a critical component in E&O claims prevention. Coverage checklists, disclaimers, sample procedures and sample customer letters are just some of the valuable tools you can utilize to help prevent claims in your agency.
Easy to use tips targeted at different positions in the agency, along with printable flyers of what you should ALWAYS do and NEVER do, suitable for your agency bulletin boards.
We are providing the coverage checklists for general informational purposes only. The sample checklists are not intended to provide specific advice about legal, business or other questions and should not be relied upon as such. If specific legal or other expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney, should be sought to ensure that any language used complies with applicable law and is appropriately tailored to the circumstances.