Apprai$ing Brokers

What do you get when you put 150 insurance industry representatives in a room to discuss insurance to value and guaranteed replacement cost (GRC)? You get strong opinions, agreement on problem areas (including the consistency and frequency of home evaluations), some disagreement on solutions and a consensus that solutions require all stakeholders to work together. This pretty much sums up what happened at The Right Value, a symposium hosted by the Insurance Brokers Association of B. C. in Vancouver on Feb. 21.

Steve Sache, a partner of Atkinson & Terry Insurance Brokers in Delta, B. C., presented a broker’s perspective on the panel. Representing insurers were: Graham Haigh, general manager for B. C. of the Gore Mutual Insurance Company; Doug Edward, assistant vice-president and manager of the Sovereign General Insurance Company’s Vancouver branch, and David Sheppard, manager, head office claims of the Canadian Northern Shield Insurance Company. Speaking to issues related to evaluation software were Peter Morris, vice-president, Canadian business, Marshall Swift & Boeckh (MSB), and Chris Lang, president of PowerSoft Development Corp.

The goal of the event was to seek areas of agreement in order to formulate a set of industry guidelines or best practices to be followed when establishing insurance to value for residential properties. The audience was mostly made up of brokers, with several attending from other provinces. In addition, 12 general insurance companies were represented, as well as inspection firms, adjusters and the Insurance Council of B. C.

INCONSISTENT EVALUATIONS

Broker Steve Sache described the problems, the first of which is an inconsistent approach when it comes to insurers requiring a home evaluation. For renewals, some insurers require them every five years; others require inspections every three years, while some prefer every two years. Not every insurer asks for an evaluation with new business. Similarly they don’t all request evaluations when building limits change or when they accept letters of brokerage.

Another issue is the inconsistency of results from evaluation tools, due to brokers receiving updates and information from one another at different times, and the different factors being used within the same region. Factors such as overhead and profit may be applied to different degrees or not at all. The result is confusion for the applicant when trying to make a decision on coverage. In a test undertaken for the symposium, eight evaluations performed on the same house by three different brokers using tools supplied by two different

vendors produced eight different answers. The lowest valuation was Cdn$584,538. Two evaluations were in the high Cdn$600,000s, three in the Cdn$700,000 range, one at Cdn$800,000 and one at Cdn$1.3 million. Any one of these estimates would have met underwriters’ requirements.

CONSUMER SUSPICION

Consumers view the cost estimates with suspicion due to differing points of view as to what figure is being calculated. Brokers often write builder’s risk policies for customers constructing new homes. Upon completion of the homes, the broker writes a new homeowner’s policy with a limit based on the recent cost, plus debris removal and expected future inflation. However, more often than not, the insurance valuation is a considerably higher figure: the customer views the proposal as an attempt to gouge for extra premium; understandably, they often reject the higher proposed limit.

Regulators are stepping into the fray. In one example cited, a direct-billed client received his renewal from the insurance company. The broker made repeated attempts to contact the insured to update the building evaluation. Contact was eventually made and a new evaluation was sent to the insurer prior to the renewal date. The customer rejected the additional premium and requested reversal of the change. The insurer refused to provide GRC and preferred rating if the higher limit was not maintained. The client took the position that he had a contract prior to the evaluation being done and he took his complaint to the Insurance Council of

B. C.,which found fault with the broker on two points. First, since the insured responded to the broker with less than the required 30 days to go before expiry, Council stated the broker did not meet guidelines for proper renewal procedures.

Second, since the customer was insured with a company that only required an evaluator once every five years, the Council questioned whether the broker was acting in good faith since an evaluation was not required by the insurer during the period in question.

Underinsurance on contents, another important issue, led to a recent court case involving a total fire loss on Vancouver Island. Although the building was underinsured by almost 100%, it was fully covered under the GRC. However, because the building limit was so low, the contents were substantially underinsured and the customer sued the broker. On the particular facts of the case, the judge did not find the broker negligent, but did state clearly that the broker’s duty of care was to “exercise reasonable skill and care in estimating the replacement cost” of the house and that the insured should be able to rely on the broker to “estimate the approximate cost of replacing” the house, and “to obtain insurance coverage that would meet the estimated replacement cost.”

Brokers are not appraisers, yet the court stated the broker has a duty to estimate the replacement cost (note the ruling did not state reconstruction cost). The decision implies brokers must persist in contacting their customers in order to complete an evaluation. However, if the contact period is less than 30 days prior to renewal, and the insurance company doesn’t require a new evaluation for five years, then Council may determine the broker has not acted in good faith. However, if a loss occurs and the customer is underinsured, the court will say he breached his duty. How does one square that circle?

OVERHEAD AND PROFIT FACTORS

Haigh pointed out there are big differences in the results obtained from the inspection firms that insurers use. Many discrepancies arise from the inconsistent application of different overhead and profit factors, he noted.

Edward said an analysis of Sovereign’s last 10 total losses showed the dwellings were underinsured by 44.8%. Furthermore, in 50 random valuation checks, the buildings were undervalued by an average of 29%. Edward expressed concern about the effects of undervaluation on re-insurance. If entire books of business have understated values, a catastrophic loss threatens the stability of the entire industry. He reminded the audience GRC is designed to act as a buffer against inflation, not to cover large gaps due to underinsurance.

MSB and Powersoft described the challenges they face in the area of evaluation software. Morris acknowledged the 15% MSB has in its calculator for overhead and profit is a national average; a high-cost area like B. C. should currently have an additional 10% added for both overhead and profit, he added, and the architect’s fees should always be included in any evaluation along with the addition of debris removal. Morris projected that by 2008 Q2, these additional overhead and profit factors will be built in.

B. C.’s housing market is dynamic, but not unique. Saskatchewan has seen some of the highest inflationary cost increases recently, according to Lang. He said his firm has already built in regionalized factors for overhead and profit, and undertakes monthly as opposed to quarterly updates. In addition, brokers who already have completed worksheets on PowerSoft’s Web system can request batch evaluations 60 to 75 days ahead of a renewal month. They also keep the number of data points to no more than 25 — the level of information that a client can reasonably be expected to know about his or her home.

Panel members pres ented a number of possible solutions to some of the issues the panel raised.

EVALUATION TIMELINES

Sache, for example, urged insurers to be consistent about how often evaluations are required. He recommended every year or two years should be the standard. Also, he added, insurers need to be consistent in the application of inflation factors.

Haigh made a strong case for developing a basic calculator that would provide consistent results within a reasonable time period (many brokers in the audience said it was common for an evaluation to take 45 minutes). He also suggested an industry task force should be formed to explore solutions. He cited the example of Germany, where valuation ranges are legislated.

Edward suggested it might be time to evaluate the evaluators, with a view to simplifying the process.

Sheppard called for more analysis of real-life reconstruction costs, citing a claim in which a dwelling insured for Cdn$160,000 cost Cdn$560,000 to replace. The ‘soft costs’ involved — permit fees, engineering costs, taxes — alone totalled Cdn$60,000.

Morris also favoured industry-wide standards and annual re-evaluations, adding that it’s the best way to factor in the increased valuations resulting from Canada’s huge renovation industry (estimated to be in the order of Cdn$50 billion).

Lang said the factor triggering a dwelling to be considered ‘high value’ should be its square footage, not its assessed value.

The symposium yielded several suggestions that stakeholders will use to develop recommended best practice guidelines for proper establishment of residential building values. It is hoped brokers, insurers, regulators and software vendors will accept and support such guidelines in order to serve the best interest of our customers.

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Many discrepancies arise from the inconsistent application of different overhead and profit factors.

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Brokers are not appraisers, yet the court stated the broker has a duty to estimate the replacement cost (note the ruling did not state reconstruction cost).