Interior Value

Underinsurance of home contents is a crucial issue that insurers and brokers have always been interested in addressing. For many years, and for many reasons, the industry has had difficulty in solving this problem. However, given new technological advances and the ever-increasing scope and speed of the Internet, specialized databases now exist to bring home contents inventory and valuation services to consumers accurately and cost effectively.

UNDERINSURANCE: A WELL-KNOWN FACT

In the United States, the Insurance Information Institute reports that achieving insurance-to-value for homeowners is a national problem. Statistics from home inventory specialists in the United States also show that the lack of a proper inventory and aggregate valuation is responsible for 70% of contents being undervalued by at least 40%.

We believe the same to be true in Canada. After the recent U.S. disasters, the industry has found – and the press has reported – that, without a proper inventory, it is difficult for claims to be settled in a quick and acceptable manner for all concerned.

Raising the level of awareness about the importance of an inventory requires the participation of insurers, brokers and vendors. It also requires that tools be available to perform such inventories and valuations.

REPLACEMENT VALUE: GUESSING GAME

Presently insurers, through their inspectors or appraisers, can determine a value for the replacement cost of the bricks and mortar, fund the risk, and insure the residential building for full replacement value. But what has been done about establishing a value for the home’s contents? Determining such a value can be a real problem: neither the insurer nor the broker know the value, and, given that less than 1% of homeowners actually have an inventory, not even the homeowner knows the total value of the contents. Consequently, an arbitrary percentage of the building valuation is used to calculate contents insurance coverage – perhaps 60% or 70% or as low as 50%. In reality, these seemingly high percentages are often inadequate.

It is relatively easy for a client to complete a basic inventory. However, an inventory is not enough to identify the client’s risk, since the aggregate replacement value of the contents is not easily or accurately obtained. Building a database of more than 100 million items to perform such valuations is not an easy task to achieve; the vast majority of homeowners would not have access to such a database. While appraisal expertise can be mastered, it takes years to become proficient in all the relevant fields.

In Canada, over the past three years, Asset Verification Inc. (AVI) has held numerous presentations and meetings with more than 400 brokers and insurers about different tools that are available to properly insure contents to value. With a professional inventory and valuation report on hand, it is now possible for a client to know exactly how much insurance he or she needs to properly insure his or her contents. As a result, insurers can now get adequate premium for the risk and the brokers have protected their client. AVI has been working diligently to help solve the problem of underinsurance and is committed to helping the industry ensure that clients’ home contents are appropriately insured to value.

WHO INFORMS THE CLIENT?

Home contents or personal property is one of the major components of a person’s net worth. These components usually include real estate, personal property, and investments; they can be presented in different orders depending on the individual’s wealth, priorities and lifestyle. But the question remains: Who is responsible for protecting the client from underinsurance of contents?

In most cases, the client trusts the broker to make sure he or she is properly insured on content. However, this is easier said than done. Brokers may discuss the possibility of underinsurance of contents with their clients, but the truth is that brokers have no way of knowing the value of the contents in an insured’s home.

Outside of recommending a resource for professional inventory and appraisal services to accurately determine the value of the clients’ contents, the broker has no reliable system or formula to determine appropriate coverages. They can only rely on the client to determine whether or not the automatic percentage of the building amount being applied to contents is a dequate for the client’s insurance needs.

If the problem cannot be solved at the end of the process, at the time of a claim, perhaps it would help to add a step to the beginning of the process – at the underwriting stage. We suggest the inclusion of two questions on an application questionnaire prepared by the Centre for Study of Insurance Operations will help brokers greatly reduce their potential E&O claims. At the same time, these questions might spark awareness on the part of the client. These essential questions for clients are: Do you have an inventory? Do you know the replacement value of your household contents?

What additional steps can insurers take? First, we recommend that appraisers be trained to ask the client, when appropriate, if he or she has an inventory and if he or she knows the replacement value of the contents of his or her home. This query will reinforce the same questions the broker has already asked when arranging the coverage. Second, underwriters should invite brokers to recommend valuation services to their clients if they are in doubt about general and/or specific coverages. From an adjuster’s point of view, an agreed-upon value established by an independent, third-party appraisal service reduces the costs of adjustment and allows faster payment to the client.

CURRENT MARKET TOOLS

The Insurance Bureau of Canada offers the download of inventory-only software on its Web site. We recommend that brokers throughout the country should embrace this resource, if they haven’t already. In the inventory market, some individuals offer inventory services but very few – only one, in fact – offer aggregate appraisals. Accredited professionals offer specific appraisals on items such as antiques and artwork, which is a first step, but unfortunately they are not in a position to offer mass individual and aggregate appraisals at a reasonable cost.

In the United States, a new Web-based service is being developed that will assist clients in completing their own basic inventory; using this technology, clients will be able to obtain an aggregate valuation and access specific appraisal services at low cost, making such necessary services easily accessible to all. Canada is expected to see this service following successful implementation in the United States. The service will be available strictly through brokers and insurers.

The crucial issue of underinsurance of contents can be solved through these new Web technologies and specialized databases. Taking the next step, insurers, brokers, and vendors must all play a part in raising the level of inventory awareness. Asking the simple question “Do you have an inventory?” is the first step to take on this “insured-to-value” journey.