Coverage gaps stemming from various sources can have serious consequences for homeowners, and commercial risks particularly during catastrophic events. As insurance agents, it’s crucial to understand that one significant cause of these gaps is the reliance on outdated software, which needs to be improved to keep up with the rapid increase in construction materials and labor costs.
Even with annual updates, such software can lag, leading to a mismatch between the tools used by underwriting departments and adjusters. This discrepancy, especially in a total loss scenario, can result in a substantial coverage deficit, leaving homeowners and commercial customers dangerously exposed. The potential consequences of these gaps underscore the importance of addressing this issue.
When clients change their homes significantly or acquire high-value personal property without informing their insurance agents, the replacement cost can increase without corresponding policy updates. This lack of communication can lead to insufficient dwelling and personal property limits. The issue of scheduling valuable personal property is crucial, as unscheduled items may fall under sub-limits, potentially causing gaps in coverage.
Commercial risks utilize commercial replacement cost estimator programs, but those programs also have limitations. While agencies may not have control over the software carriers use, they can implement practices to mitigate the risk of underinsurance accusations.
A concerning trend has recently emerged where lenders request insurance agents to supply replacement cost estimators directly. This practice places undue responsibility on the agent, as lenders seek to verify that coverage matches the property’s replacement value. By pushing this task onto agents, banks are effectively shifting the exposure risk to the agency, which could lead to the agency’s Errors & Omissions (E&O) policy in the event of an uncovered loss. Click the links below on the E&O recommendations regarding replacement cost estimators.
• SWISS RE Corporate Solutions, BIG I E&O Guardian
• Utica National Insurance Group, E&O Risk Management
Urge customers – in writing — to have their property (re)appraised by a licensed professional on a regular basis to ensure that the limits in place are, and remain, adequate.
Make sure the customer understands the definition/concept of ‘replacement cost.’ Explain that the ‘replacement cost’ of a building will likely exceed both the ‘actual cash value’ and ‘purchase price’ of a building, often by a significant margin.
Explain what a ‘coinsurance penalty’ is, and how a loss may not be fully covered even if it is within policy limits. Consider highlighting the provision in the policy.
Offer some examples of resources you might suggest finding a licensed appraiser include:
- www.appraisalinstitute.org
- www.appraisers.org
- State/provincial licensing boards, e.g., Independent Appraisers
- Other alternatives: reconstruction cost estimates by licensed general contractors, architects, or engineers.
Document your recommendation that a licensed professional be consulted, as well as the customer’s response or refusal to do so.
Agents should direct lenders to obtain replacement values from the client instead.
If agents provide estimations to clients, they should include a clear disclaimer emphasizing that the estimates provided by the policyholder and actual costs may exceed the provided limits. By providing clear disclaimers when offering replacement cost estimates. These disclaimers are not just a formality, but a crucial tool in managing client expectations and clarifying the agency’s role.
If you have additional E&O coverage questions, or how your E&O Carrier recommends these requests are addressed. Contact Ashley Riley at ashleyr@ohioinsuranceagents.com or call direct: (614)-552-3052 or toll-free: 800-555-2742.
More Information: Seek your trusted advisors Attorney, Banker, and CPA that your legal and financial interests are adequately protected. The information provided in this publication is not intended to be a substitute for legal advice. You should consult your legal counsel and make certain that you are in compliance with state law. These laws and rules are subject to change.
Legal Disclaimer: This material is intended to provide you with general background and insight. The material does not constitute, and should not be regarded as, legal advice regarding any particular facts, circumstances, or issues. This material is not intended to serve as a substitute for legal counsel, and we advise you to contact legal counsel for specific analysis, drafting and advice.
Cited Resources
Swiss Re
Utica National
About the Author:
Jeannine Giesler, CISR, CPIA, and past President of the OIA Board of Directors, Foundation for the Advancement of Insurance Professionals, currently serves as Resource Center Advisor for the OIA. The purpose of the Resource Center is to contribute to building a comprehensive library of resource materials for our members. We pride ourselves on being the one-stop shop for all OIA members and work to solve every problem or situation you may come across.
