Insurance Agent Forum

[darthmaul]

Hi,

In 2003, my wife and I purchased a home in Kentuckyfor $200k. It is an historic home, built in 1883, and we have been renovating it ever since. Our home insurance policy is for a value of $600k, since this was an estimate of what the home would be worth after renovation.

Our best estimate, based on a recent bank appraisal, is that the home now has a market value of $650k, so we are probably a bit under-insured.

Our insurance agent has recently had our house appraised for $2.1 million. This appraisal is based on replacement cost. And he is now telling us that we need to pay extra $9k annually for insurance. He will not offer us a policy based on fair market value - only replacement cost.

In talking to our neighbors, who have similar homes, nobody is paying this kind of premium - not even close!!! I can understand why an appraisal came out at $2.1 million, because you can't really replace an old home like ours inexpensively - all of the woodwork, fireplaces, brick, etc. However, it seems like fair market value is the way to go for this type of home.

Can our insurance agent really do this? Can he just increase the cost without our signoff?

Do we have any option outside of finding a different insurer? And, do you know if there is an insurance company out there that will insure based on fair market value rather than replacement cost for an old home like this? I've called a few places, and they seem to prefer the replacement cost approach.

Thanks for any insight you can provide.

[darthmaul]

One other question - can I dispute the appraisal value of $2.1 million? Would an insurance company possibly reconsider that value?

The most expensive home in our neighborhood, built within the last two years (new construction), sold for $1.4 million. And that home is somewhat larger than ours, and has a better location.

In looking at the appraisal our agent sent, it appears that the methodology is flawed. They just estimated the replacement cost at $385 per square foot. This seems extremely flawed - isn't $100-$200 about average? The level of finish in our house is probably average to slightly above average, so I don't understand why they are using such a high cost factor.

I've also talked to builders and read that just straightlining the estimate based on cost per square foot is a very inaccurate methodology. Every project is different. And when a home is over 3,000 square foot like our is, I would think that each additional square foot is less expensive, not all priced exactly the same at $385 as they have estimated.

Again, thanks for any insight you can provide.

[BKrocko]

It has been a few years since I wrote P&C homeowners coverage. As I remember, we always insured it with replacement cost. I do not know which company you use but the internal software used varies between companies. Some are more detailed than others - you should be able to review the detailed print out that your current agent submitted to get his quote. It has nothing to do with resale value, only what the rebuild/replacement cost would be. Market value includes the value of your "lot". Remember, you do not insure the land /"lot" - if the house was totally destroyed, you would not need to repurchase the land again. Don't get that confused with liability insurance on your land if someone were to injure themselves while on your property. Are you getting all of the available discounts included for which you are entitled? Eg: security/fire systems, auto/home/life products with the same company, etc.

Do yourself a favor, call another local agent or two and have them give you a quote. It will cost you nothing. It is not a big hassle to do this, the agent does the work - not you. Also, ask your neighbors who they use. You might be surprised at how different the quotes are - just make sure it is quoted correctly eg: sq ft, age of home, alarm systems, fire systems, # of bathrooms, fire places, type of house style, flooring, style and make of counter tops, household furnishings, foundation type, brick or wood structure, fire district, etc.

You have a right to review any of the information used to generate the quote to ensure accuracy. You should not even have to request it, it should be offered by your agent for your review. That's the way we always did it.

Your current agent might even get a little nervous knowing that you are shopping around - he may need to revisit his initial quote. That's a good thing. Is his quote including extra riders for guns, musical instruments, jewelry etc? These items are usually not included in basic homeowners insurance - they are extra. If your home is registered as a historic landmark or something similar, that needs to be taken into account. Did Davy Crockett sleep there? Would it have to be rebuilt with era or period like replacements? Older homes usually cost more to insure due to the increased risk that something will go wrong - how old is the wiring, plumbing, is there exposure to lead content etc.

Remember, just because someone else comes in with a lower quote does not mean it is the best. Review the outline of coverage and ask questions. However, if everyone else is significantly less and offers basically the same level of coverage - something could be fishy with your current insurer. It could be that they have had a number of claims in your area and do not want to market there. Increasing the premium is one way to get rid of the unwanted business.

The other thing you need to be aware of is the deductible amount. The same principle applies to homeowners ins. as to auto and health. The lower the deductible, the higher the price. I never recommend a homeowner use anything less than a $1000 ded. Unlike health ins, a P&C company can cancel you if you file a claim. File too many home ins claims and I can assure you, you will be dropped like a hot coal. Go for as high a deductible as you fill you can withstand. It is not to be used for a broken window, use it for major damage only.

If you have had a history of filing claims, you may not even be able to get new coverage. They all check a background report on you and the house.

Hope this helps.

[darthmaul]

Thanks very much for your insights! This is very helpful. I will check our policy to look for the "extras" that you mention.

Our house is in an historic district, and this is one of the reasons they gave for a high replacement cost. Our historic district is generally pretty flexible though - we can do anything we want on the inside of the house, and really only need to follow specific guidelines regarding what's visible on the front of the house. The appraisal report does not give any estimate of how they have factored this into their estimated cost.

Our neighbors purchase their insurance from various companies. Those with the same insurance company as ours have much lower replacement cost estimates. We appear to be the highest. The neighbors are working with different agents than we are, and we think this may be the difference that is impacting us. Our agent initiated this review, not us.

The house has been renovated, and is pretty much "new" on the inside - new plumbing, electric, windows, monitored fire/security system, new roof, etc.

The deductible they are offering is $2,500. We would probably be open to going higher, so we'll check into that.

We did receive the appraisal from our agent. It is only 3 pages and essentially takes square footage calculations and multiplies them by what seem like exorbitant cost per square foot estimates. There is almost no detail - just the cost per square foot and a description of our home. No breakdown at all of how they arrived at $385 per square foot, which seems very high to us.

Also, one other "questionable" item for us is that the $2.1 million value was calculated by an "appraiser" who is employed by the insurance company itself (he left his business card). It is my understanding that this type of review should actually be performed by an independent 3rd party "inspector" (not an appraiser). It seems to me that there might be a conflict of interest here. The report claims to be sourced from "JMI Reports", which is a separate company, yet the appraiser who came to out to our house left a business card that says he works for Cincinnati Insurance Company. His voice mail message also indicates that he works for Cincinnati Insurance, not JMI.

Finally, we have had only one $5,000 homeowner's claim with this company in nine years. And that claim was five years ago for a different house.

Next steps we are considering:
1) Get quotes from other insurance companies - we are definitely going to do this!

2) Contact the Kentucky Insurance Commisioner and learn more about the complaint process. We are confused by the massive jump in the premiums, as well as the ethics of an appraisal assembled by the insurer itself.

3) Let our current agent subtly know that we question the appraisal and are looking into "options".

4) Asking our General Contractor (he has been doing our home renovation) for a written estimate of ballpark cost to build the entire house from the ground up.

Thoughts on these next steps?

Thanks a ton!

[ROGCHAP57]

I've been with Allstate for 2 months now working on Homeowners and it's my understanding that you should have the option to have what we call a Select Value, that is you the Homeowner can select the amount of coverage you want, as long as you satisfy what your mortgage company requires. Now remember I'm no expert by any stretch of the imagination but I am pretty sure if you talk to your agent you will have a similar option. Hope this helps.

[darthmaul]

Thanks - Select Value sounds like it is exactly what we need. I did a little surfing and it seems like it would be a good fit.

The problem is that we tried to get a quote from Allstate when we originally purchased the home, and they told us that they wouldn't insure a house over 100 years old in Kentucky. In Ohio, they could do it, but not in Kentucky.

We'll check back with them to see if this policy has changed since we purchased the house four years ago.

Our current agent indicates that he can only do replacement cost.

[djs]

Originally Posted by darthmaul

Thanks - Select Value sounds like it is exactly what we need. I did a little surfing and it seems like it would be a good fit.

The problem is that we tried to get a quote from Allstate when we originally purchased the home, and they told us that they wouldn't insure a house over 100 years old in Kentucky. In Ohio, they could do it, but not in Kentucky.

We'll check back with them to see if this policy has changed since we purchased the house four years ago.

Our current agent indicates that he can only do replacement cost.

Note: While I grew up in Kentucky, I cannot speak authoritively for how homeowners insurance works there. My license is in California....

If you undervalue the home, usually you will be subject to co-insurance, as well as your deductible. This prevents insurance companies from being on the hook for claims in the 10's of thousands of dollars, without collecting the correct premium.

That said, you can probably do a 'functional value' policy. This is where they would build a similar house in size, but with current construction techniques and materials. They would not replace 'ornate' type things, since they have no functional use, and this is where the money is. Functional value is used more often in commercial buildings than homes.

If it would truly cost $2M to rebuild your home, and you want it rebuilt if something happens, then you'll have to pay the premium for this. You can probably find a better premium, but many companies won't touch a home of this reconstruction cost. A lot will, but few agents will be able to bind the coverage without going to the home office, and having some inspections done.

Just to clarify, you insure homes for reconstruction costs, basically what it would cost to rebuild a similar home in the same place. Appraised value, purchase price, sentimental value, fair market value, etc have nothing at all to do with reconstruction cost. At the inspector / appraiser went through, he started adding up all the little handcrafted things, and voila, way out of range. Insurance companies can use their own inspectors for this purpose, there is nothing illegal, immoral, or unethical about it. Most don't, since they can get burned by doing it themselves. Even if a 3rd party inspector is brought in, they work for the insurance company, not the homeowner. There was something seen during the inspection that was viewed as a very high cost item. Find that gold bar and your set....

$385 a square foot is a bit steep, for high end homes in California, I'm usually between $250 and $275. Average homes about $175. I have been over $400 a square foot before though, so it does happen. Homes over 100 years old though use an entirely different scale that I couldn't begin to tell you how to calculate.

Dan

[djs]

Originally Posted by darthmaul

Hi,
Can our insurance agent really do this? Can he just increase the cost without our signoff?

I meant to respond directly to this statement. In California (and I assume it's similar in all states), a carrier has a small window at the beginning of a new policy to do investigation where they can change rates, or decline the policy.

After that (60 days in California), they can only make changes to premium when the policy renews, or you call and make changes to the policy. My guess is your policy is up for renewal, and that is where the new premium comes in.

That said, my real guess on this is the carrier for the policy has reached their risk tolerance on this home, and is probably getting out of homes this old. Rather than just non-renewing policies, they are re-rating them as a class, so they effectively get non-renewed. I'm very much guessing here, but this is an area that carriers with reserve issues would probably pull out of without it being a big impact on them (homes over 80 years old). They are also probably one of the larger loss categories for them.

Your agent may not know this has transpired. Give him a call, he'll fix it if he can. If not, move on. I have hundreds of transactions that go through my policies every month (maybe thousands) with minor changes there and there. I can't tell you what most of them are, and this wouldn't get flagged much differently in my system than someone who did a renovation and I changed the policy myself to account for it. Unless I go looking for it, I can miss the change in my daily change diary entirely, especially when I know a policy is up for renewal, since I would expect it to be the renewal transaction being automatically processed.

I probably need to find a flag that warns me of premium changes in excess of 30%.......

Dan

[GBA Insurance]

I've been in the insurance industry for about 10 years now, and run into this problem on a daily basis. Being that this home is historic, it was built with materiels that would today be very hard to find. There are really 2 types of people 1; the person who buys on older home and is very sentimentally attached to it and 2; the person who buys an older home for it's price, location, property etc...If you are the second of the 2, you can always get the premium down by going with a standard company like Travelers or Hartford, who will allow you to choose from 2 types of replacement valuations: using original materiels, or using today's materiels. I'm assuming the company you're with now (based off of what you've told me), should they have to replace your home, would come in and replace the plaster with plaster and would replace any wood you may have within the home with that same type of wood, which today, may be VERY costly, and even somewhat unpractical from an engineering standpoint. Companies that will only replace the structure's materiels with the same exact original materiels are really meant for that first type of person as mentioned before, as their homes (in the event of a loss) will be rebuilt to imitate that same old "look and feel", if you really don't care about that though you can always go with a standard carrier that will again, allow you to choose to valuate the home by using the costs of "today's" materiels. Also, in order to avoid any headaches - before you finally decide on a new carrier and get suprised when that new carrier does an appraisal and comes back with another high figure, ask the companies to do a pre-appraisal - most of the time they will, especially if the home is older. If you are sentimental about your home though, I would ONLY be looking at: Chubb, AIG, or Fireman's Fund (as they most importantly offer non-cap replacement, meaning they'll pay WHATEVER it cost to rebuild). You better keep your fingers crossed until the appraisals come back though - they're completely unpredictable.

BTW: Homes in my area are being appraised now for almost $500 per sq. ft. Crazy!

[GBA Insurance]

As an agent (located in an area with very high valued homes) I run into these cases on an almost daily basis. When it comes to older homes, there are 2 types of people, people who are extremely particular and VERY concerned with the look and the feel of the house, and people who just see it as any other house. The reason I bring this up is because insurance companies have 2 ways of valuating a home’s replacement cost, they can either calculate the structure’s replacement cost based on the cost of using the same exact materials to rebuild OR using modern day materials to rebuild. If the company you are with now valuated your house based on the cost of using the same exact materials (replacing plaster with plaster and the aged wood with equally aged wood), the cost is obviously going to be VERY expensive. This type of replacement is very costly and in my opinion, not always the most logical from an engineering standpoint, but you will have a house that looked just like your old house (or at least close to it!). If you’re really not that concerned with the actual “look and feel” of your home to that extent and would opt to use modern day materials anyway, settling for drywall instead of the plaster, etc.. you should be trying to find a carrier like Travelers, Encompass or Hartford that will allow you to choose your method of valuation. The standard replacement cost approach (as opposed to the “pre-1930” or historic home approach) will yield a significantly lower replacement value, therefore reducing your premium, but then again you’re going to have a completely different house after any assumed loss. If you are very particular however...(continued)

[GBA Insurance]

...about the quality of the replacement, you should really only be looking at 3 companies: Chubb, Fireman’s Fund, or AIG (cross your fingers after the policy is issued though, their appraisals are completely unpredictable). The main advantage (among many) with these carriers, is that they offer non-cap replacement, meaning that if they agree to insure your home for $1 million and you have a total loss and you’re later told that it will cost $5 million to rebuild, they’ll pay it! And fast! We have a bunch of clients with Chubb out in CA, so I know for sure that they write out there, along with Travelers and Encompass. The other things that you have to take into account is that each company has their own way of calculating the replacement costs, so where one company may come in at $1 million (using modern day materials), another company may come in at $800,000 (using modern day materials), so it does pay a bit to shop around. Also included in the replacement cost are such things as: the cost of the debris removal (after a loss), economies of scale, the cost to hire a contractor quickly (which is usually surcharged) - understanding that you'll want your house rebuilt ASAP. So there is a lot that goes into it. You can also try writing a letter directly to the company indicating your disagreement with the appraisal, sometimes they will work with you – and letters are defintetly more effective than trying to have your agent get the value down, as companies really try to keep their customers happy. I just had a client who reduced his appraisal by $470,000 by simply writing a letter. Lastly, in order to avoid any headaches, should you choose to change carriers, either issue the policy a month or so in advance (which will give the company sufficient time to complete the appraisal) or order a pre-appraisal before issuing so that you’re not shocked with a totally different replacement value than originally quoted – I can’t tell you how many times it happens (almost always with the older homes).

In any case, if you have any more questions or need any advice shoot away, I’ll check up on the thread. And make sure you review the appraisal, many times there will be errors overlooked within their calculations (such as modern day additions that were calculated as part of the original home).

FYI: I don't know anything about your house/location, so I really can't say whether or not the replacement seems too high, but I can tell you that with the premier companies such as Chubb (who will ONLY replace with the same materials), homes in our area are almost at $500 per sq. ft. now.

[darthmaul]

Thanks, djs and GBA, for your replies - very informative!

We are awaiting a quote from Allstate. It turns out that they can insure our home. While it is in an historic district, the house itself is not specifically listed on the historic register. So, they can provide us a quote.

Allstate has pre-appraised the replacement cost at about $950k, very different from our current insurer. Not exactly sure why. It could be that they would use new materials rather than the exact same (i.e., plaster replaced with plaster). I'll need to ask about this.

Regardless though, I think this level of coverage would be fine with us. While we like the historic character of our home, we would prefer not to pay the extra premium for full, authentic, replacement. Instead, we would like enough insurance to allow us to purchase something similar.

I'll let you know where we net out.

Thanks!

[GBA Insurance]

Just a few tips: make sure your policy has: "All risk" on the contents (which would be an HO-5 as opposed to HO-3), off premesis theft, replacement cost on the contents, and water backup (if you have a drainage pipe in your basement). Also make sure that you increase the "replacement cap" on your home to as high as you can (preferably up to 50%) and make sure that the policy doesn't have any hurricane deductible (as Allstate is notorious for that). Also be sure to schedule any valuable aritcles that you may have (such as jewelry, fine arts, wine collection, etc..) as your policy only covers so much while unscheduled (usually about $5,000 worth). Don't just assume that the policies are the same because all of the coverage limits match - that's just the suface.

Should you have any questions reg. any of the above coverages, feel free to post any questions or ask your broker exactly what they mean - you can never ask too many questions, agents would usually rather have you ask 100 questions and have you know your coverage than selll a policy to someone who deosn't care about what they have, at least that's just me!

I'm glad I could help - Good job with the pre-appraisal!

Here's one last tip; NEVER go below a 1000 deductible, and for a house like yours it may even pay to take a 2500 deductible depending on the savings. It also helps to make sure that you don't wind up putting in 2 or 3 small claims and then get cancelled.

- Evan

[djs]

Is Allstate writing homeowners policies in Kentucky? They stopped in California, but I think they are letting the agents write outside. If this is the case in Kentucky, find out who they are actually going to place it with.

Don't get me wrong, Allstate is a good company, but got hit heavy with Katrina losses, and need to restore their reserves. I would just think they would pull out of the edge case type risks (old homes) prior to stopping writing states. Of course, it could be a case of very limited exposure with this in Kentucky, vs very large exposure with lots of homes in California.

Dan

[GBA Insurance]

DJS

I'm in NY, and Allstate also stopped writing homes here as well. From my understanding Allstate just doesn't like the costal states. All of their policies (at least in NY) had contained a 2.5%-5% windstorm deductible "hidden" witin the policy. They were so saturated here and had gotten hit with so many windstorm type losses, that even with their 5% wind deductible, their loss ratio became huge - then they realized they had to pull out. I don't know if Katrina could have caused them that much of a problem considering that most of the losses were flood based and therefore not included within the policy coverage. I know that Katrina put a dent in the wallets of a lot of these carriers but I don't think that's why they have pulled out of the costal states.

Evan

[djs]

In California, it's not so much the wind, it's the forest fires. But this can be managed in other ways, such as not writing protection classes 9 & 10 (which a lot of companies don't).

Doesn't matter where you are, there are chances for catastrophic losses. You have tornadoes in Kansas, hail in Colorado, hurricanes in Florida, etc. This is why insurance companies buy insurance (i.e., re-insurance).

In New Orleans, a lot of the damage was flooding, but everywhere else, the damage was a lot of wind / storm related, which rumor has it, Allstate was heavily exposed to. The good news is, they did have sufficient reserves to pay for it.

I'm sure this, along with other losses made them reevaluate the market as a whole, leading them to stop writing in various markets. As far as I know, they haven't non-renewed any places in bulk, just won't allow any new policies. They have also had some rate increases.

Dan

[GBA Insurance]

I didn't even think of the forrest fires - that must kill these companies out there. Most of the time you're right, the companies don't like the PC 9 or 10's, however most of them will write in a 9 (I don't know about 10), if you have a central fire and burglar alarm.

I'm also pretty sure that, while you're correct about each area having their own natural problems such as the tornados and hurricanes, etc.. most companies do redline (in a legal way of course) and will NOT write in particular areas of a state, for example in FL - if you're east of I-95 (where you're closer to the cost and get hit harder by the hurricanes), they won't write you, west of I-95 - you're OK (bu then again you'll probably have a wind exclusion on the policy so you won't be covered anyway). They will, most of the time, add exclusions onto the policies if they know there is a particularly high risk for something that may cause big losses. Almost ALL policies have flood and earthquake excluded (even in NY where earthquakes aren't a big risk), in FL, again, wind is excluded due to the hurricanes - I'm pretty sure that in tornado valley, there's an exclusion, you see where I'm going.

At the end of the day insurance companies evaluate risk and come up with a (hopefully) successfull mathmatical equation for profit, which is NEVER a guarantee, so they try to control as many variables as they can and adjust from there, they never overlook anything!

[djs]

Forest fires probably aren't as bad as you think. Most are in National Forests where building isn't permitted anyway. The ones that do involve structures tend to get 30-40 homes at a time. Not good, but not overwhelming (from an insurance company perspective), since these homes are charges a premium already.

On the other hand, fire is virtually never excluded on a fire policy It's hard to get around the basic risk.

At least with earthquake and flood, there is coverage available. You have to decide if you want it though. Since the state mandated carriers provide earthquake coverage, carriers pulled out of California, the State decided to do it themselves, the carriers came back, the state sponsored earthquake insurance is pretty unaffordable.

Actually, I don't know about elsewhere, but in California, it's earth movement that is excluded. While most people think about this as earthquakes, it also includes land and mudslides, for those who decide to build on the side of hills.

Dan