Replacement Cost dilemma

[SeaDeezKnots]

I recently wrote a client who lives in a home which was purchased 5 years ago for $359K which I set the dwelling limit to $479K. The inspection took place a week ago and the inspector estimated the replacement cost to over $700K. Of course, the carrier is now saying the dwelling limit will have to be increased to reconcile the difference, hence increasing the premium substantially.

I understand that purchase price and replacement cost are two different things but for it to cost $250K more than the current limit I set? Also, homes in the same neighborhood with similar square footage are selling for $350-$400K, the appraisal district has it appraised at $379K, and the owner's prior carrier set the dwelling limit at $435K. Again, I know, market vs. replacement cost but this difference is really confounding.

If the home was underinsured, wouldn't the bank (the home is mortgaged) take issue with the dwelling limit? At this time, they are not and haven't taken issue to the limit. Has anyone encountered this before? For fear of driving away this business, I'm contesting this estimate with the inspection company. I'd try to write it through another carrier but my initial quotes weren't that competitive. Any suggestions on how to handle this would be greatly appreciated.

 

[Josh]

First, sale value and replacement cost are absolutely two different things. What houses in the neighborhood are selling for has nothing to do with the cost of building again, I'm a bit confused why you would find this confounding if you have your license. The house could have very well been underinsured before (especially if they got the policy years ago and it didn't have any automatic coverage increases). If you want to get a better idea of what a more objective third party would say of the cost call up a builder and ask him how much new construction goes for by the square foot. When I was doing p&c the average in our area was around $100/sqft, so a 2,000 sqft house was $200k+, 4,000 sqft was $400k+. The plus factors in the construction quality, if it's bare bones average house $100/sqft, if we're talking marble countertops, tile floors, custom cabinetry, up to $150/sqft or more. I'm sure those numbers have gone up and vary by area, but if you talk to a builder for 10 minutes they should be able to give you a good rule of thumb. Based off of what you're telling me, it sounds like the estimate is coming in correct, just the consumer doesn't understand the problem. Explain to them that they're only insured for half what they should be which means that if their house burns down they'd have to pay the difference between the new construction and what their policy covers and you might have a customer for life. They probably didn't realize how much liability they were open to. If they have a house worth anywhere near $380k, they should be happily paying the homeowners premiums on their new policy.

With respect to the bank, they don't care. As long as they have their interests covered, they're fine. If they have a $300k mortgage and the policy covers more than $300k, the bank is fine. On an aside, sometimes folks will have a cottage on hundreds of acres of land and the bank will want to see the policy cover the full value of the mortgage, but the problem with that is the value of the property is much more than the structure. To use numbers, someone might own $500k in property with a cottage on it that would cost at most $200k to rebuild, but the mortgage holder will want to see the mortgage amount covered in the policy. When I got calls like that from the banks I would politely (ok, maybe not always politely, but usually politely) explain to them that the insurance company isn't going to insure the value of the land, only the structure. In the $500k total value example, even if the house burnt to the ground the property would still be worth well over $350k in land alone, but the house itself could only get insured up to $200k.

Hopefully that helps. I would strongly suggest that you get some type of a mentor that can field questions like these for you. Not that this forum isn't a great place for this type of stuff, but you quite a bit of help and they'd be able to help you in a much more effective way.

Good luck!

 

[1manshow]

Not sure I see this clearly....you set the RC at $479K ? You used the Boeck or RSVB calculator/rebuild estimator? If not, you used the carrier's preferred rebuild estimator? Either way, unless you simply guessed why not just forward your copy of the estimator you used ?

I think it's common to get a discrepancy with the inspector and normally our underwriters will give us the nod...simply because we interviewed the client whereas the inspector often uses ssytem defaults and an "exterior only" view.

 

[SeaDeezKnots]

Got the issue worked out with the Regional Manager of the inspection company for the Texas Region. It appears the inspector used a multiplier appropriate for the most "exclusive" neighborhoods of Houston's suburbs. While it certainly is a nice neighborhood (of which I'm a resident), it clearly isn't on par with the neighborhood he was describing. In the end, the valuation changed by $10K.

MPS, thanks for the tips. Fortunately, my father is the CEO of a custom home builder so my determination of replacement cost was much more congruent with the carrier's estimation of what the RC actually was compared to that of the inspector. As indicated, the valuation made no sense and the gentleman who inspected the property likely made an honest mistake.

 

[TiredAgent]

A whiles back, when I was bored and had nothing to do, I took five cost estimators, 2 regional carriers, 2 national, and directly from MSB. The carrier estimators for all intents and purposes were using the MSB program. I plugged in the stats from my own house. The difference between the high and low as about $150k, MSB being the second from the lowest. I made up a few risks and came up with about the same spread.

 

[avaloninsurance]

Tiredagent - I have done the same thing before!!! Most don't even consistently account for the same things. No wonder we come up with different amounts!! I think Fireman's Fund and Chubb have it right with sending out their own appraisers. This way they determine the correct amount and if it is off they are responsible not the agent or the client. Too bad all companies can't follow the same suit. I agree most homes (at least where I am) should have a minimum of $130 per square foot. Anything that is higher quality or has a pool/screen enclosure should start at a minimum of $150 per square foot.