“Real world” reality check can benefit newly licensed producers
While adding enhanced replacement cost coverage will help new agents and their clients sleep better at night, another potential issue may be lurking in the form of detached other structures.
By Marc McNulty, CIC, CRM
A part-time employee of our agency is in the process of completing his property and casualty insurance pre-licensing training prior to taking the state exam. He’s the son of one of the agency principals and has been with our agency for a year and a half, so he’s better versed in insurance than most 23-year-olds.
This made things interesting when I recently spoke with him about the topics covered in the personal lines insurance pre-licensing material.
For example, he said the study material barely touched on personal articles, and he didn’t recall seeing anything about enhanced replacement cost coverage on homeowners policies. Market value and actual cash value loss settlement options were apparently discussed, and he seemed to recall agreed value being mentioned in commercial lines—but not personal lines.
He admitted that it was somewhat difficult to keep everything straight because what our agency offers our clients is typically much broader than the basic ISO coverage that is reviewed in the study material.
This confirmed my thoughts on how much difference there is between insurance “in the real world” and what is shown in licensing study materials and practice exams.
Yes, newly licensed individuals can legally sell personal insurance as soon as they obtain their licenses and receive the appropriate carrier appointments, but are they armed with the knowledge needed to properly protect their clients?
Homeowners replacement cost coverage
Obviously, replacement cost coverage is explained to students when discussing the applicable dwelling fire and homeowners policy forms. Upon their entry into the “real world,” newly licensed agents will soon be shocked to see what replacement cost figures generate from carrier rating software (compared to market value amounts).
Most will quickly get over that and will feel comfortable offering replacement cost homeowners quotes to prospects whenever the Coverage A limit meets the generated replacement cost amount. However, this doesn’t mean the client has adequate protection.
As we discussed in “Combating Inflation in Personal Insurance Claims” in the July 2023 issue of Rough Notes, most carriers offer an enhanced replacement cost endorsement that offers a 25% or 50% cushion in case of a total loss. Typically, these endorsements require that the home be insured to 100% of its replacement value at policy inception and then allow for the carrier to adjust Coverage A each year to keep pace with inflation.
Adding this type of enhancement provides extra protection that is usually needed for total losses, as many seem to meet or exceed policy limits once building contractors put their finishing touches on rebuild estimates. New agents should strongly consider adding this to all homeowners policies whenever available.
It didn’t sound like this important practice was emphasized in the training material, so this is one reason why new agents should seek as much “real world” guidance as possible once they pass their licensing exam.
Coverage B considerations
While adding enhanced replacement cost coverage will help new agents and their clients sleep better at night, another potential issue may be lurking in the form of detached other structures (Coverage B). Don’t assume that enhanced replacement cost endorsements also extend coverage for other structures!
Many enhanced replacement cost endorsement forms specifically reference Coverage A only. Another giveaway is in the title. Endorsements titled “Extended Dwelling Coverage” and “Specified Additional Amount of Insurance for Coverage A–Dwelling” quickly tell you that enhanced coverage only applies to the dwelling.
Depending on the geographic location of a new agent’s clients, this might not be a big deal. But for others, this could be significant. Tornadoes that wipe out homes can do the same to other structures, as can large fires that destroy multiple properties at once.
New agents should read through their carriers’ enhanced replacement cost endorsements so that they fully understand what’s covered—along with what isn’t. In some cases, there might be a pleasant surprise.
For example, one carrier-specific form I found contains the following language (provided the appropriate policy provisions have been met):
(b) Increase the Coverage B limit of insurance up to 100% more than the applicable Coverage B limit of insurance indicated in the Declarations if the amount of “physical loss” to the other structures is more than the limit of insurance indicated in the Declarations.
This provides a welcome extra amount of insurance for unforeseen, life-altering events.
Similarly, another form that is typically reserved for high-net-worth clients contains the following verbiage in the additions and alterations section:
We also cover any other structure on the property that is owned by you or available for your exclusive use and which you are required to insure.
The payment basis for these items is extended replacement cost. This means that for a covered loss to these items, we will pay the reconstruction cost. If the reconstruction cost exceeds the amount of coverage for additions and alterations as shown in the Coverage Summary, we will pay up to 50% more than this amount of coverage, if necessary, for the reconstruction cost.
Again, these examples aren’t typical, so it’s always best to review policy limits and increase Coverage B if the insured feels it is necessary. Again, new agents can speak to industry veterans to help them out if needed.
Let’s circle back to our 23-year-old employee. He knew that personal articles could be covered on a replacement cost basis, but he didn’t understand the importance of covering such items on an agreed value basis. I would imagine that this is a very common mistake for new agents when personal inland marine coverage is so quickly glossed over in pre-licensing materials.
To highlight the importance of this, let’s examine the policy language from the HO 04 61 03 22 (Scheduled Personal Property Coverage) form, which states:
The value of the property insured is not agreed upon but will be ascertained at the time of loss or damage. We will not pay more than the least of the following amounts:
(a) The actual cash value of the property at the time of loss or damage;
(b) The amount for which the property could reasonably be expected to be repaired to its condition immediately prior to loss;
(c) The amount for which the article could reasonably be expected to be replaced with one substantially identical to the article lost or damage; or
(d) The amount of insurance.
The form proceeds to state that the actual case value condition does not apply if the replacement cost loss settlement is selected. However, this still allows for the carrier to replace an item with an identical one if they can find it for less than the limit of insurance.
Compare that language to the following wording in a carrier-specific personal articles endorsement:
Jewelry – If a scheduled article is totally destroyed or lost “we” will pay the Limit of Insurance, minus the Deductible if applicable, shown for each scheduled article. The Limit of Insurance is agreed to be the value of the article.
Of course, this language is preferred, as it eliminates any potential back-and-forth between the carrier and the insured, and it allows for a check to be issued for the applicable amount of insurance.
While scheduling personal articles on an agreed value basis is a great practice for new agents to implement, agents must also remind insureds to periodically obtain appraisals for their scheduled articles. Agreed value coverage doesn’t provide any sort of enhanced replacement cost coverage if the insured value is insufficient due to an outdated appraisal.
In short, newly licensed agents should take the material they have learned in their pre-licensing courses and plan to build upon it by learning best practices from their experienced counterparts and insurance company sales representatives. Seasoned veterans can often provide real-life examples of how coverage should be written by citing examples of their own successes … and failures.
Marc McNulty, CIC, CRM, is a principal at The Uhl Agency in Dayton, Ohio, and has been with the agency since 2001. He divides his time among sales, marketing, technology and operational duties. You can reach Marc at firstname.lastname@example.org.