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Coverage Concerns Home values and building costs rise Sharp increase requires adjustment in insurance limits By Roy C. McCormick
The National Association of Realtors recently reported that the median sales price of existing single-family homes in the United States increased 15% between April 2004 and April 2005. The percentage increase is substantially higher in areas where demand is great and land is scarce. Examples include (at the end of the first quarter of 2005): San Bernadino, California (32.6%); Las Vegas (29.4%); Miami, Florida (28.4%); Sarasota, Florida (36%). Building costs have climbed sharply in the first five years of the new millennium, fueled by increases in the prices of virtually all building materials, notably lumber, brick, concrete block, steel and plumbing. The challenge for agents, brokers and companies is clear. Dwelling coverage limits must be reviewed and adjusted upward at renewal time. Contact with the insured is an essential part of the process because a substantial premium increase warrants explanation so the insured understands what must be done to assure rebuilding, however severe the damage might be. Dwelling Coverage A under homeowners policies written for single-family dwellings provides for replacement cost if the limit of insurance has been fixed at, generally, 80% or more of the replacement cost of the damaged building. Otherwise, adjustment will be made on an actual cash value basis. In light of the escalating cost of building materials and skyrocketing property values, special steps must be taken to make certain that out-of-pocket rebuilding expenses paid by insureds are limited to applicable deductibles. A relatively new consideration is the increased cost of rebuilding with materials and procedures required by a governing building code. These code regulations have proliferated in numerous communities and counties and, in some cases, are applicable statewide. As the provisions vary from area to area, it is essential to be aware of the requirements for the location in which covered property is situated. The special homeowners forms used by major insurers—including ISO and AAIS forms—now include basic provisions to comply with ordinance and law requirements up to a specified limit. When such laws first appeared, policy exclusions, reinforced by court decisions, resulted in denial of coverage for such expense. The problem was first eased by availability of optional endorsements to cover the additional expense for additional premium. When the problem mushroomed, “built-in” protection for the exposure was designed, with additional limits available by endorsement when building requirements warrant them. If the amount of dwelling coverage under a homeowners policy was fixed at the approximate replacement cost of the dwelling when the property was acquired and occupied by the insured, the attachment of an optional inflation guard (or automatic increase in limits) endorsement became a big factor in keeping abreast of construction costs. However, because of the unprecedented current rise in values and costs, it would be a good idea to look at the Coverage A limits and the provisions of the applicable inflation guard endorsement and to make adjustments in limits if necessary. Last year’s natural disasters, including the Florida hurricanes, demonstrated the value of loss of use insurance, Coverage D. The limit of insurance under Coverage D is an additional amount that is fixed at 20% of Dwelling Coverage A in most broad and special forms, generally 20% of Personal Property Coverage C in renters forms, and 40% of Coverage C under condominium unit owners forms. The key benefit under Coverage D is for additional living expense, defined as “any necessary increase in living expenses incurred by you so that your household can maintain its normal standard of living.” Families requiring temporary housing while their dwellings are being repaired or replaced following fire or windstorm damage will attest to its value. Food, clothing and transportation are other major expenses that are within the scope of coverage. Just as Coverage A limits warrant increase, so do those for Coverage D. Photos of a covered dwelling, both inside and out, are especially useful in the event of loss when limits have been substantially increased prior to the occurrence. Additions and structural improvements are significant subjects on which to focus. Personal property coverage (Coverage C) under a homeowners special form (3) is an additional amount of insurance, on an actual cash value basis, that is generally fixed at 50% of the dwelling coverage limit. The cost of home furnishings and other personal property has increased during the same period in which dwelling construction expenses have risen. When the Coverage A limit has been fixed accordingly on renewal, a revised Coverage C limit based on it will be proper in most situations. However, it may be adjusted to suit individual needs. Following last year’s natural disasters, insurance companies provided indemnification to a substantial number of claims on the basis of full replacement cost without depreciation taken on damaged, destroyed and lost items of personal property. If these provisions are not already in force, it would be wise to discuss optional replacement cost endorsements with insureds who own new or well-maintained personal property. Too many insureds who did not have this protection were critical of their insurance providers when severe losses were adjusted. Scheduling items of exceptional value rounds out sound insurance programs for the many people who possess such personal property. Overlooking the option can result in unhappy insureds in the event of loss. Most people will not be familiar with the pertinent coverage limitations unless they receive guidance and explanation from their insurance provider. Check the “special limits” clearly enumerated in homeowners forms for specific classes of valuable personal property. They apply to the total of like objects involved in a loss—not separately to each object—and coverage is limited to the named perils applicable to unscheduled personal property. Scheduling provides coverage on specified valuable items for their full value, established by bills of sale and appraisals, and from any cause except for a few reasonable exclusions. Policyholders should be encouraged to take photos of personal property both inside and outside of a dwelling. These photos are invaluable, but loss experience has proved that written, room-by-room inventories of personal property are the best guarantee of sound adjustment. The adjustment process is easier when the insured has been given an inventory booklet and has completed it in advance. An insured may enlist the services of an experienced local building contractor to substantiate the replacement cost of a dwelling structure. Professional appraisers offer their services to people who are concerned about proper insurance limits for costly personal property. * The author |
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