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Insurance Community University www.InsuranceCommunityUniversity.com

Property Valuation

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Welcome to your Insurance Community University

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Polling

• Throughout the class we will be conducting periodic polls

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• The polls are intended to check participation but also to create discussion topics throughout the presentation

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address

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This class is being recorded

• Available in the University• Does NOT qualify for CE if not taken

during a scheduled class


Your Instructor Today

Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRISPresident and Co-Founder of

The Insurance Community Center


California Department of Insurance New Regulation on Valuation


The Regulation is Long Overdue

• The discussions began as far back as 2005 when SB 2 was added to Section 1749.85 to the California Insurance Code (CIC).

• The regulation is in response to the “chronic” problem of underinsurance most notably in the area of residential properties.

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• The State Insurance Commissioner, Steve Poizner, initially proposed these regulations as a result of major wildfires most notably in the San Diego area that destroyed 1600 homes and a reported 35,000 claims according to the L. A. Times.

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• A major issue following the loss was underinsurance and who should be held responsible. Many homeowners publically complained that they felt they had been mislead by their insurers.

• United Policyholders, an insurance consumer group, called on the commissioner to take action.

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• California courts have ruled that homeowners have the primary responsibility for ensuring that they have enough insurance on their property.

• Insurers are brought into the actions because they are supplying the valuation tools that they require be completed for acceptance

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• The agent certainly has been held responsible but errors, omissions, negligence are not that easy to prove

• The regulation is a heightened responsibility on the agent/broker

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An Agent is the Eyes and Ears of the Company they represent

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AND


Polling Question #1

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Polling Question #2

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Overview (2188.65 and 1749.85)• (b) On or after June 27, 2011, every California

resident fire and casualty broker-agent and personal lines broker-agent who has not already taken a homeowners' insurance valuation training course must satisfactorily complete one three-hour training course on homeowners' insurance valuation meeting the requirements of this section prior to estimating the replacement value of structures in connection with, or explaining the various levels of coverage under, a homeowners' insurance policy.

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Overview (2188.65 and 1749.85)

• For resident broker-agents, this requirement shall be part of, and not in addition to, the continuing education requirements of Insurance Code section 1749.3. The homeowners' insurance valuation training course needs to be taken only once in order to satisfy the requirements of this subdivision

• http://www20.insurance.ca.gov/epubacc/REG/151771.htm

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Overview (2188.65 and 1749.85)

• This class must only be taken once and does qualify for three hours of CE

• An individual who no longer has to take CE in California due to their age still MUST take this class if they are involved in residential insurance

• The regulation is for California resident fire and casualty broker-agent and personal lines broker-agents ONLY

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Overview (2188.65 and 1749.85)

• If individuals who primarily write commercial lines also offer advice and provide any information on estimations on residential insurance then they should attend this class, as well to avoid any future problems

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Section 2695.182. Documentation of Person Making Estimate

• This section is VERY important and discusses the new requirements for documenting estimations. The section should be read in its totality, communicated to the entire office staff and procedures should be put in place for compliance and monitoring of the systems. We will discuss some of the key requirements later in the course.

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Polling Question #3

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Do you have an area in your agency management system where you store the underwriting questions you asked about the home before you wrote the coverage?


Polling Question #4

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Course Objective

• Be able to differentiate between a homeowners policy and a dwelling property form

• Be able to estimate the value of an insured’s property by having basic knowledge of its value

• Know the valuation principles and methods• Know the value of the components of a

dwelling to access its replacements cost or value

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Course Objective

• Have the ability to recognize other factors influencing the replacement cost

• Have knowledge of endorsements used in relation to the insuring of replacement costs of homeowners’/dwelling policy; and,

• Understand the process used in determining the value of an insured’s property

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No Two Homes Are Exactly Alike

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No Two Homes Are Exactly Alike For Sure

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Property Valuation

• “Value is a matter of opinion”, according to a New Jersey court. “Not only in the eyes of the courts is value indeterminate, but appraisers differ in their opinions and contractors bidding on the same job vary widely in their cost estimates”.

» Practical Risk Management

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Property Valuation Practical Risk Management

• “Further, values for insurance purposes differ significantly from values for other purposes”.

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Differences between Homeowners and Dwelling Property Policies

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Insurance Policies

• A dwelling is considered a residential property of up to four units, whether occupied by the insured or not

• There are several forms of insurance for residential properties

• The type of policy that should be written on a residence depends on the underwriting considerations discussed in this course

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Insurance Policies

• A Homeowner’s policy is for a dwelling that is owner occupied

• In general the major considerations that determine the type of policy to be issued include:– Type of Residence– Ownership– Occupancy– Age, Condition and Protection– Values

• Insurance Companies all have different eligibility requirements for different insurance forms

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Insurance PoliciesDifference in property coverage forms

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DP Forms Available

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Reasons to Write the Dwelling Fire Program• Home does not qualify for a Homeowners

Policy• Residence is NOT owner-occupied• Residence is in a designated brush hazard area• Residence is under construction• Home is vacant• Differences in property coverages available on

the DP series necessitates different coverage levels and valuation triggers

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Reasons to Write the Dwelling Fire Program• Residence value is less then the minimum or

maximum allowable by the company• Residence is a “seasonal” or secondary• Residence is not up to the “physical”

standards • Residence may be owned in a name different

from the “home owners” such as a partnership, joint venture or corporation

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Reasons to Write the Dwelling Fire Program

• The insured may prefer having their home issued on a Dwelling Program because:– The insured might not want or need the full

range of homeowners coverages– The Homeowners Program might be more

expensive than the insured chooses to pay

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California FAIR Plan

• The California FAIR plan policy is written on a DP 1 basis

• The policy is written on an ACV basis and Replacement Cost is optional on the Dwelling

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CEA (www.earthquakeauthority.com) • Dwelling coverage - The coverage limit

is the insured value of your home stated on your companion homeowner policy.

• Additional Coverages Limited Building Code Upgrade In most California communities, repairing or rebuilding a home after an earthquake must be done according to current building codes.

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CEA (www.earthquakeauthority.com) • In addition to providing funds for repairing or

replacing your home, the CEA base policy includes an additional $10,000 in Building Code Upgrade coverage. Option to Increase Building Code Upgrade CoverageFor policies that renew or become effective on or after July 1, 2006, homeowners can choose to increase Building Code Upgrade coverage by an additional $10,000, for a total Building Code Upgrade coverage limit of $20,000.

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CEA (www.earthquakeauthority.com) • Your CEA policy excludes some items from

dwelling coverage. A partial list of items that are not covered includes:

• Detached garages and most other structures that are not part of the dwelling

• Land damage (other than $10,000 in coverage for land stabilization)

• Swimming pools and spas • Awnings and patio coverings

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CEA (www.earthquakeauthority.com) • Fences, landscaping, and irrigation systems • Antennas and satellite dishes • Patios and decks • Walkways and driveways not needed for

pedestrian or disabled access to your home • Certain decorative or artistic items such as

mirrors, chandeliers, stained glass, or mosaics

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California Earthquake Authority (CEA) Section 10081• That coverage may be provided in the policy of

residential property insurance itself, either by specific policy provision or endorsement, or in a separate policy or certificate of insurance which specifically provides coverage for loss or damage caused by the peril of earthquake alone or in combination with other perils.

• http://www.leginfo.ca.gov/cgi-bin/displaycode?section=ins&group=10001-11000&file=10081-10089.4

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Homeowners

• Homeowners Policies are the premier policy for the owner of a home who occupies it as their residence.

• It is a package policy of Property and Liability and includes a lot of enhanced coverages and numerous endorsements.

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Homeowners

• Every company has their own eligibility and their own form and endorsements

• ISO provides a guideline for homeowners coverages

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Homeowners Forms Available

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HO 04 81 05 96 Actual Cash ValueChanges the valuation on all building losses to ACV. Endorsement used for homeowners who do not want to carry enough insurance

to comply with valuation provision


What Types of Properties Are Insured On A Homeowner’s Policy

• A Single Family Dwelling• A Multiple Family Dwelling (1-4 units)• A Townhouse Unit

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Basic Concepts of Property Valuations

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Loss Settlement Provisions

• Loss Settlement Provisions are contained in each type of property policy

• Loss Settlement Provisions in terms of how it applies indicates how a loss will be settled and on what basis:– Valuation trigger– What will happen if there is underinsurance– What will happen if the insured does not

repair or replace

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What effect does underinsurance have on a settlement

• Insurance companies require that a home be insured to replacement cost in order for them to qualify for a homeowners policy

• Estimators are required as minimum indicators of coverage

• In the event of underinsurance the insured will NOT receive the total loss that they claim

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What effect does underinsurance have on a settlement

• There is no “coinsurance” requirement on a Homeowners Policy but there is an “Insurance to Value Clause”

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Insurance To Value Clause on a Homeowners Policy

Buildings covered under Coverage A or B at replacement cost without deduction for depreciation, subject to the following:

a. If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation, but not more than the least of the following amounts:

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Insurance To Value Clause on a Homeowners Policy

(1) The limit of liability under this policy that applies to the building;

(2) The replacement cost of that part of the building damaged with material of like kind and quality and for like use; or

(3) The necessary amount actually spent to repair or replace the damaged building.

If the building is rebuilt at a new premises, the cost described in (2) above is limited to the cost which would have been incurred if the building had been built at the original premises.

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Polling Question #5

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Loss Settlement Provisions

– Market Value—Fair Market Value– Jefferson Decision– ACV– Replacement Cost

• Under normal situations• Under catastrophic situations

– Reproduction Cost• Historical buildings

– Inflation Guard– Functional

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Market Value/Fair Market Value

• A term used in the Real Estate industry to represent the price a property can be sold at based on what the market will pay at any given time.

• The price at which the property is being sold normally includes the land value and area consideration.

• This is NOT appropriate to determine the amount of insurance to be carried.

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Bank Requirement Changed2009 California Civil Code Section 2947-2955.5:

Article 2. Mortgage of Real Propertyhttp://law.justia.com/codes/california/2009/civ/29

47-2955.5.html• 2955.5. (a) No lender shall require a

borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property.

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Actual Cash Value (ACV)

• There is NO specific definition of this word in the insurance policies

• It is broadly interpreted to mean the cost to repair or replace the property with material of like, kind and quality minus depreciation.

• The insured need not repair or replace the damaged property to be indemnified on the contract-- it is a cash settlement and a “holdback” in terms of allowing for the full Replacement Cost.

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Actual Cash Value (ACV)

– Physical deterioration– Functional obsolescence– Economic obsolescence due to causes

independent of the property– Effective age as compared with other

properties considering renovations and reconstruction

– Future life expectancy

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Replacement Cost less Depreciation of age, wear and tear

• Factors that enter into depreciation– Age– Usage– Wear and Tear– Obsolescence

• Depreciation guides are available through some insurance companies AND there are sites that have important information such as: www.claimspages.com

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Depreciation (Holdback)

• There is a requirement under the Replacement Cost provision of a Homeowners Policy to actually repair or replace or they will HOLDBACK the additional dollars available under the Loss Settlement Provision.

• The policy reads as follows:

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We will pay no more than the actual cash value of the damage until actual repair or replacement is complete. Once actual repair or replacement is complete, we will settle the loss as noted in 2.a. and b. above.

However, if the cost to repair or replace the damage is both:

(1) Less than 5% of the amount of insurance in this policy on the building; and

(2) Less than $2,500;

we will settle the loss as noted in 2.a. and b. above whether or not actual repair or replacement is complete.

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• You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to buildings on an actual cash value basis. You may then make claim for any additional liability according to the provisions of this Condition D. Loss Settlement, provided you notify us, within 180 days after the date of loss, of your intent to repair or replace the damaged building.

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Jefferson Decision vs. ACV

• Since 1970 California has been referred to as a “Fair Market Value” State or a Jefferson Decision State.

• The case is Cheeks v. California Fair Plan.61 Cal.APP.4th423 (1998)

• In the case, Cheeks’ home was severely damaged in the Northridge Earthquake of l994

» Claims Magazine July 2000

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Jefferson Decision vs. ACV• It was insured on a policy with the California

Fair Plan that promised: “Covered property losses are settled at Actual Cash Value at the time of loss, but not more than the amount required to repair or replace the damaged property.”

• Cheeks sued, contended that the ACV of his home, based on its market value, was more then the insurer’s estimate

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Jefferson Decision vs. ACV

• The basic test is what would a willing buyer pay for a property irrespective of land consideration

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Replacement Cost

• This is the cost to repair or replace the property with materials of "like, kind and quality" without depreciation.

• Replacement cost is based on what it would cost to replace the structure on the same premises and for the same purpose without the requirement to do so.

• Replacement cost would be different based on different types of structures; construction; square footage; upgrades

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Replacement Cost• Replacement Cost applies to different types of

structures including– Dwelling– Detached Garage– Detached buildings other than garages– Structures such as swimming pools, cabanas,

etc

• CIC Code 10102 has language precluding the use of Guaranteed Replacement Cost

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Replacement Cost CIC Section 2051 and 2051.5• 2051.5. (a) Under an open policy that

requires payment of the replacement cost for a loss, the measure of indemnity is the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less

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Replacement Cost CIC Section 2051 and 2051.5• If the policy requires the insured to repair,

rebuild, or replace the damaged property in order to collect the full replacement cost, the insurer shall pay the actual cash value of the damaged property, as defined in Section 2051, until the damaged property is repaired, rebuilt, or replaced.

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Replacement Cost CIC Section 2051 and 2051.5• Once the property is repaired, rebuilt, or

replaced, the insurer shall pay the difference between the actual cash value payment made and the full replacement cost reasonably paid to replace the damaged property, up to the limits stated in the policy.

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Replacement Cost CIC Section 2051 and 2051.5• (c) In the event of a total loss of the insured

structure, no policy issued or delivered in this state may contain a provision that limits or denies payment of the replacement cost in the event the insured decides to rebuild or replace the property at a location other than the insured premises. However, the measure of indemnity shall be based upon the replacement cost of the insured property and shall not be based upon the cost to repair, rebuild, or replace at a location other than the insured premises.

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Replacement Cost

• There is, however, the requirement to actually rebuild, repair, or replace in order to be indemnified on the contract.

• Is the insured required to build at the same site?

• Is the insured required to build the same home/building?

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Replacement Cost and Different Types of Structures

• Dwelling• Attached Garage• Detached Garage• Carport• Fence• Patios• Greenhouse

• Swimming Pools• Jacuzzis• Gazebos• Guest Houses• Barns• Fire pits• Docks• Tennis Courts

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Additional costs associated with single or custom home• Estimators only provide basic information

and “estimates” of value• Broker/Agents should always inspect a

home, take pictures and do an on site evaluation for any costs associated with customization

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Is that a house or a Garage?

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Size and Type of Attached Garage

• Garages vary in type, size, usage and construction (specialty finishes)

• Often times the garage is overlooked in the overall valuation and must be considered as a separate line item

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Replacement Cost and Different Types of Structures• Homeowners Estimators are only as good

as the questions we ask your insured• We must identify ALL structures that they

have to include in the value and insure properly

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Other Costs relating to evaluating Replacement Cost• Cost of demolition and debris

removal– The policy is silent on Demolition and

would be construed to be covered under “Replacement Cost”

– Debris Removal is included in a Homeowners Policy but the limit of insurance MUST include the costs associated with the coverage

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Debris Removal

• This expense is included in the limit of liability that applies to the damaged property. If the amount to be paid for the actual damage to the property plus the debris removal expense is more than the limit of liability for the damaged property, an additional 5% of that limit is available for such expense

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Debris Removal

And if there are any Pollutants?? And there probably are!

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Other Costs relating to evaluating Replacement Cost

We will also pay your reasonable expense, up to $1,000, for the removal from the "residence premises" of:

(1) Your trees felled by the peril of Windstorm or Hail or Weight of Ice, Snow or Sleet; or

(2) A neighbor's trees felled by a Peril Insured Against under Coverage C;

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Other Costs relating to evaluating Replacement Cost• Other costs that must be included when

considering the amount for Replacement Cost would be:– Architect’s Plans– Engineering Studies– Building Permits

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Replacement Cost and Additional Living (CIC 2051.5)• (2) In the event of a covered loss relating to a

state of emergency, as defined in Section 8558 of the Government Code, coverage for additional living expenses shall be for a period of 24 months, but shall be subject to other policy provisions, provided that any extension of time required by this paragraph beyond the period provided in the policy shall not act to increase the additional living expense policy limit in force at the time of the loss. This paragraph shall become operative on January 1, 2007.

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Functional Replacement Cost Loss Settlement - HO 05 30 10 00

• Allows for functionally equivalent building to replace the original structure.

• Buildings under Coverages A or B are eligible.– Must be insured at least 80% to functional

value.

• Must contract to rebuild within 180 days of loss.

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Polling Question #6

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Reproduction Cost

• This is the cost to reproduce with identical types of materials rather than a functional equivalent.

• It is used for special types of construction where reproducing the structure identically is necessary based on its value, function, or aesthetic quality.

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Reproduction Cost

• If you own an historic building, whether it is a stately home or an ancient cottage, a standard policy from a general insurance provider could fall well short of expectations if you need to make a claim. If your building is also listed, it is protected by law, limiting repair options and making some higher costs unavoidable: it is the responsibility of the owner to insure it properly.

www.buildingconservation.com

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Polling Question #7

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California Residential Property Insurance Disclosure Statement

California Insurance Code (CIC) 10102http://www.leginfo.ca.gov/cgi-bin/

displaycode?section=ins&group=10001-11000&file=10101-10107

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California Residential Property Insurance Disclosure Statement• This is a disclosure required by California

Law under section 10102 of the Insurance Code

• For policies issued on or after July 1, 1993, the agent or insurer shall obtain the applicant's signature acknowledging receipt of the disclosure form within 60 days of the date of the application

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California Residential Property Insurance Disclosure Statement• There is a checkmark required on the

Disclosure Form indicating the following valuation triggers– Actual Cash Value– Replacement Cost Value– Extended Replacement Cost– Guaranteed Replacement Cost

• With limited building code upgrade• With unlimited/full building code upgrade

– Building Code Upgrade

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Components of a Structure Necessary to Estimate Replacement

Cost

Including a discussion on how the various components contribute to Fire Hazard

Identification

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One of the Best Lessons in Construction

Laguna Fires October 1993http://www.finehomebuilding.com/how-to/

articles/fire-resistant-details.aspx

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Laguna Fires

• That was the scene in October 1993 after a fire storm destroyed nearly 400 homes in Laguna Beach, California. The fires started several miles inland and swept to the sea at a brisk 2 mph to 4 mph, consuming increasingly thick vegetation along the way.

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Laguna Fires

• Frequently, the flames boiled 50 ft. or 60 ft. into the air, and they reached temperatures of 2,000°F or greater

• The most obvious question homeowners, builders, architects and code officials asked as they combed the rubble for clues was how did a precious few structures survive such an inferno while houses on all sides vanished in the fire? What they learned was a number of lessons that likely will work their way into local building codes and should help to reduce the damage of future fires.

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Laguna Fires

• The home of To Bui and Doris Bender was called a "miracle house" by the Los Angeles Times because of its dramatic survival in a neighborhood almost totally devastated by the fire. Why did this trilevel structure and a few others like it survive while neighbors' homes on all sides, sometimes no more than 10 ft. or 15 ft. away, burned to the ground?

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Laguna Fires

• "It's in the details," Bui insists. He knows about such details. Originally from Vietnam, he lived and worked as a structural engineer in Germany for more than 10 years. There, the predominant building materials are concrete, stone, brick and steel. "In Germany, structures are designed to last hundreds of years," he said. "I built my house to last."

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Types of Basic Building Construction

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Types of Construction

• Tilt Up• Cinderblock• Wood Frame• Brick & Masonry• Metal Frame

• Superior Construction– Non Combustible– Masonry Non

Combustible– Fire Resistive

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Types of Foundations

• Determining the types of foundations is very important for purposes of loss settlement and determination of value

• If a foundation is cracked due to excessive heat, for example in a fire, then the loss is considered a constructive total loss and the foundation must be replaced

• Often times the foundation may not be up to code such as in the example of the Oakland Fires

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Types of Foundations

• Type of Foundation– Depending on when and where a house was

built, the foundation may be made of stone, brick, preservative-treated lumber, concrete block, or poured concrete. By far the most common material for foundations is concrete

– There are three types of conventional concrete foundations: poured concrete, concrete block, and post-and-pier. Size and acceptable types are regulated by building codes

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Foundations and the Homeowners

To determine the amount of insurance required to equal 80% of the full replacement cost of the building immediately before the loss, do not include the value of:

(1) Excavations, footings, foundations, piers, or any other structures or devices that support all or part of the building, which are below the undersurface of the lowest basement floor;

(2) Those supports described in (1) above which are below the surface of the ground inside the foundation walls, if there is no basement; and

(3) Underground flues, pipes, wiring and drains.

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Roofing Materials

• Roofing Materials are very important in terms of fire hazard

• Many older types of roofs are no longer acceptable, such as wood shake, due to their susceptibility to fire.

• Example is the Laguna Fires where the roofs caught on fire and created explosions that was a major cause in spreading the loss to other homes.

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Roofing Materials

• Roofing materials can be a significant cost factor in replacement of homes

– Shingles—Asphalt, Shingles Architectural– Wood Shake, Wood Victorian Scallop– Tile—Clay Concrete– Tar & Gravel– Slate– Tin– Copper– Foam

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That’s a roof?

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That’s a roof?

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Siding Materials

• Stucco• Stone Veneer• Cement Fiber• Wood Clapboard• Brick Veneer• Cedar Shingle Siding• Engineered Wood Siding

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Hazards

There are checklists that are useful to help identify hazards

and mitigate them such as: www.befiresmart.com/prot

ect

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Slope

• The Slope on which a home is built enters into the per square footage replacement cost.

• As relates slope, various schemes for rating fire hazard have been developed

• Five elements chosen by many agencies are: vegetation, canopy cover, slope, aspect, and elevation

• Slope and Other Fire Hazard Considerations http://grayback.com/applegate-valley/fireplan/how-freq.htm

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Slope and Other Fire Hazard Considerations• Vegetation directly influences rate of

spread,• Canopy cover and ladder fuels are

closely related when it comes to hazard rating. A greater percentage of ladder fuels means a greater likelihood of a surface fire moving into the crown canopy, increasing the difficulty of suppressing the fire.

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Slope and Other Fire Hazard Considerations• Gravity dictates that many if not most

things travel downhill faster than uphill. As the slope becomes steeper, fire increases in speed. On flat terrain, the spread of fire relies more on wind.

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Slope

• Slope is graded in the following broad categories– Flat to Slight– Moderate– Steep

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Age of the structure or the year it was built• The age of the structure is important for

valuation from a couple of aspects– Building could be substantially out of

code– Building may be able to be built as it

was prior to the loss– The building my be “historical” or have

unique building items that must be included in Replacement Cost

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San Diego Fires 2007 Oakland Fires

Laguna Beach Fires

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CAT Losses make a big difference


Oakland Fires 1991

The destructive Oakland fires were an eye-opener when it came to rebuilding costs in the Bay Area. With the steep slopes in the Oakland hills, the bill came in at $400 per square foot rather than the $100 national average. www.paloaltoonline.com

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Effects of Catastrophes on Replacement Cost• Under Normal Situations Repair and Replace• Following a CAT loss the costs of construction

can sky rocket– Cost of permits– Change in building codes– Supply and demand (Building Supplies)– Fuel Charges– Inability to replace at the same site—

especially a consider in flood prone areas– Construction Labor Sources

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Review of Significant Endorsements

• Guaranteed Replacement Cost• Extended Replacement Cost• Inflation Guard• Building Ordinance

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Polling Question #8

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Guaranteed Replacement Cost

• The limit of insurance is suspended on the described property.

• In the event of a total loss, the recovery is the actual amount of the loss.

• In the event of a partial loss, the policy pays replacement cost or ACV if the property is not replaced.

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Guaranteed Replacement Cost

• Many homeowner policies prior to 1991 provided this enhanced coverage.

• In the aftermath of a catastrophic fire in the Berkeley Hills above Oakland, most homeowner policies revised this provision.

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CIC Code as relates Guaranteed Replacement Cost 10102• Significant misuse of the “Guaranteed

Replacement Cost Endorsement” and Extended Replacement Costs have resulted in law suits following losses.

• Specifically the term Guaranteed was misused leading the insured to believe that the full cost of replacement was “guaranteed” without restriction. According the code makes specific reference to this.

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Guaranteed Replacement Cost Section 10102 of CIC• e) No policy of residential property insurance may be

initially issued on and after January 1, 1993, as guaranteed replacement cost coverage if it contains any maximum limitation of coverage based on any set dollar limits, percentage amounts, construction cost limits, indexing, or any other preset maximum limitation for covered damage to the insured dwelling. The limitations referred to in this section are solely applicable to dwelling structure coverages. Endorsements covering additional risks to the insurer's dwelling structure coverage may have internal limits as long as those endorsements are not called guaranteed replacement cost coverage.

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Polling Question #9

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Extended and Guaranteed

• Misuse of Extended Replacement Cost AND Guaranteed Replacement Cost does NOT remove the obligation to insure to value and it is inappropriate and harmful to an insured to underinsure their property and rely on either of these endorsements as remedies.

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Extended Replacement Cost

• Most homeowner policies today provide coverage for the dwelling at an increased percentage of the specified amount on the policy.

• This provision has in the past been mis-used in setting value

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Extended Replacement Cost

• Commonly at 125% of the specified amount.• Requires the home to be insured to 100% of

the insurance company’s replacement value.• Must report any remodeling or additions that

increase the reconstruction cost above $5,000 or 5%, whichever is less.

• What does it really mean anyway?????

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Catastrophe Coverages and Types of Replacement Cost• Following a Catastrophe loss there will be

increased costs of construction due to such issues as: construction labor, building supplies, fuel, transportation issues and permit restriction.

• All of these can contribute to demand surge and the cost of rebuilding

• Replacement Cost estimators do not take into account these increased costs

• This is the purpose of the Extended Replacement Cost Endorsement

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Inflation Guard• An Inflation Guard is usually a built in feature

on a Homeowners and Commercial Property Form.

• The Inflation Guard may appear as a percentage on the Declarations Page

• The intent of the Inflation Guard is to provide coverage during the policy period to increase by a percentage for inflation of building costs.

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Inflation Guard HO 04 46

• For an additional premium, the limits of liability for Coverages A, B, C and D will be increased annually by %*, applied pro rata during the policy period.

• *Entries may be left blank if shown elsewhere in this policy for this coverage.

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Building Ordinance


Polling Question #10

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Regulate Everything About “How” A Building Is To Be Constructed

• Plumbing• Electrical• Structural support• Grading• Sloping• Roofing • Parking Spaces• Set Backs

• Flooring• Insulation• Landscaping• Signs - placement,

size and type• Materials used vs.

Occupancy • ADA• Miscellaneous

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Sprinkler Code

• California State Fire Marshal Information Bulletin

• http://osfm.fire.c.gov • http://osfm.fire.ca.gov/pdf/

firemarshal/taskforcefinalrepord.pdf • Section R313 and R313.3

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Building Code Upgrades

• Building Code upgrades deal with the size and construction of the entire structures and separately for the square footage of the living space. Valuation must be done to determine the amount necessary under the Building Ordinance Endorsements

• This is not only important for older homes but is part of insurance company’s eligibility.

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Building Code Upgrades

• If a home is over a certain age then it must have required upgrades which would include such items as electrical, plumbing, and roofing. The company is specifically asking these questions to mitigate the fire exposure and exposure to other types of losses.

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Building Code Upgradeswww.bsc.ca.gov

Building codes regulate how a building has to be reconstructed following a loss.

• Types of construction and costs attached thereto can vary based on many factors:

• Size of the building and at what point it must be sprinklered.

• Number of stories and nonstandard interior wall heights is a factor.

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• There is a point with damage, when the building must be ripped down and replaced in its entirety rather than simply repairing damage.

• There are always additional costs associated with building a custom home.

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• Geographic location in terms of set backs, brush hazard and proximity to other hazards

• Construction costs differ tremendously based on where the home is being built. This differs state by state and city by city.

• Cost of demolition and debris removal are often written for a separate limit from the increased cost of construction.

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Homeowners Policy• Section I – Exclusions• We do not insure for loss caused directly or

indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.

• Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair, or demolition of a building or other structure, unless specifically provided under this policy.

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Building Ordinance Issues

• Tearing down undamaged dwelling• Removing Debris• Building the home as to updated building

codes

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Ordinance or Law• You may use up to 10% of the limit of

liability that applies to Coverage A for the increased costs you incur due to the enforcement of any ordinance or law which requires or regulates – This is new to the 2000 series.– This can be increased with the HO 04

77 Ordinance or Law Increased Amount of Coverage.

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CIC Section #10103

• (5) Whether the policy provides coverage for the increased costs of repairing or replacing damage to the insured dwelling caused by a covered loss because of building ordinances or laws regulating the repair. In the event that no coverage is provided for repairs that result from new building ordinances or laws, the insurer shall include in no less than 10-point typeface the following statement: "THIS POLICY DOES NOT INCLUDE BUILDING CODE UPGRADE COVERAGE."

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CIC Section #10103

• In the event that the policy does include code upgrade coverage, it shall either: (1) State this on the declaration page, and denote any applicable limits. (2) State this on a separate disclosure form attached to the declarations page, if the separate disclosure form meets the following standards:

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Methodology of Determining Values

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Proprietary Valuation Tools

• Valuation tools provide a mere indicator of minimum values. Agent/Brokers should pay particular attention to individual home components and values• Insurance Company Evaluations On Line• Marshall Swift• www.marshallswift.com • Data Quick• www.dataquick.com

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Proprietary Valuation Tools

• Zillow• Real Quest• Netroline• Google Maps

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Why Values Are So Important

• Accurate values avoid– Over insuring– Under insuring– Ultimately used to establish a fair premium

for the property at risk

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Responsibility• Whose responsibility is it to establish

property values for the personal lines client.– The responsibility is the property owner’s not

the insurance agent or insurance company– IF the insurance client asks to be “fully”

insured then a heightened responsibility exists.

– The insurance agent has guidelines such as estimators but these are only minimum limits that should be carried

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How Are Values Established??

• Purchase Price of the home– Insureds often want to insure for what

they purchased the property for

• Bank’s requirements– Banks often want the insurance to equal

the amount of the loan

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Methodology of Determining Value

• Prior Policies– New buyers may assume the coverage of

the prior homeowner• Property Owner

– Property owners typically only know what they paid for the property or the comps

– The property owner typically does not understand how the policy will pay in the event of a loss.

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• Real Estate Appraisals– Real estate appraisals are sometimes

done by insurance agents utilizing independent companies. These appraisals, while they cost money, are a very good indicator of value

• Insurance Company’s Valuation Software– Almost all insurance carriers provide

estimators through their portal

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• Contractor’s and Expert’s estimates or opinions– The same comment applies here as

with independent appraisals• Cost per square footage Estimates

– This is a beginning mark for determining value

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Polling Question #11

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Documentation of Person Making Estimate

• There are specific requirements in the DOI Regulations relating to the requirements of an individual who is making an estimate on Residential Properties.

• All of this documentation must be in a retrievable format

• The website should be consulted• The regulations provide as follows

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Documentation of Person Making Estimate (2695.182)

a) In the event an estimate of replacement cost is provided or communicated by a licensee to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, the licensee shall document and maintain in the applicant's or insured's file the following information:

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Documentation of Person Making Estimate (2695.182)

1. Status of person preparing estimate2. Name, job title, address, telephone

number, license number of person preparing estimate

3. Source of estimate4. Copy of any reports, inspection

reports, contractor’s estimates

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(b) In the event the estimate of replacement cost is provided by a licensee to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, the licensee shall maintain in the insured's file the records specified in subdivision

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Documentation of Person Making Estimate(g)(1) If a licensee communicates an estimate of replacement cost to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, the licensee must provide a copy of the estimate of replacement cost to the applicant or insured at the time the estimate is communicated.

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Section 2695.183. Standards for Estimates of Replacement Value• However, in the event the estimate of

replacement cost is communicated by a licensee to an applicant to whom the licensee determines an insurance policy shall not be issued, then the licensee is not required pursuant to the preceding sentence to provide a copy of the estimate of replacement cost.

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Section 2695.183. Standards for Estimates of Replacement Value• In the event the estimate of replacement cost is

communicated by telephone to an insured, the copy of the estimate shall be mailed to the insured no later than three business days after the time of the telephone conversation. In the event the estimate of replacement cost is communicated by telephone to an applicant, the copy of the estimate shall be mailed to the applicant no later than three business days after the applicant agrees to purchase the coverage.

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(c) Notwithstanding any other provision of this Section 2695.182, this section shall impose no duty upon a broker-agent to obtain from the insurer and maintain any information or document that in the absence of this section would not come into the possession of the broker-agent in the ordinary course of business.

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Section 2695.183 Standards to be used when a licensee estimates Replacement Cost• This section of the regulations is also found at:

http://www20.insurance.ca.gov/epubacc/REG/151771.htm

• The regulations deal with the requirements and standards of communication of what must be included in the estimation submitted to the insured

• Follows is the regulation language

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Section 2695.183 Standards to be used when a licensee estimates Replacement Cost

• No licensee shall communicate an estimate of replacement cost to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, unless the requirements and standards set forth in subdivisions (a) through (e) below are met:(a) The estimate of replacement cost shall include the expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety, including at least the following:

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• (1) Cost of labor, building materials and supplies; (2) Overhead and profit; (3) Cost of demolition and debris removal;(4) Cost of permits and architect's plans; and(5) Consideration of components and features of the insured structure, including at least the following:

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(b) The estimate of replacement cost shall be based on an estimate of the cost to rebuild or replace the structure taking into account the cost to reconstruct the single property being evaluated, as compared to the cost to build multiple, or tract, dwellings. (c) The estimate of replacement cost shall not be based upon the resale value of the land, or upon the amount or outstanding balance of any loan.(d) The estimate of replacement cost shall not include a deduction for physical depreciation.

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• (e) The licensee shall no less frequently than annually take reasonable steps to verify that the sources and methods used to generate the estimate of replacement cost are kept current to reflect changes in the costs of reconstruction and rebuilding, including changes in labor, building materials, and supplies, based upon the geographic location of the insured structure. The estimate of replacement cost shall be created using such reasonably current sources and methods.

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Summary of Retention

• Prospects, applicants and renewals– Name, position, license number , address,

telephone number– Source of estimate and additional reports– Copy to customer immediately

• If by phone – within three days• If prospect, but not customer – no need to

send copy

• Five years retention

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