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Nov 17
AIG Valuation Update

Due to the pandemic, per company guidelines, AIG is not allowed to visit homes to complete replacement value and loss prevention assessments at this time and is conducting virtual assessments.  As part of the virtual assessment, AIG researches whatever information may be found online for the residence, checking the local municipality Tax Assessor’s Office records, prior real state listings, etc. If the broker has any prior inspections from other insurance carriers, that would also be helpful.  A conversation is then set with the insured to speak either by phone, or have a Zoom meeting, to discuss the history of the home, when constructed, year(s) of renovation of systems and possible additions.  The features, finishes, built-ins, appliances, loss control measures in place, etc. will also be discussed. AIG will also request that the insured forward photos of the front and back of the home, major rooms within the home, and any other pertinent features or mechanicals they feel important for documentation.

AIG will put together a document with all of the information compiled for both the underwriter and for the broker and insured. If more info is needed, or if the insured would like an on-site assessment once it is safe to do so, AIG can suspend a request to do so at a later date.

Here are some topics that arise often for you to review with your clients. 

Frequently Asked Valuation Questions

Q: What is replacement cost and how does it differ from market value or assessed value?
A. Valuation Concepts:

Market Value: The amount that a seller may expect to obtain in the open market, based on current market conditions and recent comparable sales.
Assessed Value: The value placed on a home or condo by the city or county assessor for determination of property taxes. It is generally based on the percentage of the home’s overall market value.
Replacement Cost: The cost of reconstructing the unique features of the residence in today’s marketplace using materials and craftsmanship of similar quality. Replacement cost includes fees to employ an architect, a local contractor and builder profit and overhead.

Q: The figure seems too high, what is the basis for the valuation?
A: Our valuation approach encompasses a combination of information from the following sources:

Marshall & Swift. An independent resource that has provided cost data to the construction, insurance and real estate industries for over 70 years.

Xactware. A valuation company with an in-house estimating staff which has more than 250 years combined construction and estimating experience and is often utilized by our Claims department. Xactware produces reports that note specific trends in materials and labor in specific markets. We compare this data to our estimates and our construction caliber guides.

Contractor interviews. Our risk management team and vendor partners survey hundreds of builders annually to gauge rebuilding cost on a variety of home types throughout the entire country.

In-house valuation research. Our valuation department extracts construction information from published pricing indices and our risk management team notes specific materials as they encounter them during the inspection process. This information is compiled and used to estimate unique features in homes and update our caliber guides.

Construction caliber guides. Pricing is compiled from all sources above as well as knowledge from our risk management team. The construction caliber guide has been created for use by brokers, vendors, underwriters as well as risk managers as a guideline for establishing replacement value. You can request a copy of the current guide from your business development manager.

Q: The valuation’s replacement cost is more than the market value of the house. Why is that?
A: Homes can be located in areas with a declining market value, but the replacement value may actually increase. Here are some reasons why:

  • Rebuilding costs do not follow the ups and downs of the real estate market. Most people assume that if sales prices are down so too are rebuilding costs, but that is usually not the case.
  • Often times we are paying to replace items added after the home was built; such as alarm systems, stereo/intercom/phone systems, interior decorations, chandeliers, and wall coverings. We must consider all finishes and features into our final estimate.
  • Builders will often build a new home for a discounted price to establish themselves in a new development, but not extend “preferred pricing" when the home is being rebuilt by the insurance company. In addition, the builder that originally built the home may not be available and another more expensive contractor may need to be employed.
  • We often hear builders say “If I did it again, I could never build it for…" Custom homes typically take 12-18 months to build and construction costs, economic changes and supply and demand can impact the cost of a project while it's still being built.
  • Economies of scale. Rebuilding one home is significantly more expensive than what it costs to build ten or fifteen multi-million dollar homes in a development at one time.
  • Builder profit, overhead and the fees to employ an architect can add as much as 20% or more to the cost of building a home. These fees must also be factored into rebuilding costs.
  • Historic homes have additional factors to consider:
    • Matching up millwork, plaster, antique hardware, leaded glass windows, light fixtures, and other distinctive features is often very costly to repair and/or replace.
    • Balancing the requirement to rebuild to current building codes and maintain historical distinctiveness of the replaced items is often challenging and costly.
    • Rebuilding a historical house sometimes involves a variety of very skilled artisans to reproduce unique features, which are often in short supply.
    • If located in an established neighborhood with homes in close proximity, the cost to rebuild can dramatically rise. For instance, local ordinances may limit the type of equipment that can be used or require special permits.

Q: Most of the home is built of stone, solid masonry or concrete. It is unlikely the home will be a total loss because those materials won’t burn. Why is it necessary to insure-to-value?
A. Actually, masonry homes can and do burn. Masonry homes tend to retain intense heat, destroying the home’s interior and its structural integrity; and when the temperature of a fire reaches a certain level the mortar in the masonry actually turns to powder, creating structural problems for the home.

Even when the home isn’t completely damaged, most of the materials cannot be reused or require a great deal of engineering. We have often torn out and replaced foundations because rebuilding required additional excavation, it was required by a local building code or significant damage to an exterior wall demanded it.

Q: Why are the architect fees included, I already have plans?
A: Most reconstruction projects require architectural oversight even if new plans are not created. Architectural fees go beyond the production of drawings and in the case of a rebuild, demolition plans must be created, building codes updated and more often than not, the homeowners request some design changes.

Q: This home took over three years to build and I would never build it again. Why insure-to-value for this home? 
A: As part of the insurance contract AIG Private Client Group is obligated to reimburse the policyholder for the amount it would cost to rebuild the home they currently reside in, whether they choose to rebuild the home or not. In most states, homeowners who experience a total loss can choose a cash settlement option in lieu of rebuilding. In addition, the policyholder could choose to build at the same location a home that is smaller or less expensive than the one that was insured. Regardless of the option chosen, we require that the home is insured for the amount it would cost to rebuild in its current state.

Q: Most of the materials in my home are no longer available today. Even if they were available, I wouldn’t build the house back the same way. Why do I need to insure to replace these items?
A: Our claims experience is evidence that almost everything can be rebuilt; even if constructed of rare, unique or outdated materials. Experts and preservation resources can be consulted to reconstruct homes back to their original character and include unique architectural elements. Our replacement cost estimates must take into account what it would cost to rebuild the home in its present state. The homeowner has options to rebuild with newer or different materials should a loss occur.

Condo/Co-ops
Q: Why is the cost per square foot for the condo/co-op improvements almost equivalent to what the cost per square foot is to build a home?”
A: Most condo/co-ops are located in highly desirable, often difficult to access, locations, such as New York City, Chicago, Miami and Los Angeles. Primary considerations for condo/co-ops are access, staging, debris removal, special permits and the hours laborers can work in the building. Many restrictions are put in to place which limit a contractor’s ability to work efficiently.
For example, in order to renovate a luxury condo in a high rise apartment building in New York City, the builder had to remove the debris using two rubber trash cans in a standard service elevator. It took months to prepare the unit for reconstruction. The same approach was used to move building materials into the apartment to complete the renovation.

Q: I feel the combined limit of Addition & Alterations and Contents is excessive. How was the amount determined?
A: It is important to take into account the amount of coverage needed to replace the additions and alterations, the improvements the homeowner has made to the unit, as well as the contents. Total losses can and do occur. Examples include water damage from another apartment, smoke damage, faulty heating systems, air craft collision and fire. The majority of condo/co-op owners underestimate the value of their contents; while only a minority of homeowners do so. Wardrobe items are often overlooked including suits, dresses, coats, shoes, handbags, etc. For example, the sofa that was purchased in 1970 for $5,000 could cost $30,000 today. We pay replacement cost on contents.

Q: Doesn’t my condominium master policy cover the additions and alterations?
A: Condominium master policies can differ in the coverage provided. Most associations will insure the building and its common elements based on one of two approaches:
  1. Bare walls (drywall in and sub-floor up). The association will insure only the general building parts such as the exterior walls, roof, floor structure, elevators, etc. The association is not responsible for insuring anything inside the unit such as appliances, cabinets, carpeting, wallpaper, interior partitions, plumbing, wiring and bathroom fixtures. Therefore the condo owner is responsible for repairing and maintaining everything in the unit. This is the most common type of coverage.
  2. Single entity. The association will insure the building as well as certain fixtures inside the unit including carpeting, cabinets and appliances. The owner is only responsible for personal property inside the unit and for any additions or alterations made to the original structure.
As the most common coverage provided by master policies is “bare walls” our estimates are based on the assumption that the owner is responsible for insuring everything inside the unit. If the owner has evidence that the master policy will provide coverage based on the “single entity” approach, the estimate for Additions and Alterations can be adjusted accordingly. However, for “single entity” policies it is important that the loss settlement term be examined, as often these policies are not settled on a replacement cost basis.

Q. My condo is located in an old building. The assessed value of the apartment is much less than what you’re requiring me to insure it for. Why is that?
A. Older condos in urban areas often have replacement values that exceed market or assessed value. Here are some reasons why:
  • Matching up millwork, plaster, antique hardware, leaded glass windows, light fixtures, and other distinctive features is often very costly to repair and/or replace.
  • Balancing the requirement to rebuild to current building codes and maintain historical distinctiveness of the replaced items is often challenging and costly.
  • Rebuilding a condo/co-op in a historical building sometimes involves a variety of very skilled artisans to reproduce unique features, which are often in short supply.
  • If located in an established neighborhood with homes in close proximity, the cost to rebuild can dramatically rise. For instance, local ordinances may limit the type of equipment that can be used or require special permits.
To access AIG for affluent homeowners insurance for your clients, log in to www.bigimarkets.com
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​127 South Peyton Street
Alexandria VA 22314
​phone: 800.221.7917
fax: 703.683.7556
email: info@iiaba.net

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