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Inadequate Replacement Cost – An Indirect Result of COVID

Author: Chris Boggs

Building material costs have increased dramatically during COVID because supply has not been able to keep up with demand - for many reasons. As a result, IIABA's Risk Management department in conjunction with Swiss Re recently recommended agents consider notifying their clients (personal and commercial) that current replacement cost limits may be too low as a result of these dramatic increases.

Although it may be useful for agencies to warn their insureds of these potential COVID-caused underinsurance issues, however short term it might be, the agency must be cautious when addressing this situation. If an insured contacts the agency as a result of any notification provided, the agency should:

  • Remember agency personnel are not licensed appraisers. Replacement cost estimators are just that, estimators (not guarantees).
  • Confirm the edition/version date of the estimator being used to generate the replacement cost. The cost of building materials has risen quickly, if the edition date of the estimator is more than a couple weeks old, the value generated may still be too low. For instance, if the data being used to generate replacement cost is based on costs from last month, the developed value may still be too low by anywhere between 10 and 15 percent. Confirm the most recent edition is being used.
  • Remember to run several valuations using multiple “grades" of construction (fair, average, superior, etc.). This should give a reasonable range of values.
  • Remember the difference between market value and replacement cost. Market values are currently even more volatile than replacement cost values. Insurance values are not dependent on what a willing buyer will pay a willing seller (market value) but are based on the cost to rebuild the structure.
  • Require the insured to pick the value they feel is appropriate (confirmed with a signature). The agent may consider recommending the insured hire an appraiser to develop the value.
  • Disclaimer. Consider using a disclaimer on the estimator. “The replacement costs developed are for information only and are not guaranteed or to be considered an appraisal. Values used are at the sole discretion and the responsibility of the property owner."

Unfortunately, the uniqueness of COVID has not yet passed, especially in regard to ongoing insurance issues. While this incredible increase in building material costs may be “temporary," no one knows how “temporary" this situation will be. Prices may remain high for weeks or months following a return to “normalcy" within the supply chain.

Although agents may be going beyond expectations and requirements by warning of this potential coverage limits problems, agents are not and cannot be expected to provide expertise in areas where they are not licensed and/or trained. Apply the recommendations listed above when working with insureds regarding coverage limits.

Replacement cost estimators are simply a tool developed by third parties to assist the insurance industry in the development of the ESTIMATED replacement cost. Even the providers of these tools cannot guarantee the results because the real “replacement cost" is not known until the loss occurs and the structure is rebuilt.

​If the developer of the tool cannot guarantee the results, neither can the agency utilizing the tool. Agents must guard against the temptation to provide the coverage limit for the insured.

Last Updated: June 25, 2021

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