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Hard Market Shenanigans

Author: VU Faculty

You believe that the agents of a particular company are deliberately underinsuring homes under an HO policy because the carrier's rates are not competitive. They are allegedly relying on the carrier's guaranteed replacement cost provision on the home, but you believe that this results in gross underinsurance of other property, and it definitely puts you at a competitive disadvantage. What do you do (besides submitting an "Ask an Expert" question to the VU)?


Question..."Several agents for an insurer that I will not name, have started to sell reduced homeowners limits, telling the insureds that since their company will pay replacement cost on the dwelling up to 120% of what they have the home insured for, they can just take 80% of the RC and, in the event of a total loss, can collect full value. For example, they will insure a $150,000 home for $125,000 and, in the event of a total loss, the insured will (allegedly) collect up to the $150,000 limit. These agents don't mention that the personal property has been reduced by about $20,000 in the event that the home is gutted, but not destroyed.

"The reason for the reduced coverage is that their company is not competitive at this point in time and is looking at increasing their premiums another 30% this year. The reason for the increase in premium is that the agents have not insured the homes to full RC to begin with. This is an injustice to the insureds and, in the event of a cat loss in the area, it will really give the industry and agents a black eye. If this is reported to the company, they will look at it as sour grapes and I know for a fact that their field rep knows what is going on. I feel that it is unethical at best and is not serving the public in their best interests as they have put faith in these agents.

"I've had 2-3 this week already. Here are two examples of what we ran into:

  1. I have an insured for auto only. I tried to place his HO, which is with this insurer, with the same company as the auto. He stated that he had $85,000 on a 1,450 sq. ft. home and that the agent told him with the guaranteed replacement cost capping out at 120% would give him an additional $17,000 coverage in the event of a total loss, for a total coverage amount of $102,000.

    I told him that all companies' agents have to prove, or should prove, to the company that they have the home pretty close to full replacement cost value to begin with, and that the 120% clause is in the event of high inflation or if construction costs go through the roof like they did when Andrew hit Florida. What the agents are doing is using the cap on the RC like a peak season endorsement is on a business policy.

    I proceeded to give him a quote for $145,000 using $100 a foot as a guideline on the home. He went back to the present agent who then told him that he should insure the home for $121,500 and, with the extra 120% cap on the RC, he would then have $145,000 for a total loss, and did not have to insure for so much...this would cut his cost down. "HE STAYED WITH THE AGENT" if you can believe that.

  2. Another insured where we are trying to round out the account and have been successful this week: The insurer had $133,000 on a home that we calculated to be in the $190,000 range. The insured felt the same way. The insurer's agent argued that the $133,000 with the 120% RC would give him about $160,000 in total coverage. I explained to the insured the consequences of this and that, if construction cost rose during the year, he could be as much as $50,000 to $60,000 underinsured, plus the fact that he did not have enough personal property coverage with the $133,000. We got this account as he understood that he had been getting short-changed for the past 20 years with this agent.

"Could you please address this issue if at all possible as it has been going on for a few years and I would like to have some ammo to show these insureds that have been faithful to this company."

Answer...This is, indeed, a disturbing practice not only from a competitive standpoint, but from the potential harm to innocent, unassuming consumers. We ran this by our faculty and got the responses below. We'd also like to hear from our readers, so send us your opinions and we'll post them below.

Faculty response....
It would be interesting to look at the policy form for the exact wording on the Guaranteed RC coverage. I'd be curious to know if the policy wording requires the house to be insured to RC in order for this coverage to respond.

Faculty response....
Most "guaranteed" replacement cost policies I've seen still require, in the contract wording, for the home to be insured 100% to value. The 120% factor is there in the event of unanticipated cost increases. If the agents are deliberately circumventing this language, isn't this a violation of the insurance laws if these policy forms are filed and approved by the department of insurance? Sounds like they are effectively issuing orally modified contracts, most likely in violation of filing requirements. Since these agents are representatives of the insurer, I suspect they are jeopardizing the company's certificate of authority with this practice, not to mention taking advantage of consumers to make a sale.

Faculty response....
That "Guaranteed Home Replacement" endorsement goes by several names. My experience as an agent was that every company offering it required 100% insurance-to-value for it to be added. It was cheap, $1.00 to $5.00 back in my days. My current HO policy has it for about the same cost. The actual endorsement says I agree to insure for 100% ITV and to notify the company if I undertake a modification of 5% of value or more.

The whole idea behind the endorsement is to give some "wiggle room" in case the estimated replacement cost is too low, or in case costs escalate after the claim. Anyone who has ever done a cost estimator knows that they are just that : ESTIMATES. Having a policy pay 120% of the replacement cost allows for slight errors in the form. Also, anyone who has ever been in a post-catastrophe environment (hurricanes for example) knows that costs go up after the event. Labor costs go up because of supply and demand, as does the cost for materials. By stripping out coverage down to 80% then adding the endorsement you've lost any cushion and are defeating the purpose of the endorsement.

Plus, I'll bet if the company executives knew what was going, on they would quickly "counsel" the agents in question. If I had hard data proving what the agents were doing, I'd be inclined to contact that company and report the agents. Additionally, in many states (Florida being one), an agent who intentionally puts an incorrect replacement cost on an application violates the state's unfair trade practices...626.9541(1)(k) in Florida. Finally, the cost to go from 80% ITV to 100% ITV just isn't that great in the big picture. Everyone thinks, "It will never happen to me," but it does.

Faculty response....
This practice has been around in California for a number of years, even after the Oakland Hills fire in which many, many homes were drastically underinsured despite the extended (nee: guaranteed) replacement cost provision. Unfortunately, I don't think there's a way to stop unscrupulous agents from engaging in this activity. However, the agents who come up against this objection need to have a way to overcome it.

I would suggest something like, "I know you're concerned about the cost of your homeowners coverage, especially with the price going up this year. But can I ask you a question? If your home were totally destroyed by fire, would the cost of your insurance be your primary concern?" They will of course say it wouldn't be. From that, I would go on to the discussion of what happens in the unlikely event of a total loss, perhaps using some specific examples from high-profile situations such as Oakland.

I agree that this is indeed a disturbing situation, and not an isolated example. Unfortunately, the hard market (combined with insurer concerns over mold and other issues) has a tendency to bring out the "dark side" in some agents.

Faculty response....
The Oakland-Berkeley Hills firestorm of 1991 resulted in 3,236 total and 2,892 partial homeowner, renter, condominium, dwelling and apartment unit losses. It was discovered that several agents were undervaluing building replacement cost estimates to rely on the guaranteed replacement cost provisions to cover the difference. It made them competitive and they were "adequately" insuring homes.

The practice became evident very quickly as the losses were being adjusted. The increased cost to thirty-four insurance companies who upgraded and reformed policies following the loss was $274,017,306. This was the sum paid in addition to benefits within their previous policy limits. Please see the CPCU Society Chapter Research Project titled "Deja Vu: Lessons Relearned from the Oakland-Berkeley Hills Firestorm of 1991."

This practice may also violate the insurer agent's contract with their company. A number of insurance companies reformed their agents agreements following the Oakland-Berkeley Hills fire.

I will suggest that the concerned agent document these practices and take the information to the national (not the local) office of the insurance company. I have done this several times and found reporting a pattern of abusive practices can be stopped on the national level. The local supervisory offices are a little less predictable. They may be aware of the abusive practices and condone them. Other times they intervene right away.

This practice can, and should, be stopped.

Faculty response....
I can visualize such unethical practice in some companies (that will remain unnamed) whose agents are trained as "salespersons" not agents.

The public shares in allowing such shenanigans by dollar shopping. They don't want to hear the truth if it costs $10 more because they think, "It'll never happen to me."

The media doesn't help by their "anti insurance companies" attitude. They have the public convinced the big, bad insurance industry is out to rip them off and all policies are over-priced while companies and execs (think Enron and others) line their pockets...see the ambulance chaser adds, in depth news reports and consumer affairs broadcasts. When something like this is exposed, it just gives their witch hunts more credibility.

The insurance industry is to blame as well because we do little to get the truth to the consumer. We can share the information among ourselves, but it does little good other than making the ethical and professional more ethical and professional. We preach to the choir while the "sinners" turn a deaf ear.

I would like to see a contract with this company to read just how the replacement cost section is worded.

Faculty response....
This behavior is not new. The only good news is that their companies generally have a 20% to 25% cap now, instead of selling an unlimited GRC.

Another limitation to point out to policyholders is that the increased coverage will not apply if the homeowner fails to notify the company of substantial improvements they make to the home. One article I saw recently indicated that 80% of those who make improvements to their home never contact their agent to discuss the need for increased coverage. One of the biggest problems I see is people adding a deck. They just never call.

Faculty response....
Even when an insured/agent THINKS the home is properly valued and insured, studies show that it probably isn't. I just read an article on MSN that quoted the following:

"A whopping three out of every four homes nationwide are underinsured, according to a survey by Marshall & Swift / Boeckh. This Princeton, N.J., company specializes in estimating construction costs, and its annual reviews of 3 million insurance policies consistently show homeowners don’t have enough coverage. We’re not talking small amounts, either. The latest survey showed the typical homeowner was underinsured by 35%.

"These figures aren’t news to the insurance industry, which has known for years that most of their customers weren’t buying enough coverage. The point was driven home again this year by the Colorado wildfires, which so far have cost insurers $79.3 million. 'Most of the homes that were covered were underinsured,' said Loretta Worters, spokeswoman for the Insurance Information Institute, a trade group."

And, with regard to the point about remodeling:

"Homeowners are remodeling like crazy. Americans spent $180 billion last year updating their homes, often boosting the value of their homes in the process. An estimated 75% of remodelers fail to update their insurance coverage to reflect those improvements, said Bob Crine, president of Marshall & Swift, the construction estimating company.

“The company has found that homeowners consistently shortchange themselves when it comes to getting enough coverage, Crine said. Homeowners have more at stake now, however, because so many insurers have capped their replacement coverage. In the past five years, the vast majority of insurers have done away with, or radically modified, their guaranteed replacement policies. Whereas once your company would rebuild your home no matter the cost, today most insurers cap how much they pay to 120% of your policy’s stated coverage amount."

hmmm...that sounds familiar, doesn't it?

Faculty response....
From a competitive standpoint, I think that the practice you are describing would be considered an unfair and deceptive practice in your state and probably an unfair trade practice in most every state, not to mention a possible violation of several other insurance laws.

Unfortunately, someone is going to have to step up and file an official complaint in order for the DOI to investigate. I shudder to think what will happen to these agents and their company in the event that a total loss (or several total losses) escalates into a full scale, possibly class action, lawsuit and the media gets hold of it.

These agents must be in desperate straits since they probably have no coverage under their E&O policies because they're commiting deliberate acts undervaluing the dwelling and knowing that a personal property loss claim under a total loss would not make the insured whole.

I'd write a letter to the company's home office, outlining what's going on and giving specific examples of properties you know are undervalued, and tell them that, if they don't take action, you're going to take the matter to the department of insurance and call for a public hearing. It's likely that the insurer doesn't know what's going on at the local level.

Sadly, some people are probably going to lose their jobs. However, if the company can clean their own house, they'll be better off than if the DOI has to do it and they lose their license and livelihood. More important, the saddest thing is that the well being of innocent families is being threatened and they don't even know it.

Do you have an opinion?
If so, email it to and we'll post it here. You can comment anonymously or, if you prefer, include your name, etc. and we will too.

Subscriber Response....
This problem extends far beyond lowering home values in our industry. Many, many agents will cut whatever coverages they must to write accounts to earn their commissions. As long as most customers only look for the lowest premium they help fuel the non-professional agents desire to cheat.

We have one such agent in our multi-county area that is nicknamed "Ragoo" - it's all in there! His approach to prospects is that he will save them 20% off their current insurance program. On his applications he will reduce coverage amounts, lower payroll/sales, increase deductibles and eliminate coverages, whatever it takes to cut 20%.

He will make his proposal to these clients saying he cut the 20% while providing the same coverages and tell them if he missed something he has E&O insurance to take care of it! When a commercial client is quoted that savings with the promise it's all there, what do you think they will do?

It's a bad situation for the clients, our state and the insurance industry. And yes, believe it or not his state manager knows what is going on and promotes him as being their best agent in the state!! As the other gentleman pointed out insurance companies feel it's sour grapes if agents complain and generally won't respond. Luckily, we don't represent the company involved in this situation because his book is a growing disaster waiting to happen.

Also, getting a customer to complain to the insurance commissioner is like pulling teeth. It's not going to happen. So what is a professional agent to do? Plug along doing your best and hope time will level the playing field. It's not easy but at least you can sleep at night.

Subscriber Response....
Before I got into the insurance business my two least favorite people were car sales persons and insurance sales persons. Now I sell personal insurance! However, I realized that this job can and should be done with a high regard to ethics.

I have worked at three agencies over the past ten years. I have been very lucky because my employers had the same views as I on servicing our customers. My customers are like my family, some you love, some you hate and some you do not want to claim kinship to! In spite of this they all look to us to make sure they are taken care of properly. Over the years you come across all different types of people, and I have found that if you explain what a homeowners policy actually covers in regards to the replacement cost guarantee about 99% of my customers will pay the higher premium to be insured properly. In our agency if the customer insists on a lower coverage amount on the dwelling, we just do not write the policy. We would rather lose a customer than get the reputation of not taking care of our insured's needs properly.

It is sad to have people come into my office with their current carrier's policy dec sheet and see a small section on the bottom stating that it is the insured's obligation to determine if the home is insured to its replacement cost value. This, as you would say "nameless company," will then issue a policy with the replacement cost guarantee that isn't worth the paper it is written on!

On one of the responses, a person noted that if the company knew what was going on, they would counsel the agents. I believe the company is responsible for how these agents are insuring their customers. The reason for this is that I have quoted against customers from the same company that have different agents and all of them have underinsured the homes. When something is that widespread it is usually a reflection on the company requirements rather than the ethics of all the agents. Some of these companies have been hurt due to the weather losses over the past few years. Even the companies that have a superb record of insuring their customers properly are in a bind due to these losses.

I have noticed a trend with the companies we represent to start using the same guidelines across the board. The general public is becoming more insurance savvy and are shopping their insurance till they find an agent and a company that will take care of them properly. There are a lot more people out there who are totally ignorant of what they need as far as insurance goes.

I had a situation where I knew of an agent with a company I myself represented was purposely lying on their applications and told the company representative what the agent was doing. I was told that he could not investigate the other agent until one of their customers complained! I could not believe it!

In another case I found that a company I sold insurance for was not in compliance with state guidelines. I kept calling the company and got in touch with the regional manager. I even talked with one of their attorneys who handled contact with the commissioner of insurance to be sure they were in compliance with state laws. I did not give up! Guess what happened? We were contacted by that company and had to provide copies of all agents' licenses and all of our company insurance policies.

Even though we were in compliance, they contacted the commissioner of insurance department and we had to provide them with the same information. I hate to think what could have happened to my employers if their paperwork had been slightly off! I was proven right in the end and the company had to change their guidelines to get into compliance with the state guidelines. My employers did not lose their contract with the company because of my pig headedness. Thank God!

In another case where I found a company was not in compliance with state requirements, I sent a statement to the top company manager and a copy of the letter to the commissioner's office. The company changed their ways in a couple of months. My employers received a phone call from the company representative and I was questioned extensively by my employer. Once I showed him what was going on, he backed me 100%. Another "Thank God!"

In just the past four months, I persisted in contacting a company for recent changes in their guidelines that were not in compliance with the state requirements. They contacted the commissioner's office and within a month had stopped writing home insurance till possibly Jan of next year. This is the only company that so far has not come back on me for bringing their errors to their attention.

I just got off the phone with a lady that has her insurance with a company I represent. Classic example: She has an older home at 3,300 square feet. The agent wrote her a policy at a limit of $150, the renewal, the coverage limit was increased by the company to $190,000. It needs to be insured to a minimum of $264,000. The interior and exterior are made of high quality material from her description. We talked for a while about what it would take to replace her contents and house if she had a loss. When she first called she was upset about the increase in coverage and premium.

By the time we finished our conversation she realized how underinsured she was and wanted me to see if I could fix it. I told her we could possibly process an agent of record change which would not go into effect until 2003. I recommended she get with her current agent and see about reviewing her policy. I told her she needed to do that today rather than wait until next week because, in the event of a loss prior to getting the correction processed, she would still be very underinsured. She thanked me for scaring the heck out of her!

As you can see, there are things that can be done on a one-person basis. However, there are consequences that can come back and bite you or your employers. I can see where you would have a lot of people wanting to correct the problems we have with unethical agents or companies that are out there for a buck. It puts a black eye on us all. If I owned this agency I would not have a problem with stepping forward and making a stand either by myself or in a group. I try on a daily basis to affect those around me, either the customers I serve or prospects that come to me. If we all worked together like that we could one day see the change we all want in our field of business.

We can all stand around pointing our finger and saying, "Look at them!" What is needed is to look at ourselves and ask what can I do to make things change today.

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