Insuring to Value and Proper Appraisal: Suggestions to Citizens Proposals
(*Chip Merlin's Note: This guest blog is by John Nixon, President and founder of Asperta, Ltd., an independent consulting firm focused on improving the quality of property insurance decisions by policy holders, agents, brokers, underwriters, reinsurers and investors.)
I’d like to offer your audience my perspective on Citizens’ proposed changes to their appraisal standards, which were released last week. These important changes are intended to address an increase in quality issues identified when appraisals are submitted as supporting documentation in underwriting applications. These proposed changes are in the consumers’ best interest.
Appraisals generated as part of a loan application process are not appropriate for insurance purposes. The “cost approach” section of a market value appraisal is based on a “new construction” rather than a “reconstruction” basis. While not appropriate for insurance, the “cost approach” is what you’ll commonly get from a real estate appraiser if you simply ask for the “replacement cost;” it’s what they’re most familiar with, and they don’t need to spend money on an additional software packages to do the job. If you see the term “replacement cost new,” or “RCN,” it’s not the right kind of estimate. When ordering an appraisal, you probably need to take the extra step to tell the appraiser: “This is for insurance purposes; an estimate based on replacement cost new will not be acceptable.” If the appraiser seems baffled by such a request, you need to find a different appraiser.
Any estimating software can be manipulated to generate an artificially low number. Citizens’ has identified a few of the variables commonly manipulated: area, construction type, and subjective quality adjustments. There are many other variables that can be manipulated; it is important for the insured to carefully review the detailed report to make sure the entries are valid.
The agent/broker working with the insured also needs to check the appraisal to make sure that additions and deductions are aligned with the policy coverages. If foundations are covered (recommended) then they shouldn’t be deducted from the appraisal; if driveways and sidewalks are excluded, then they shouldn’t be included in the estimate. It would be difficult for the insured to recognize if an appraiser has manipulated the standard factors for quality, architects fees, overhead & profit, and others; but the agents/brokers see enough of these that they should be able to identify these adjustments.
The reason Citizens’ memo specifies that the detailed report be submitted, rather than a summary report, is so that the underwriters can spot the adjustments. Most of the “creative” adjustments would not appear on a summary report.
The Citizens’ memo mentions two vendors of software appropriate for generating insurable value estimates (Marshall & Swift/Boeckh [MSB], and e2Value). This list is not complete, there are a few others. MSB’s RCT, RCT HV, BVS are used by the insurance industry, but be careful, the books published by Marshal & Swift (same company) and commonly referenced by real estate and tax appraisers are not appropriate for insurance purposes. Before hiring an appraiser, you should check with the agent/broker to see what software the insurers use and request that the appraiser use the same software, this should help in reducing the potential for co-insurance.
In closing, please be wary of any appraisal firm that promotes its services on the basis that they can generate a lower estimate than the insurance company. Likewise, be wary of any agent/broker that has a “friendly” appraiser who is willing to provide a favorable estimate. Neither the “friendly” appraiser nor the agent/broker will likely suffer any consequences of under-reporting the exposure values.
-John Nixon
President, Asperta, Ltd.
As a contractor, I see estimates from many different insurers. Most mainstream companies like State Farm and Farmers are using Xactimate, while Allstate and many smaller unknown companies use MSB.
There are two major differences between the programs that I can point out. Last year I worked in a neighborhood replacing hail damaged roofs. On several occaisons I had two houses of the exact same floor plan and roof area, one insured by Allstate and the other by Nationwide or State Farm or Farmers. In every instance the differences in settlement totals shocked both me and my customer.
First, the MSB estimates were very poorly written and left out many component items that the adjuster claimed "were included in the shingle per square price".
The second very obvious issue was line item pricing. Even after adding in the 29% contractor O&P, almost every line item was below a matching Xactimate price, sometimes by 25-50%. In addition, MSB line items aren't consistent from estimate to estimate. I believe some adjuster are told what value to plug in and not to move from there.
Finally, MSB places the contractors internal O&P on the back page. When did it become the insurance industry's responsibility to dictate Profit margins? And how do they know what is correct for overhead? How about a project with 3+ trades involved, where any other insurer will consider applying General Contracting O&P?
Allstate and any company using MSB says that it is already included in the estimate and points right to the back page.
Lying cheating and stealing...
Mark,
You are right on the money. I worked as an IA for an IA firm that had insurers who used Xactimate and others who used MSB. The adjusters began noticing the MSB claims to be lower overall.
One of the manages and myself each took 5 MSB estimates and punched the same exact line items into Xactimate. The MSB estimates averaged 35% lower overall across the 10 completed estimates.
You may have noticed more and more carriers moving to Xactimate. During the 2004 hurricane season Allstate began bumping their O&P up to 40+% because they could not obtain agreed pricing with the contractors.
Mark and Joe,
Thanks for your comments.
I will write Xactimate and ask for their view on their pricing. I went to the training session for Xactimate at the Windstorm Conference and was very impressed. However, nothing was discussed regarding pricing.
To be fair, I think Xactimate had all kinds of problems and numerous updates of prices during the 2004 storms because of the strong worldwide construction, demand for materials, and the unique set of four major hurricanes within two months. Value disagreements were at an all time high.
Chip,
Appears I was a bit unclear. I stated, "During the 2004 hurricane season Allstate began bumping their O&P up to 40+% because they could not obtain agreed pricing with the contractors."
Your reply, "To be fair, I think Xactimate had all kinds of problems and numerous updates of prices during the 2004 storms..."
Allstate uses MSB Integraclaim. I was advising that during and since the 2004 hurricane season Allstate had to bump their O&P up. They did this because the MSB price lists were low... not Xactimate's price lists. Even since that time, all of Allstate's claims will include 40% to 42% O&P to try to correct the low unit cost numbers. Even their daily claims.
On a side note. Glad to meet you at the Wind conference. Know you could not begin to remember me with all the people you met, but was glad to meet you and some of your staff. Hope to work with your company real soon.