Citizens' Miscalculation Costs Policyholders
Recently, a great deal has been written regarding Citizens Property Insurance Corporation’s replacement cost value (RCV) calculation methodology. It seems that, in some cases, Citizens is grossly overestimating the cost to replace a home following a disaster. Consumer advocates decry this practice as nothing more than a backdoor rate increase following the denial of Citizens’ proposed 2000% rate increase a few short months ago. Predictably, insurance industry backers have called these increases necessary and appropriate.
While it is true that under the standard ISO homeowners policy homes must be insured to at least 80% of their value to avoid penalty, the current estimations seem unreasonable.
An article recently published in the Tampa Tribune cited such a case:
Joe Freitas thought $109,000 was a good deal on his new home. His insurance agent recommended a $139,000 policy - enough to give him a cushion in case of a disaster.
But Florida's insurer of last resort says that's not enough, and will only insure Freitas if he's willing to pay for a $237,000 policy.
I have a hard time believing that Mr. Freitas home, which was purchased for $109,000 and appraised at $139,000, needs almost $240,000 in coverage. Even in the most egregious cases of damage surge, the phenomenon where repair costs spike following a disaster, this number still seems exorbitant.
Industry backers will tell you that Florida’s Valued Policy Law safeguards against any ill-effects caused by over-insurance – after all, in the case of a total loss, a policyholder is entitled to receive a check for the policy limit. What they fail to mention, however, is that very few insurance claims involve a total loss. In the overwhelming majority of claims policyholders experience only a partial loss. This is where cases of over-insurance and CPIC’s new methodology are most precarious.
For example: in a total loss, the policyholder would get the benefit of a higher RCV payout, somewhat justifying the increased premium required by this new methodology. However, in a partial loss, the benefit to the policyholder is less apparent. If a Citizens policyholder is indeed over-insured, then they are paying higher premiums for a benefit that would only truly apply in the rare case of a total loss.
In practice, they are paying a great deal more for the almost the exact same coverage.
To make matters worse, it appears that Citizens, YOUR state run insurer, is the only company requiring its customers to adhere to these inflated appraisals without recourse. Does this seem fair?
While there is certainly a need for policyholders to have appropriate property insurance coverage, Citizens’ current RCV calculation methodology does far more harm then good. Especially in this economic climate, our state run insurer should make certain all the kinks are out of its Value 360 software before charging Floridians an extra $1000 in policy premiums.
To read and watch some of the media coverage on this issue, click below:
NBC: Citizens' replacement cost estimates rise for homeowners
FOX: Home values down; insurance costs up?
Sun Sentinel: Complaint: Citizens insurance inflated rebuilding costs, premiums
Sean,
Hopefully the Citizens report expected later this month will outline the various definitions and uses of valuation terms. The 360Value tool from Xactware generates an estimate of the cost to rebuild a structure, as did the software Citizens used before (RCT and BVS from Marshall & Swift/Boeckh).
Yes, the vendor has changed, but Citizens underwriters have also become more disciplined in their review of the values.
These articles compare the reconstruction cost estimates to market values and/or "appraisals". The "replacement cost" section of a market value appraisal (cost approach) is a new construction cost estimate, not reconstruction, and is not appropriate for insurance purposes.
If the appraisal was done specifically for insurance purposes, was the valuation basis correct? were input details complete and correct? Too often this isn't the case.
Sean
In your article, you reference the Value 360 software created and sold by Xactware. The credibility of this software program is limited to the expertise of the individual who inputs the information. These programs require you to answer very detailed and specific questions. I do not believe any of these programs can be used correctly with out an onsite inspection and the estimator having a background in home construction.
I do not subscribe to Vaule 360 program, but I do subscribe to the Xactware Residential Valuation software include with Xactimate 27. Again, correct information needs to be entered in order to arrive at the correct Replacement Value of the home.I would like to think, if the same information were entered into Vaule 360 and Residential Valuation software, the Replacement Cost Valuation would be the same.
An individual can go on line to the Xactware website and pay to do their own Replacement Cost Valuation. The cost for this service is $8.95. Go the Xactware website click on Products and then Home Valuation.
If a person does not feel comfortable using the program suggested above, they can hire someone to make a comparison evaluation for them. I look forward to more of these type of articles.
Gary Ahrens
Most people who suffer a total loss soon learn that they are grossly under insured. There is much more underinsurance than over insurance. If an insured only insures for the purchase price or the amount of the mortgage, the insured has been given very bad advice by the company or agent. Cost to replace usually far exceeds market value. There are many ways to reduce premiums (e.g., price shopping, higher deductibles, multi-line credits, security equipment credits, fire suppression credits, etc.)
Sean:
I disagree with your underlying analysis of the issue regarding the amount of insurance a person should carry as RCv of their home.
Please consider my comments in perspective. As you are aware, it would be a rare occurrence for you and I to have a divergence in thinking about insurance coverage issues, so I will hopefully explain my opinion here accurately. Keep in mind, I am not at all in agreement with how citizens calculates the cost of anything, so I am not saying they are right either. Z
As I see this issue, a person should insure the rebuilding cost of the structure. This is not, as the term is widely understood, the RCv, or "replacement cost value" of the structure. For example, to use your homeowner here, he purchased the home for $109,000( Ed. Note. I cannot scroll up on the iPad while writing this, so I'm just trying to remember the number here). The purchase price of real estate, which often includes a dwelling plus land, and especially in this market, has little or nothing to do with the cost of rebuilding the house after a loss.
For this example, we are assuming the amount of insurance is not directly related to the mortgage balance, because in that case the amount of insurance may be dictated by the amount of the mortgage as stated in the mortgage contract.
I recall in 2004, fighting citizens to give me more coverage on my smaller sq footage home. In a land of mcMansions, I have a little mcCottage. Although smaller, my 1950's comstruction house has certain features (lots of poured concrete, but no closet space) which in 2004 were expensive to replace. I also live on Miami beach, and building here just costs more, period. Last year, I was able to get citizens to lower my coverage limits by simply asking them to do so. [ed. Note 2: it is possible that my file at citizens is in a special place on someone's desk.] Here, although the homeowner seems to have gotten a good deal, in order to determine repair Cost, one would look at things like square footage, type of construction, materials, and location, just for starters. The price paid for the real estate is about where the property is, what is the structure on the land, etc. I know a parking spot downtown by the courthouse you can buy for $74,000, but the repair cost (asphalt, concrete curb and reflective paint (plus permits)) is probably less than $5000.
Most people are underinsured for a total loss. However, the likelihood of having a total loss, even in a massive hurricane, or even a fire nowadays, is still rare. Law and ordinance is more likely to drive up costs for rebuilding, and it can often be cheaper to simply knock it down and start again. In Andrew, the total losses stemmed from crappy construction more than actual destructive forces of wind. In homestead, one builder's community survived, while the one next to it was decimated. My home, on a barrier island, is more likely to be totally destroyed by a storm surge than by a windstorm.
There are a lot of questions here which require answers:
Why does ALE and cov C have anything to do with the amount of COV a? A structural issue may not actually cost as much money as it would to move a family of 4 into a replacement home for 6 months....
If homeowners were required to set their own coverage limits, would they be more aware of the value of their property and belongings, or would they simply go with the cheapest alternative?
This got me to thinking about what it would be like to have Florida "no-fault" homeowners coverage for losses under 20k. [hmmmmmmm]
Back in reality, we all know that the insurance companies make money based on fear of the worst. As long as the legislature tells us that a nuclear hurricane could come at any moment, it can justify prices for fixing the pretend damages. It reminds me of hiding under a desk in 1959 for a nuclear attack. Yeah, that piece of wood over their back made everyone feel safe.
The rule of thumb here is that rebuilding a home (with proper construction methods) is as good for the community as it is for the homeowner. I have no issue with ensuring that homeowners carry the proper amount of insurance. If the actual rebuilding costs of the dwelling this 109,000 real estate purchase is, in fact, $230,000, maybe it is appropriate for it to be insured for that amount. I can't tell from this example.
Now, whether citizens, or any other carrier, is charging the appropriate amount of money for the policy is a different story altogether. Until the insurance company's method of determining the cost of this insurance by always basing costs on worst case scenario and not historical accuracy and actual costs is challenged, the carriers (the house) will always come out winning on the disaster insurance price gambling odds in Florida.
Xoxox
Adrian Arkin
Excellent article, I enjoyed reading it.