Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The problem is that "replacement cost insurance" is never marketed truthfully by most of the insurance industry. Want an example? How about the Insurance Information Institute and its explanation of Replacement Cost Insurance:

Replacement Cost and Actual Cash Value

Replacement cost provides you with the dollar amount needed to replace a damaged item with one of similar kind and quality without deducting for depreciation—the decrease in value due to age, obsolescence, wear and tear and other factors. An actual cash value policy pays you the amount needed to replace the item minus depreciation.

Suppose, for example, a tree fell through the roof onto your eight-year-old washing machine. If you had a replacement cost policy for the contents of your home, the insurance company would pay to replace the old machine with a new one. If you had an actual cash value policy, the company would pay only a percentage of the cost of a new washing machine because a machine that has been used for eight years would be worth less than its original cost.

Suppose, also, that the tree damaged your 15-year-old roof so badly that it had to be completely replaced. If you had a replacement cost policy, the insurance company would pay the full cost of installing a new roof. If you had an actual cash value policy, it would pay a smaller percentage of the cost of replacing it."

Does this explanation say that the policy form subtracts depreciation from replacement cost until the item or structure is repaired or replaced? No. What the insurance company wants people to think is that when they buy replacement cost insurance, they will get paid full replacement right away. In many states, there is no difference between actual cash value insurance and replacement cost insurance unless you actually spend the money within a set period of time and make the replacement. You pay a higher premium for the replacement coverage, but the benefit is the same as actual cash value unless you make the repair or replacement within the time frame allowed by the policy.

If an insurance company wants to sell replacement cost insurance, it should be required to pay replacement cost right away. If it wants to sell a policy that pays replacement cost only after an item or structure is repaired or replaced, it should sell "contingent replacement cost coverage." The Florida legislature should not encourage this bait and switch with legislation specifically approving it.

Let me give you an example of what every claims adjuster would recognize as complete stupidity in the insurance world and that insurance lobbyists provided as an analogy to support their position that 20 year old roofs should be separated out of the replacement cost coverage. A lobbyist explained that their proposed law allowed insurance companies to take depreciation on old roofs even under a replacement cost policy. He said this was just like a situation where a five year old car is wrecked and the insurance company replaces it with a five year old car rather than a new car. Now, most of the people reading this Blog know that is a ridiculous and misleading example when applied to real property loss. The reason why is that you cannot buy a five year old roof. There is no ready market of five year old roofs to purchase. And, there is no ready market to purchase five year old nails, shingles, tiles, and whatever else is needed to repair a five year old roof. Indeed, finding and acquiring five year old parts as a replacement will be a lot more expensive than using new materials.

An insurance industry lawyer-lobbyist told the Senators that before the 2006 Replacement Cost Laws that require insurers to immediately pay replacement costs for policyholders who purchased replacement cost insurance, Florida did not require claims repairs to be paid that way. Instead, according to that lawyer-lobbyist, under actual cash value principles, insurers could hold back depreciation before repairs were made. Wrong again. Florida is one of many states that require "repairs" of structures on an actual cash value basis to be made without depreciation taken. Glens Falls Ins. Co. v. Gulf Breeze Cottages, 38 So. 2d 828 (Fla. 1949) In Glens Falls, the Florida Supreme Court decided this very issue:

When insured structures suffer damage far less than total loss, appropriately compensable only by repair, is the measure of indemnity the cost of repair, necessary to render the structure habitable, rather than cost of repair less depreciation?

The discussion of this longstanding Florida law that all adjusters learn was strangely similar to the discussion taking place in the Senate hearing room. I wonder why the insurance lobbyists did not tell the Senators about it and its very sound logic followed by many states when considering how much must be paid when partial repairs are made? The Court noted and found:

The appellants urge us to make a distinction between the damage to a roof and to other parts of a building, going so far as to say that no contention is made that depreciation should be allowed on repairs to the ‘main portions' of a building damaged by windstorm; that even though the other parts of the building repaired after damage from a storm would be in better condition than before repair, nevertheless the insurer should not be relieved of his duty to make those repairs. Of course to the insurer there may be reason, from a practical standpoint, why the roof of a building might fall into a separate category, that being the part of the building which always feels the full force of the elements, but we must take into consideration the protection which is sought and granted when an insurance company contracts with an owner of property to insure him against loss.

The appellants and the appellee agree, and the chancellor announced, that the contract was one of indemnity. Appellants themselves in their brief concede that in the case of partial loss it is the duty of the insurer to restore the property to its condition prior to the loss (if the cost of doing so does not exceed the amount of the insurance), although the cost of doing this ‘is proportionately more than the amount of damage bears to the value of the insured building.’ Appellants do not dispute the soundness of that rule. In a contract of that character the companies undertook to save the owner from harm caused by ravages of storm, and we think the responsibility obtained without distinction between the roof and the remaining components of the structure. We are not referred to any provision of the contract making any such distinction.

Since the buildings were only partially destroyed, it was all the more necessary, for the reasons we have given, that the roofs should be in good condition in order that the structures might remain habitable, and there seems no occasion for holding that, although the repair of other parts places them in better condition than they were before the damage, a different yardstick should be employed in measuring the amount due for the repair of roofs.

Bearing in mind that the purpose of the contract was to indemnify the owner against loss, we think...that the property should have been placed in as nearly as possible the same condition that it was before the loss, without allowing depreciation for the materials used. Certainly it was not intended that the repairs should be made with materials which were not new. If depreciation were allowed, it would cast upon the owner an added expense which we do not believe was contemplated by the parties when they entered into the insurance contract.

The Florida Supreme Court therefore followed the line of reasoning that actual cash value of partial losses to real property is the amount to repair without depreciation, limited by the total amount of available insurance. It would be a strange quirk if the Florida legislature not only receded from its recent 2006 laws, but, in doing so, took away seventy years of common law protecting insurance consumers---and have the nerve to call the proposed law a consumer protection bill.

Legislators would be well served if they removed insurance industry lobbyists from their "trusted" advisors and only partly for the example I just provided. These insurance lobbyists use conservative principles as "spin." They package anti-consumer laws that will harm Floridians using phrases that appeal to conservative values, although the laws are illogically anti-consumer, but "sound good." For example, who is against the "free market" or "competition?" Nobody. So, every time these insurance industry lobbyists propose a law, they package it in such terms, although the terms do not apply. Conservative legislators should be outraged that the insurance industry lawyers and lobbyists are misappropriating the terms that describe conservative core values and using them to mislead the legislators into supporting laws that truly do nothing to foster the free market or competition, but only hurt their constituents. Conservative legislators and constituents should be further outraged that these lawyers and lobbyists have such inroads into our democratic process because of enormous wealth and resources.

Still, I must apologize if my rhetoric is too harsh regarding our elected officials . I can be as guilty as anybody of getting excited about an issue. I truly meant the following I posted in The Florida Insurance Lobby Currently Controls the Rhetoric Regarding Public Adjusting in Florida:

Everybody reading this should remember a few important aspects about our democratic process, the need to participate, and the need to reform when criticism is warranted:

1. Most elected officials truly want to make the "world, country, state" a better place to live and work. They are not corrupt, but are truly well meaning people.

2. Politicians viewpoints on issues are often ignorant because nobody knows everything. If full-time insurance lobbyists show propaganda to these elected officials that only shows that policyholders are getting something they do not deserve... you do not need to be a genius to appreciate their impressions and viewpoints.

3. Many insurance companies require and train their employees and agents to speak with elected representatives about issues in such a way to slant impressions to elected representatives about the need for laws that protect insurance company interests over consumer interests. They often have these scripted out as talking points so that the propaganda actually makes it sound like the proposed law is in favor of the policyholder---usually through the promise of lower rates which then never materialize or do so at the cost of not having coverage.

4. Unless interested people take an active role to visit with, write, and support representatives that appreciate the truth and the need for policyholder protection, the full time lobyists and employees of the insurance industry will prevail with their message.

5. You have to participate if you want justice to work in a democracy because large corporate interests have already figured this out and spend massive money and time coordinating special interests by industry.

...

7. Show up and support representatives that appreciate the consumer side of insurance. You need to encourage and provide financial support to consumer organizations...

8. If you want justice, you cannot just sit back and expect others to do it all for you. You have to work at it with your time and money. Make a commitment and stick to it. If it is important enough, make a big commitment and encourage others. One person can make a difference.

9. Do not get discouraged. I have visited with and provided information to various representatives for a number of years. Sometimes, I have felt like it is just me, a few lobbyists I have personally hired because I have to work on my cases, and just a handful of others in Tallahassee trying to push for laws that favor consumers...I feel as if I have wasted a significant amount of money and time while some other colleagues simply do nothing and provide no support. And, I still keep at it.

In contrast, the insurance lobbying effort is massive, professional, and full time. They can outspend and provide greater numbers of individuals in their efforts.

And, policyholders cannot give up because the alternative is unjust laws. Those well meaning political representatives understand the enormous wealth and resources of corporations. Contrary to popular rhetoric and demeaning criticism, most elected representatives are not "paid off" or "corrupt." They will listen if you can present a credible and persuasive impression that is based on genuine and authentic truth of an issue.

I enjoyed providing some of my knowledge and explaining my appreciation for insurance to our elected representatives yesterday. Insurance is a wonderful man-made financial product. The issues before the legislature are not easy. Insurers need to make a profit and we need to develop a larger supply of available insurance. Doing that and providing an affordable product that pays fully and promptly demands lawmaking based on truth, logic, and knowledge.

Under most policies, an insurance company’s obligation to pay replacement cost value (RCV) does not arise until the repair or replacement has been completed, and the insurance company will never be responsible for any amount in excess of what it actually costs to repair or replace. However, if an insurance company denies a claim and fails to pay any benefits under the policy, it could be argued that an insurer cannot require compliance with the replacement cost provision or any other condition precedent, as a matter of contract law.

In Florida, it is well-established that a party who prevents or renders impossible the performance or occurrence of a condition precedent, upon which his liability is contingent, cannot avail himself of his own wrong, and be relieved of his responsibility to perform under the contract. See, North American Van Lines v. Collyer, 616 So.2d 177 (Fla. 5th DCA 1993). By the same token, it can be argued that by denying liability and refusing payment under a policy, an insurer prevents the insured from complying with the policy’s replacement cost provision and cannot require specific performance after the claim denial.

In Bailey v. Farmer’s Union Cooperative Ins. Co. of Nebraska, 498 N.W.2d 591 (Neb. Ct. App. 1992), the insured’s home collapsed during an excavation to perform renovations—which was a covered peril under the policy. The policy provided coverage for the least expensive of the three, 1) policy limits, 2) RCV of the home for like construction and use on the same premises, or 3) the necessary amount actually spent to repair or replace the home. As in most policies, Bailey’s replacement cost provision obligated the insured to pay no more than the actual cash value (ACV) until the actual repair or replacement was complete. Without extending coverage for the loss, Bailey’s insurer tendered a settlement offer of $11,900 as ACV to bring the “doubtful and disputed claim to a close” Bailey rejected the offer and demanded her ACV option with an opportunity to claim RCV after incurring in the expenses. Still refusing to extend coverage, Bailey’s insurer rejected her demand and offered to buy her a dwelling of like kind and quality in the same neighborhood, but Bailey insisted on rebuilding on the same site and a lawsuit ensued. The Bailey court held that:

Bailey was prevented from satisfying the condition of rebuilding […] by Farmers Union's refusal to assure Bailey that, in addition to the actual cash value figure, the cost of rebuilding her home would be covered up to the policy limit. A condition is excused if the occurrence of the condition is prevented by the party whose performance is dependent upon the condition. Chadd v. Midwest Franchise Corp., 226 Neb. 502, 412 N.W.2d 453 (1987). Though in Nebraska this general principle of contract law has not yet been applied specifically to a set of facts analogous to those of the case at bar, we are persuaded by the reasoning of the Michigan Court of Appeals in Pollock v. Fire Ins. Exchange, 167 Mich.App. 415, 423 N.W.2d 234 (1988), that an insured should not be barred from recovery for failure to rebuild within the time constraints of the policy when the conduct of the insurer prevented the insured from rebuilding.

Likewise, in Vantage View v. QBE Ins. Corp., 2009 WL 536546 (S.D. Fla. March 3, 2009), the insurer denied the claim. The court, relying on Bailey, held that it is not “reasonably possible” for the insured to make repairs without receipt of the funds from the insurer and that the insured was therefore relieved from its obligation of repairing or replacing the damaged property before demanding replacement cost value.

It is important to note that both Bailey and Vantage View are cases where the insureds were denied any benefits prior to filing suit and the insureds were unable to repair or replace the damaged property out of their own pocket. It therefore follows that, if there are no other provisions or exclusions that prevent coverage, an insured may be entitled to receive RCV benefits without having first repaired or replaced the damaged property, as required under a particular policy.

Traditionally, property insurance policies only offered ACV calculations to settle the amount of the loss. In the early 1990s, however, insurers began to offer Replacement Cost Coverage (RCV) as alternative products or endorsements that would require the insurance carrier to pay the full replacement value of the insured property without reservation or holdback of any depreciation in value and irrespective of whether or not the insured repairs or replaces the damaged property.

Of course, the math behind RCV is not as simple as it sounds. Generally, RCV will be calculated based on whether the policy limits are lesser or greater than 80% of the full replacement cost immediately before the loss. Arriving at these numbers is no easy feat, but with the help of computer systems and insurance valuation professionals, the insured will generally be able retain the right to collect the greater between ACV or RCV, subject to the limits of the policy.

In Florida, if an insured has elected RCV coverage, the carrier has to pay the replacement cost for a dwelling or personal property without withholding any depreciation in value, whether or not the insured replaces or repairs the dwelling property. See, Fla. Stat. 627.7011(3) (2009). According to this definition and following the example above, you should receive $1,000.00 for the widget whether you replace it or not.

In practice, however, the difference between ACV and RCV has become somewhat of a gray area, particularly in cases where the insurance carrier has paid some money to repair the damages. In State Farm Fire and Cas. Co. v. Patrick, 647 So.2d 983 (Fla. 3rd DCA 1994), the insurance company wrote a damage estimate under the policy’s RCV coverage and issued a partial payment. Mr. Patrick fully repaired his damages with the partial payment and sued to recover the amount that was withheld. The court held that under RCV coverage the insured was not entitled to recover the difference between the estimated replacement cost and the amount actually spent to repair or replace the damaged property.

More recently, in Vantage View, Inc. v. QBE Insurance, 2009 WL 536546 (S.D. Fla. 2009), a Federal Judge ruled that even when a policy provides that RCV will not be paid unless the repairs are made, if the carrier does not pay a penny on the RCV damages, the carrier cannot require repair or replacement before issuing the RCV payment. The judge noted that it is the advanced funds that generally enable repairs to occur.

In sum, under both ACV and RCV, an insured will never collect more money than what it actually costs to repair or replace the damaged property to its pre-loss condition. However, RCV will afford additional assurance and value protection that will preclude a depreciation holdback, irrespective or whether replacement or repairs occur, if the carrier does not pay any money to repair the damaged property. I will leave it at that for now. Join me next week to discuss more RCV issues, particularly in cases where the insurance claim is wholly denied. Stay tuned.

In New York Central Mutual Fire Ins. Co. v. Dikis, Fla. 69 So.2d 786 (Fla. 1954), the Supreme Court of Florida adopted the broad evidence rule and established that in determining the ACV of a damaged or destroyed property at the time of the loss, courts should consider any evidence that logically tends to establish a correct estimate of the value of the property. Therefore, under the broad evidence rule, valuation will go beyond mere price points and recovery will not be barred because the damages are difficult to ascertain. Of course, mere speculation or conjectures will not suffice, but evidence that logically tends to establish the correct valuation of a damaged property will be admitted.

A few examples are of rigor. In attempting to determine the ACV of stolen goods from an antique dealer, the insurer argued that the ACV was the equivalent to the price at which the insured could have sold the property at the time of the loss. Under the broad evidence rule, however, consideration may be given to the original cost, the cost of replacement and expert opinions on the value and gainful uses of the property to determine the ACV. Mew v. J&C Galleries, Inc., 554 S.W. 2d 249 (Tex Civ App. 1977). In a claim to recover the value of a herd of pedigreed and registered chinchillas the insured’s contract to sell and deliver 12 pairs of chinchillas was admissible even though the demand for chinchillas at the time was falling and the contract was solicited by an inexperienced buyer. Pinet v. New Hampshire Fire Ins. Co., 100 N.E. 346 (1956).

In Florida, Courts have held that under the broad evidence rule, replacement value and wholesale value are factors, not shackles, by which to determine ACV. J&H Auto Trim Co., Inc. v. Bellefonte Ins. Co., 677 F.d 1365 (11th Cir. 1982). Courts in Florida have also held that a sworn statement in proof of loss and a contractor’s estimate can constitute probative evidence from which a jury can make an ACV determination. Barret v. Prudential Prop. Casualty Ins. Co., 790 F.2d 842 (11th Cir, 1986).

While the broad evidence rule applies to any claim, its use and practice is particularly crucial in business interruption claims since courts will admit any evidence that tends to shed any light to the actual value of the insured property at the time of the loss, including self-serving testimony and opinions as to any gainful uses to which the property may have been put, but not otherwise incurred. However, like any other evidence rule, the opponent will be free to offer rebuttal evidence to challenge the weight and credibility of the conflicting evidence before a jury. Join me next week to discuss Replacement Cost Coverage and more valuation topics.

One even made a joke about how, according to TWIA, they each have exactly 11.2% of building value damage, reflected in The Parable of Hurricane Ike Insurance Claims:

The parable is a story of two men, Larry and Moe, who were on the peninsula when Ike hit. Larry was struck by a flying 2X4 launched by the wind, then, when the surge came, he grasped a floating timber and made it to safety. He was treated for his injuries, estimated at 11% of his being.

Moe was not so lucky. He was killed instantly by a flying TV set. The storm surge subsequently swept his body away.

The medical examiner compared Moe's corpse to Larry. After taking several months to consider the situation, the examiner declared that Moe was only 11% killed by wind, because that's what happened to Larry. He opined that 89% of Moe's death must have been due to flooding.

As a result of Javier Delagado following up on evidence produced in an administrative trial, Slabbers finally have the answer of how TWIA performed the calculations that everybody has exactly the same damage. The person making the calculation for TWIA was University of Texas Professor William Spelman. The TWIA attorneys introduced his testimony via a previous administrative hearing to avoid expense—so much for the ability to confront and cross examine a witness. The TWIA pleading was very telling: 

Dr. William Spelman provided sworn testimony in a previous contested case hearing involving a "slab" claim (see SOAH docket No. 454-09-3158.E). He has not been retained by T.W.I.A. to specifically evaluate any particular claim, but rather he was reetained to perform a statistical analysis from which all slab claims were evaluated by T.W.I.A. His sworn testimony offered in the previous contested case hearing explained the process by which he performed his statistical analysis, and another witness explained how that statistical analysis was applied to the particular slab claim.

Spelman’s transcript revealed that he has no insurance claim experience. Instead, his education is political science, economics, and public policy. He is not a contractor, estimator, meteorologist, or engineer. He teaches applied math and statistics at the University of Texas-Austin School of Public Affairs.

The “Reader’s Digest” version of what he did to calculate how each of the Bolivar Slabbers would be entitled to 11.2% was to perform a statistical regression analysis where three main variables were considered to provide a statistical expectancy that 95% of all residential Slabbers would fully be indemnified for wind only damage if TWIA paid 11.2% of the insured value of the structure. He was provided information and variables from 387 TWIA estimated claims of partial damage. After consultation with TWIA retained engineers, he considered 18 different variables from those claims, but found that only three of them had a significant impact upon the wind damage. Those three variables were:

1. Whether the building use was residential or commercial.
2. Whether the building was constructed before 2004.
3. Whether the roof was placed on the structure before 1989.

He determined a “loss ratio” which he defined as the Actual Cash Value payment by TWIA on the partial damage buildings divided by the Insured Value. The average residential payment loss ratio was 9.8%. But, if TWIA paid 11.2%, he calculated that 95% of all Slabbers would statistically have their full indemnity on an actual cash value basis.

There is much to criticize with this work. Indeed, from what we have reviewed regarding the accuracy and low-balling of the TWIA estimates of partial damage, the entire population will have to be revised. We will provide more on the extent TWIA underpays wind damage claims on partial losses.

Still, I felt that Slabbers are entitled to know the person and how the amount was arrived at. Here is the pleading and testimony for everybody’s review.

The rule and argument suggested in the title has applied at least in the following cases:

1. Zaitchick v. Am. Motorists Ins. Co., 554 F.Supp. 209, 215-16 (DCNY 1982), aff'd., 742 F.2d 1441 (2d Cir. 1983), cert., den., 464 U.S. 851 (1983) (insureds were entitled to recover replacement cost of home destroyed by fire where insurer refused to pay any money to insureds, which made it impossible for them to comply with condition precedent requiring them to first rebuild their home).
2. Ward v. Merricmack Mut. Fire Ins. Co., 753 A.2d 1214, 1218 (N.J.Super. 2000) (evidence created jury question whether property insurer's refusal to tender actual cash value made it impossible for insured to satisfy the precondition of replacing structure in order to recover the replacement cost and whether the condition was excused);
3. McCahill v. Commercial Union Ins. Co., 446 N.W.2d 579, 584 (Mich. Ct. App. 1989) (insurer's failure to advance funds that insured required in order to rebuild home excused insured from having to rebuild in order to recover for replacement costs of home);
4. Northrop v. Allstate Ins. Co., 720 A.2d 879, 883 (Conn. 1998) (insurer's withholding recoverable depreciation determined to be wrongful because it rendered replacement cost coverage illusory);
5. Bailey v. Farmers Union Co-op of Neb., 498 N.W. 2d 598-599 (Neb. Ct. App. 1992) (insured homeowner who lost home to fire entitled to recover replacement cost where insurer failed to ensure that it would reimburse her up to the policy limits);
6. Polack v. Fire Ins. Exch., 423 N.W. 2d 234, 235-38 (Mich. 1988) ("no reason to hold an insurer any less accountable for its actions than other contracting parties" replacement cost was proper measure of damages in case where insurer's refusal to pay prevented insured from rebuilding within 180 day deadline set forth in policy);
7. State Farm Fire & Cas. Ins, Co. v. Miceli, 518 N.E. 2d 357, 362 (III. Ct. App. 1987) (where insurer's denial of vandalism claim precluded insured from making repairs, insured entitled to recover replacement costs at trial);
8. Maine Mut. Fire Ins. Co. v. Watson, 532 A.2d 686, 688-89 (Me. 1987) (insured entitled to recover replacement cost).

Virtually all insurance adjusters are taught to pay the actual cash value of a building or personal property as soon as possible, and then pay replacement values on an ongoing basis for real and personal property as the replacement expense is “incurred.” Some policies now require the replacement to be “paid” or “completed” rather than just “incurred.” But, this is the common practice and most companies have written claims procedures that more specifically follow exactly what I have highlighted. Most insurers, acting in good faith, extend any limitations of the period of replacement, so long as the insurance company is not prejudiced by delay. The typical prejudice caused by delay usually results in price increases, and many insurers will still pay far outside the allowable period of replacement if the price is brought back to present value at the time of the loss rather than an inflated amount. Some just pay, acknowledging that they profited from the float. Some of my colleagues and others upset with the insurance industry may hate that I acknowledge that insurance adjusters and their managers do anything correctly, but most property insurance cases are amicably resolved in this manner.

The problem arises when some carriers make the wrong call on coverage, fail to timely pay, or fail to pay enough to allow the policyholder to replace. When this happens, the aforementioned cases and thorough discovery into the insurer’s typical practices provide the policyholder with a good factual and legal basis for jurists to relieve the policyholder from a harsh result caused by the insurance company’s wrongful decisions or actions.

I received an email from an insurance agent and appraiser, John Nixon, that warns of many condominiums "shopping" for cheap appraisals and low estimates for the full replacement value be insured. He wrote:

"Lately, I’ve seen some "professional appraisers" advertising that independent appraisals can help reduce homeowners or commercial property insurance premiums. These ads are suggesting that the insurance carriers are cheating the consumer by inflating estimated replacement costs.

Indeed, some ignorant legislator is accusing Citizens of wrongdoing because he can get an independent appraisal 30-50% lower. These appraisers are using tools and methods inappropriate for insurance purposes: new construction vs. reconstruction, inappropriate deductions for covered property, shorting measurements, and/or failure to include building features.

Sadly, many good independent appraisers were driven out of the insurance to value business by a generation of appraisers willing to work for low fees. Many of these new appraisers unethically do their job and "hit" the number their client wants. This same type of unethical behavior by real estate appraisers generated over-valuation and fueled mortgage fraud. In part, these activities helped lead to the collapse of the lending market.

Now, these same appraisers are trying to appease client demands and "hit" a low number for insurance premium purposes. The insurance consumer doesn’t know any better. However, they will get a hard lesson when the carrier uses different tools and methods when it comes time to calculate coinsurance requirements after a loss. Neither the clever agent nor unethical appraiser will help their client recover from inadequate limits and resulting coinsurance penalties.

I have tried to get Citizens Property Insurance Corporation to clarify their advice for consumers on getting replacement cost estimates for insurance to value purposes, but they declined. They have left the responsibility with the uneducated policyholder to determine appropriate valuation methods. They also declined to disclose what standards they would use post-loss.

Does an underwriter’s acceptance of an independent appraisal on the front-end for underwriting purposes obligate them to use the method/calculations on the back-end for coinsurance calculations? If the coinsurance penalty holds up, have you ever tried to go after appraisers E&O coverage?

In most cases they will have used M&S cost guides and software which have a license restriction prohibiting their use for insurance purposes. I think the agents are more careful to cover their malpractice exposure with signed waivers.

John Nixon
President
Asperta, Ltd."

There is no definitive answer, as each case depends on the facts. I deal with the ramifications of coinsurance penalties all the time. The worst offenders are usually commercial businesses and condominiums. There are various methods we use to avoid coinsurance penalties when the issue arises.

However, I urge all policyholders to get a professional replacement value estimate if feasible. To be safe, over-insure rather than underinsure. Most of the time, many who believe they over-insured are still underinsured.

Agents have to be careful as well. We currently have an eight-figure errors and omission case against an agent. The case involves a co-insurance penalty, and the agent helped make the determination as to the amount of required insurance.

One example is in California where the law requires payment of insurance loss on real property based on loss of market value. It is a stupid rule of law since modern policies contemplate payment based on repair costs regardless of market value. Most California adjusters simply disregard the law and pay based on construction repair estimates.

Texas has a very fair method to determine the value of personal property within a household. The rule certainly is not being told to policyholders. Indeed, most policyholders are told to list their personal household goods, list the date of purchase and the replacement cost, and then provide that list to the insurance adjuster. The adjuster arbitrarily applies depreciation and pays a figure claiming it is the "actual cash value" of the personal property loss. This practice is wrong under Texas law and probably results in underpayment.

In Crisp v. Security Nat'l Ins. Co., 369 S.W.2d 326, 329 (Tex. 1963), the Texas Supreme Court held:

"The law of damages distinguished between marketable chattels possessed for purposes of sale and chattels possessed for the comfort and well-being of their owner. In the instance of the former it judges their value by the market price. In the instance of the latter it measures their loss, not by their value in a second-hand market, but by the value of their use to the owner who suffers from their deprivation. The latter measure is employed in the case of household furniture, family records, wearing apparel, personal effects, and family portraits.

The courts have not abandoned the consideration of either market or reproduction or replacement values in arriving at actual value to the insured, but evidence of those values may be used as a guide in making that determination rather than a shackle which compels strict adherence thereto. The trier of facts may consider original cost and cost of replacement, the opinions upon value given by qualified witnesses, the gainful uses to which the property has been put as well as any other facts reasonably tending to shed light upon the subject.

Where property, such as household goods and wearing apparel, has no recognized market value, the actual value to the owner must be determined without resort to market value." (Emphasis added)

In 1979, the Texas Supreme Court overruled a lower appellate Court that wrongly excluded the testimony of the policyholder's estimate of value. It upheld the finding in Crisp and stated:

"Thus, the rule is that where household goods have no recognized market value, the trier of fact may consider, in determining the actual value to the owner at time of loss, the original cost, cost of replacement, opinions of qualified witnesses, including the owner, the use to which the property was put, as well as any other reasonably relevant facts.

The Court of Civil Appeals erred in holding that the testimony of Mrs. Chance was not competent evidence on the value of household possessions at time of trial. This holding is contrary to the Texas Supreme Court's holding in Crisp."

Allstate Ins. Co. v. Chance, 590 S.W.2d 703, 704 (Tex. 1979).

Power to the Policyholder!