(*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.