Professor Alan Manning

Insurance protection gaps can be caused by many different things. One is when insurance agents suggest that a policyholder can save money by purchasing insurance to less than full value. Professor Jay Feinman warns about this and calls this the “underinsurance gap.” He defines this as occurring when “the policyholder has coverage, but in an amount that is less than the extent of actual or potential losses.”

This was warned against by another Professor, Alan Manning, in his blog post, Under Declaring – You are now the insurer!  In the post he says the underinsurance problem is common:

A significant number of claims we at LMI attend, have an under insurance problem. This can destroy all the hard work of a business and in some cases leads to business failure or at the very least a significant financial loss for the owners/shareholders and often dismissal for the person responsible for the decision.

He also recounted how this happens when some insurance agents provide advice to underinsure, often to obtain business by suggesting that another agent is not attempting to reduce the price of insurance:

Yesterday I had one of those calls where you can feel the frustration and stress in the broker, where a long standing client is under attack by another broker who is simply selling on price and stripping away the years of hard work that the holding broker has put into the client.

In this case, the attacking broker is advising the Insured to only declare 80% of the true value at risk as the policy contains an 80% co-insurance clause.

To me, this is extremely poor advice and is putting both the Insured at risk and the attacking broker’s professional indemnity program, not to mention their reputation.
. . .

My advice to brokers is, in the strongest terms, never recommend this to your clients . . . . Insurance is all about protection . . . . Too much is at risk to gamble with half baked insurance.

My advice to Insureds is, if you receive this advice, stick with the broker who is there protecting your business and personal risk, or if it is your holding broker, find a new broker.

The American Association of Public Insurance Adjusters (AAPIA) and the Florida Association of Public Insurance Adjusters (FAPIA) have come out publicly against the insurance gap problem. They are taking action about this problem with regulators and legislators. Merlin Law Group joins them in this effort.

Holly Soffer, the General Counsel for AAPIA, will be at the Professional Public Adjusters Association of New Jersey meeting this Thursday. She will be presenting on, “Coverage Gaps Issues Affecting Public Insurance Adjusters.” Here is a link to the agenda for the conference.

Next week, yours truly and leaders from the PPAANJ will meet with New Jersey’s Insurance Commissioner to discuss, in part, the insurance gap problem and what she can do about it.

Thought For The Day

Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half-baked solutions. Nothing pains some people more than having to think.
—Martin Luther King, Jr.

  • Jay Williams


    You may not remember me, but we met prior to one of your sessions with David Thompson a couple years back at the FAIA Annual Convention and Educating Symposium. I really appreciate your article and the points about insuring to the proper value of the structure. As you know, undervaluation is a huge problem and the people in CA have found this out after the last few wildfire seasons.

    Unfortunately, I’m going to have to disagree that it’s an agent problem. While there are a few agents that might suggest underinsuring to save premium dollars, most agents are conscious of proper valuation. I’ve spent over 40 years in the industry: 21 as an agent; 9 with FAIA; 7 on the company side; along with various other positions.

    Most homeowner insurance companies have valuation software built into their rating and policy writing systems. One problem that agents run into is that many consumers think the replacement estimate is too high and want to insure for less. An agent that recommends underinsuring is asking to be sued. That said, it’s also hard for them to sell a customer that thinks they are over insuring.

    The most accurate way to properly value the structure is for the insured to get an appraisal from a licensed and reputable property appraiser.

    Thanks for allowing me to express a counter opinion. I’m a regular subscriber and enjoy reading the blogs you all post.

    • wmerlin

      Thank you for this view. It is important.
      I also remember very well the session with David Thompson. The FAIA is very lucky to have such a distinguished insurance educator. Indeed, the public is served by his education to insurance agents.
      I was at another conference in Tampa with David Thompson where he provided some responses which insurance agents could use to help dissuade customers from buying cheap insurance. I think we need to do everything we can to educate policyholders why full replacement cost coverage is the only way to insure.
      Indeed, it is illegal to underinsure when a federally backed mortgage is on a home or commercial structure and a breach of contract even when it is a non-conforming mortgagee or security agreement that requires one to insure to full replacement cost.
      What do licensed agents say to the mortgagee certificate holders when agents have actual knowledge of the underinsured situation? What are the agents saying to the insurers underwriters who have underwriting requirements to insure to full replacement cost?

  • This deliberate underinsurance issue really began when insurers introduced “guaranteed replacement cost” (GRC) homeowners policies that at least provided an extra 25% or more to the Coverage A dwelling limit. Some agents abused this by rationalizing that the insured had an extra amount of “free” insurance so the selected limit could be lower than the actual replacement cost.

    The reason for GRC policies was to recognize that valuation is not an exact science and that the replacement cost could be higher following widespread catastrophic losses like hurricanes. As a result, too many insureds were underinsured and insurers did not receive adequate premium for the exposure.

    At one time, I heard a lot of complaints from independent agents about competing with captive agents that were allegedly doing this. As a result, many carriers abandoned the GRC concept or limited its use. Today I hear very little about deliberate underinsurance by agents in the marketplace. if an agent recommends 80% insurance to value on a homeowners policy (BTW, the 80% clause in those policies is usually not a “coinsurance” clause), it is likely someone who is ignorant or relying on their E&O coverage in the unlikely event the insured has a loss.

    I’d be more concerned about the rise of “fast/easy/cheap” insurtechs that sell online or through a phone app and say they can place your homeowners insurance in 60-90 seconds. There’s no way to properly do an exposure analysis for a family no matter how big your data is.

    On a research project, i got a quote from one such company and the square footage of the home was 1,200 sq. ft. smaller than the actual living space. The insurtech used data from a real estate web site like Zillow or Trulia which got their data from county tax records which are often notoriously out of date.