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