The insurance-to-value questions and concerns of underinsurance come up every time an insurance agent selling property insurance makes an application or oversees a renewal of a property insurance policy. Bill Wilson is an experienced insurance agent and insurance agent educator. When he talks insurance, those of us in the insurance business should listen.

He wrote a comment to a post, The Wildfire Underinsurance Gap, where he stated, in part:

Some good news I guess…I had a very good agent I know tell me yesterday that his carriers were increasing limits by 20% of more, recognizing the increased price of labor and especially materials. The difficult part is properly insuring for widespread catastrophes like wildfires and hurricanes when costs can dramatically increase overnight due to demand and construction may not begin for months due to the lack of materials and labor.

It is the rare agent that has the knowledge and experience to guarantee or ensure that a building is adequately insured even for losses to that lone structure. Insurers usually hire third parties that do property valuations that allegedly do have the proper training on the valuation system being used.

And, again, even where a valuation is reasonable, with catastrophic losses affecting hundreds or thousands of properties, prices are going to be driven up for labor and materials. Given current supply side issues and labor shortages, I’ve heard that there are properties in the recent Colorado wildfires where construction is unlikely begin for a year. How do you predict these economic situations and, if you could, who is going to pay the increased premiums…especially when there are going to be cash flow focused insurers willing to underprice insurers who are diligently trying to protect the policyholder’s assets?

It’s a complicated issue with valid points on both sides as to who can best advise as to reconstruction cost. My belief is that, as the owner of my biggest asset, I have a vested interest in making sure, as best as I can, that I’m adequately insured. So I’m going to contract for my own valuations. That being said, I realize I’m far more knowledgeable than the average consumer who doesn’t even bother to turn past the declarations page on their policy.

It is interesting to note his view that “it is the rare agent” who can properly determine the proper amount of value to place on a structure to be insured. If an agent, who is asked to make applications for insurance coverage where the insured may even have co-insurance penalties for not insuring to full replacement cost value, cannot make such a calculation, I would suggest the entire system of property insurance valuation needs to be revamped. Surely, if it is rare for an insurance agent who at least is doing this endeavor on a regular basis, how much more difficult is it for policyholders who never make this calculation and have not had training to determine what to do?

Is it negligent for an agent to sell a property insurance policy with a co-insurance penalty without instruction to seek a third-party expert opinion before selling such a policy and warning how difficult it is to properly insure to value?

Wilson’s view is important. If agents cannot do this for policyholders, shouldn’t the insurance industry admit it and then find an alternative method to determine the accurate replacement values of the structures it insured? The industry knows the policyholders cannot do it.

If insurance to value is so important that we allow insurance companies to penalize their customers for not getting the valuation correctly, should there not be a new industry of professionals who will take this task on, since the insurance agent industry will not do so voluntarily?

As I have stated in my book, PayUp!, the first key for a policyholder to avoid a disaster with their own insurance company is to find a great insurance agent. Until the underinsurance gap problem is resolved, a great agent may be the best to help find and suggest methods for a policyholder to be accurately insured to value.

Thought For The Day

There are worse things in life than death. Have you ever spent an evening with an insurance salesman?
—Woody Allen