I remember the moment clearly.  Hurricane Jeanne had just walloped Florida with its fourth hurricane of the 2004 season.  I spent over four hours in the muggy summer heat measuring and scoping damage to a home that two 50 foot pine trees had fallen on and split in two.  Roof and wall framing jutted out at odd angles like jumbled matchsticks.  After uploading my estimate to my carrier and receiving authority to issue a total loss payment, I walked over to the homeowners.   The husband and wife were digging through the debris of their home and salvaging their personal property that hadn’t been destroyed.

This was always the most rewarding part of my job as a catastrophe adjuster.  I handed them a check for $170,000 and waited to see the relief and joy on their faces.  Instead, they broke into tears.

“That’s it?” the wife said.

The husband was visibly upset.  “How are we supposed to rebuild our house with that?”

Not the reaction I expected.  But I understood – the cost to rebuild their home exceeded the amount they had it insured for.  Despite the value of the check I’d given them, there was nothing more I could do.  They saved a hundred dollars a year in premium by reducing their Coverage A limit and now were left over $25,000 short on the cost to rebuild their home.

Have you had a similar conversation with your clients about the danger of underinsuring their home?  While the Geico-ization (my made-up word) of insurance has made consumers focus more on price than coverage, insuring homes to full replacement cost value is an important topic for several reasons:

  • Protection for the clients.  Even with O&L coverage, no one wants to be left $25,000 short if there is a total loss.   If the customer is price-conscious, point out the small difference in annualized premium compared to the large coverage gap.
  • Insuring a risk to value means the risk is being properly rated and priced for its exposure.  Having the correct premium means Tower Hill has adequate money to pay its claims and in surplus, opening capacity to write business in other areas.  If we don’t receive accurate values for our risks, our actuarial data and long term financial stability are put at risk.
  • As we all focus on controlling loss ratios, think of this simplified example:  for every $100 you collect in premium, Tower Hill pays out $30 in losses (i.e. a 30% loss ratio).  If every home in your book of business was underinsured by 5%, this would reduce premium to $95 and increase your loss ratio to 31.5%.

Tower Hill requires all homes to be insured at replacement cost value.  This is not always the same as “market value.”  What you can sell your home for depends on factors (location, school district, land, the economy) other than re-construction cost.  Replacement Cost Estimators (RCEs) focus on the physical materials and labor required to rebuild the home in the event of a total loss.  This value is unique to every home depending on its features.  At renewal check-ups, it’s a good idea to ask customers if they have made any upgrades or remodeling that would increase their Coverage A limit.

I’ll open it up to the group – what are other things you do to ensure customers are insured to value?

Brian Hunt, AIC, CPCU

About Brian Hunt, AIC, CPCU

Commercial Underwriter II
Tower Hill Insurance Group

Brian started his insurance career with State Farm in St. Paul, MN, in 1998. In addition to handling property and liability claims, he served as part of the National Catastrophe Team, following tornadoes, hurricanes, and hailstorms across the country. He made several friends named Charley, Frances, Jeanne, Ivan, Wilma, and Katrina. He moved to Florida in 2009 to manage a catastrophe office in Jacksonville, and because of a girl (now wife) his path led him to Gainesville and Tower Hill Insurance. In his free time, Brian is an Ironman triathlete and also enjoys writing about local and national history.