Limit Uninsured Loss With Proper Valuations
FEBRUARY 1, 2022
A few years ago, during a relatively long period without a major catastrophic event in the U.S., insurance carriers were lenient on property valuations. Clients and brokers submitted declared values in good faith, and, if the amount seemed in line with market value, carriers did not hesitate to accept submissions, and paid claims accordingly.
This began to change in 2017 when the U.S. was impacted by several catastrophic events, including three major hurricanes and a massive wildfire, causing billions of dollars in damage. A surge in demand for contractors and materials following these events further inflated the cost to rebuild. In many cases, the cost of the damage was one and a half to two times the declared amount — and with very few policy limitations in place, carriers had little choice but to pay the claims.
In response to this unexpected “loss creep,” insurance carriers began to impose recovery limits to insulate against inadequate valuations. The resulting gaps in coverage could mean millions of dollars in uninsured losses.
As the U.S. continues to experience billion-dollar disasters every year, and supply chain constraints continue to drive up the cost to rebuild, addressing gaps in coverage and ensuring proper valuation is critical for a full recovery following a catastrophic event.
Address Coverage Gaps
Before tackling recovery limits, insureds should develop a thorough understanding of their risk and the cost to rebuild using data analytics (read more about using analytics to better understand risk).
Armed with analytics, insureds can negotiate policy terms and conditions with the carrier and reduce the risk of significant loss following a catastrophic event.
In USI Insurance Services’ experience, the following recovery limitations commonly result in uninsured losses ranging from $500,000 to $3 million. Review your policies for these and other coverage gaps:
- Coinsurance — a penalty imposed on insureds for not insuring to the carrier’s required level. When the insured suffers a loss, the carrier divides the insured’s current coverage by the required amount and applies that percentage to the total cost of the loss. Anything beyond that is at the insured’s expense.
- Occurrence Limit of Liability — a recovery limitation based on the insured’s statement of values. Essentially, what the insured declares is what the carrier will pay for a claim. Costs in excess of the declared value is an uninsured loss.
- Margin Clause — a buffer offered by some insurance carriers to help insureds absorb losses in excess of the declared value. Carriers that offer this are willing to pay the declared value, plus a margin percent, typically about 10% of the declared value. While this does offer some benefit to the insured, costs in excess of this percentage would not be recoverable under the policy.
Don’t wait until the next loss to find out whether you’re adequately covered. Review your policies and assess your risk to ensure full recovery following a catastrophic event.
How USI Can Help
USI helps clients fully understand their risk to determine accurate valuations and optimal carrier placement, and negotiate policy limitations. USI works with clients to:
- Start the renewal process as early as possible to ensure an accurate and timely submission.
- Internally evaluate current values:
- Compare to regional costs for similar buildings.
- Gather and validate client’s COPE data and other information related to the exposure.
- Run valuation analytics and loss projections to determine appropriate values and limits.
- Get agreement from the underwriter, and in disputed cases, use a third-party valuation service; drive pricing down based upon the certainty of the values.
- Evaluate risk financing structures and program design changes, and align clients with carriers that best fit their needs.
- Present declared values to the carrier, and negotiate policy terms to minimize or potentially remove restrictions, allowing for optimized recovery following a catastrophe.
Natural disasters such as hurricanes, flooding, wildfires and other severe weather events continue to increase in frequency and severity — and supply chain constraints keep driving up the cost to rebuild. Therefore, it’s more important than ever to ensure appropriate coverage for your organization’s unique risks.
Learn how to limit uninsured risk and implement tailored mitigation solutions that help reduce your organization’s total cost of risk. Email firstname.lastname@example.org or contact your USI representative today.
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