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Selling Adequate Limits on Dwellings

By David Surles, IIAT Insurance Agency | Oct 7, 2010
People take big risks, sometimes without knowing they are taking the risk or how little it might cost to avoid the exposure. For example, a significant number of home owners don’t purchase enough insurance to replace their homes after a total loss by fire, wind or flood. According to Marshall & Swift/Boechk, a leading supplier of local building cost information, 66 percent of U.S. homes were underinsured in 2007 by an average of 18 percent. Most people - including insurance professionals - know that the chance of a total loss is not high, but that would be small comfort to a customer who suffers a total loss. Look at it this way: chances are good that one of your customers will experience a total loss in the next five years. What will you say when they discover they don’t have enough insurance to replace their home? “Think about all the money you saved by underinsuring over the last 20 years” probably won’t be very comforting.

You and your customer may be shocked at the amount of insurance required by an insurance company based on the company’s replacement cost calculator, but it’s your job to explain the reasoning behind the valuation. When you consider all the factors that determine the cost to rebuild a home after a total loss, you have no reason to be embarrassed about selling the recommended limit - or even more.

The amount of insurance should cover the cost of rebuilding the home at current construction costs, not including the value of the land. Don’t think about the price paid for the home or the appraised value. The cost of rebuilding could be more or less than the price paid or the amount it would sell for today.

Besides the cost of materials and labor, there are other considerations such as: (1) the expense of clearing debris from the lot before rebuilding can begin; (2) fees for an architect or other design professional to estimate costs and produce plans to be followed by the contractor; (3) rapid inflation in the cost of building materials and labor following a major catastrophe that affects a number of homes in the same area; and (4) local building codes that require replacement with additional features or more expensive materials.

Ultimately it is the customer’s responsibility to establish the value of their home and select the amount of insurance, but you can help with that decision and explain what you can do to avoid an unpleasant surprise after a loss. For one thing, you can encourage the customer to take a look at AccuCoverage by Marshall & Swift/Boeckh, where he or she can obtain a real-time estimate based on information they enter for a fee of $7.95 charged to their credit card.

You can find a consumer-friendly piece on InfoCentral to help you communicate these ideas to your customers. “Insurance to Value - Homeowners and Dwelling Policies” in the Client Communication section of InfoCentral at iiat.org, can be downloaded and saved to your computer. It can be and modified to suit your needs, either as a general communication to all policyholders by mail, e-mail, on your website, or in your agency newsletter.