My firm, Burand Insurance Education, teaches in-depth coverages classes. The course material is in-depth and personal and when combined with my 25 years' E&O auditing experience, we convey a lot of existing knowledge that is not possible to gain when classes are taught in a lecture setting. This combination has truly provided the best situation for our participants to learn, without an E&O event, just how much coverage knowledge they possess and then improve upon it.
We have discovered large coverage knowledge gaps among our participants relative to many coverages. This kind of in-depth education, where knowledge gaps are discovered, is the most important kind of education possible even though the discovery of such gaps is alarming to many agency owners and executives. The realization of, "Oh my goodness, my producer/account manager does not even know that?!" is disconcerting. But it is far better to learn of these gaps in a class setting as opposed to a deposition setting.
Specific to building values, we have learned that a large percentage of agency staff, producers, and underwriters, take the building value assessment at face value without understanding what the numbers actually represent. Before going further, however, I have a caveat that this article is far too short to be considered comprehensive or even thorough.
Additionally, a point that we constantly reinforce in our classes is that students have to read the form they are selling to understand the coverage at hand. Much to the frustration of many people, universal answers do not exist. If everyone sold the same insurance policy, agents would not be necessary. The reason agents are necessary is to identify the applicable coverage in the form being sold. Therefore, the best advice, regardless of coverage topic, is to read and understand the forms you are selling and to not depend on your underwriters to advise you correctly. Read the definitions in the form and don't Google the definitions because Google is not the insurance company and therefore, their definitions are moot points.
Relative to building values, they are obviously important and also obvious to many, but what is not obvious to all people we have discovered, is whether the values are associated with actual cash value (ACV), replacement cost, functional replacement cost, or even market value. It is well worth every agency's time and effort to determine whether your staff and producers truly understand the differences in values and can effectively explain these differences to insureds.
Probably more important is understanding Ordinance & Law. An argument exists that replacement cost estimators include O&L. For example, the building cost to rebuild is $300,000, but new codes will add an additional $50,000 to the total. Does the estimator/ITV include that $50,000? Many people say it does and many people say it does not. I am not privy to the confidential data used to determine replacement cost so I do not know the answer. I suspect that on any given building, it sometimes does and sometimes does not. Many times, where the building design or even square footage would be changed to meet new codes, the ITV almost certainly does not include the O&L cost. Therefore, my suggestion is unless explicitly stated, never assume O&L calculations are included.
Another reason to avoid making the assumption that O&L is included in the replacement cost is because insurance is designed to restore the insured to the same financial status they had immediately preceding the claim. The immediately prior status for a building not up to current code is rebuilding it to its prior status, not the up to code status.
Many people assume O&L only applies to old buildings. That is not necessarily the case. Considering all the new green initiatives and requirements that have been put into effect, buildings that are almost new may be code deficient. With COVID-19, expect significant building code changes soon.
Two building calculations are usually required. One ITV for the building as is and one for code compliance. A common response we get in classes is that O&L is automatically included in the policy so why bother? That question is usually evidence of not knowing coverage adequately because the person asking is not doing the math relative to whether the throw-in coverage is adequate for any given building. Is the throw-in coverage 10%? 20%? How close to adequate is the throw-in coverage? Is it enough to rebuild even to the point of obtaining a certificate of occupancy?
A professional agent will take the extra step of asking the insured to determine what amount of O&L is adequate. Insurance agents don't generally have the tools required to make these assessments on their own. Realtors and contractors are great resources. However, a 10% throw-in is obviously inadequate in a whole host of scenarios. In fact, in the worst cases I've seen, the O&L equaled the entire building replacement cost. How far does the throw-in coverage go in those situations?
Explaining O&L to insureds can be difficult and many will be lost relative to what number will apply. They are not building experts either. Adding to the difficulties of true professional agents is explaining to insureds why they are bringing the situation to their attention when the last 10 agents never discussed it.
Plenty of amateur agents exist who will gladly sell inadequate coverage and never have these kinds of discussions. A knowledgeable professional agent who cares about their clients enough to have these difficult conversations has a tall hill to climb, but with success they usually make the most money too. Additionally, no one needs an agent who sells inadequate coverage.
Be the hero explaining to clients and prospects that you are working hard to protect them rather than just sell to them. Explain your extra commission is $5 (or whatever the number is) for the extra coverage. For some, when they realize you are making next to nothing for recommending better coverage, the more they will trust you. Meanwhile, you are protecting the agency from E&O claims and building a polished, professional reputation!
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
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