Suddenly there’s a cluster of articles, formal complaints, and political hay about Citizens replacement cost (RCV) calculation methodology. There are four reasons for this:
1) Citizens is finally getting serious about making sure it’s policyholders are insured to value.
2) Way too many Citizens policyholders are underinsured.
3) Those who are underinsured want to continue to pay even less than their subsidized, rate-capped, Citizens policy should cost.
4) Those complaining and writing about it don’t have the vaguest idea of what they’re talking about.
In fact, there seems to be an automatic presumption by some–media, activists, politicians, whatever–that anything causing a poor put-upon Citizens policyholder to pay one penny more is part of some conspiracy to backdoor an otherwise prohibited rate increase. You decide, but the renditions I’ve seen are barely more than activist innuendo masquerading as balanced news.
In essence; Citizens is using subterfuge to obtain higher premiums–requiring applicants to calculate the “replacement cost” of their homes via an updated computerized method, resulting in the purchase of higher and unnecessary amounts of insurance. Ludicrous on its face…Citizens has been using its new computerized 360 Value cost estimator for some time now and was exploring its use and accuracy before rate caps were even implemented.
Besides, insurance people know this is standard with both private carriers and residual markets in other states. We also know the duty to assist customers in determining an accurate amount of insurance should never be taken lightly–there’s a replacement cost penalty applied at the time of a loss.
When calculating replacement cost, the tendency is to think only of a total loss which, actuarially, is a rare occurrence.
Those quoted in the articles don’t understand that when a “partial” loss occurs the claim payment can be reduced, too, to the same extent as a total loss. In essence a policyholder 50% underinsured has a kitchen fire that causes $10,000 in damage would only receive $5,000 (minus any deductible).
Policies could vary, of course, but…this is standard in every state, and for all companies, including Citizens. (See note #1 below).
The activists and politicians quoted in these articles are way too quick to criticize what is an attempt by Citizens to protect consumers against this shortfall.
Also, in one Tampa Tribune article by Shannon Behnken; a homeowner, who has now filed a formal complaint, expressed concern that “…if he does have to rebuild, he’ll never get to collect the full amount on the policy he’s paying for.” While we can’t teach Insurance-101 to everybody, just a phone call to an insurance agent would’ve revealed that a total loss, to his home that Citizens said had a replacement cost of $237,000, would’ve been paid in full under Florida’s valued policy law; even if its actual replacement cost was much less; (See note #2 below).
Lastly, at some point, the industry needs to do a better job of explaining that a home’s sales value and replacement cost are light years apart. The cost to repair or replace after a loss involves labor and materials, contracting fee’s, transportation costs and more. And, after a hurricane or other disaster, repair costs spike through the roof; a phenomenon called “demand surge”. In a deflated real estate market the replacement cost will often be double the sales price.
In summary, and contrary to the “conspiracists”: getting serious about insurance to value isn’t Citizens trying to collect more premium, it’s Citizens trying to help consumers collect the full amount of their claim.
Good job Citizens!
Of course, I say all this secure in the knowledge it will continue to fall on the ears of a deaf media.
Note 1: Under the standard ISO homeowners policy building losses are settled on a replacement cost basis as long as the insured carries at least 80% of the replacement cost. A house with replacement cost of $200,000 has to have at least $160,000 Coverage A to get full replacement cost. If the house is not insured to at least 80%, then the carrier pays either the amount due after applying a coinsurance penalty or the ACV of a loss, whichever is greater.
Note 2: The Valued Policy Law requires that when a building or structure suffers a total loss from a covered peril the carrier must pay the policy limits; with the following exception: “…(7) Nothing herein shall be construed as prohibiting an insurer from repairing or replacing damaged property at its own expense and without contribution on the part of the insured except, as provided in subsection (6), when an insured has elected to purchase stated value coverage…”
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