Your client has the gold star of homeowners coverage: special form coverage, replacement cost on dwelling and contents, and inflation guard. The carrier does its magic at renewal and voila! The coverage limits are increased each year.

Smooth sailing ahead, right? Wrong. There is still a gap in coverage after a covered loss, which is the beginning of every agent's nightmare. 

Here's an example. A longtime customer of an agency wanted to shop the market because the renewal premium was a concern and the HO3 policy was moved to another carrier for a substantially lower premium. After discussion about the coverage limit the customer decided to go with the replacement cost that the new carrier had calculated based on information the customer provided, which was lower than the prior HO3 policy. The agent obtained an HO3 that had replacement cost on the dwelling and property. The policy limits increased gradually at each renewal. 

Shortly before renewal, the home suffered a loss due to a fire. The customer contacted the agency and stated that they had been planning on coming into the agency to discuss the coverage limit prior to the renewal. However, the fire occurred prior to arranging the meeting. 

The loss adjustment exceeded the policy limits, and the carrier tendered the dwelling limits and personal property limits without withholding depreciation. The customer then accused the agency of underinsuring them. 

It was later determined that the customer had made improvements to the property that increased the square footage 10 months prior to the fire loss. However, the customer never reported it. Further, the customer had personal property that should have been scheduled, which would have increased the personal property coverage above 10% of the dwelling limit. The customer did not advise the agent of the purchase of these items. 

Miscommunication between homeowner and agent is just one way coverage gaps are created. There are several ways for a gap in coverage to be created:

1) Out-of-date software. The software utilized by the insurance company has not been updated to factor in the ever-increasing cost of construction materials and labor, which have skyrocketed over the last two years. Software that is updated annually may still be outpaced by these rising costs. 

2) Software mismatch. The company adjuster utilizes a different software to adjust the loss than the underwriting department when calculating the replacement cost. This is not uncommon. The difference between the adjuster's software and the underwriting software may not be apparent with a partial loss. However, the issue raises its ugly head in the event of a total loss.

3) The personal property limit is too low. If the dwelling limit is inadequate, this directly impacts the personal property limit.

4) Home improvements. The client increased the square footage or made improvements without notifying the agency. Obviously, this will increase the replacement cost.

5) Scheduling. The client did not schedule valuable personal property items. Unscheduled items can be capped by a sublimit, leaving a potential gap.

An agency cannot control what software the carrier utilizes when calculating replacement cost versus loss adjustment. An agency can, however, adopt measures to provide a defense to accusations of underinsuring a customer, such as:

• Be sure the application is completed in full, including the square footage of the home and a signature.
• Remind the client in writing that if any changes are made to the dwelling or expensive personal property has been purchased, they should report it to the agency immediately. 
• Amid escalating construction costs, ask the underwriter to run a new replacement cost estimate. If your client declines the new replacement cost estimate, get the rejection in writing.

While the agency cannot prevent an allegation of error, an ounce of prevention is worth a pound of cure.

Janice Blanton is an assistant vice president, claims specialist with Swiss Re Corporate Solutions and teleworks out of the office in Kansas City, Missouri. Insurance products underwritten by Westport Insurance Corporation, Kansas City, Missouri, a member of Swiss Re.

This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re") and/or its subsidiaries and/or management and/or shareholders.