Addressing Valuation Discrepancies in HO Replacement Costs

Most homeowners companies have cost estimators an agent must fill out to determine replacement costs.

Q: “My question is, if there was a loss and the home was insured for $300,000, but rebuild cost was $325,000, what would be the responsibility of the homeowners company?”

A: “This question comes up often, and the Big ‘I’ Virtual University offers several articles on the topic (see below). While we can't respond to any legal ramifications, determining value is the insured’s responsibility, not the agent’s. The insurer wants to make sure the property is not over-insured, particularly if the state has a valued policy law. That’s why the company insists on the use of some sort of valuation tool.

The insurer also wants adequate premium for the risk so, to a lesser extent, it wants to make sure the property isn’t underinsured. The insured should be concerned that the property is not undervalued. The tool the agent uses should simply confirm the insurance limit the insured requests.

If the situation you describe should arise, you can bet both you and insurer will be sued. You can ask the insurer for a hold harmless agreement so if the agency is sued for an inaccurate valuation, the insurer will indemnify. Experts usually suggest the insured get the property appraised on an insured replacement cost basis and confirm that with the insurer’s underwriting tool.

Also include inflation guard coverage on the policy by endorsement or declarations page entry. Then have a professional valuation conducted by the insured perhaps every five years to make sure they’re still in the right ballpark.

For more information, check out the following articles, available to Big ‘I’ members only:

The HO Undervaluation Problem

Agent Liability for Property Undervaluation

Valuation Methods Don’t Measure Up’”

Bill Wilson is director of the Big “I” Virtual University.

This question was originally submitted by an agent through the VU’s Ask an Expert Service. Answers to other coverage questions are available on the VU website. If you need help accessing the website, email to request login information.