The Underwriting Submission—Homeowners Insurance
March 2009
The homeowners policy provides a broad
spectrum of property and liability coverage. In spite of the broad nature of
the coverage, underwriters typically focus on a few key areas when making
their decisions about coverage.
by Elise Farnham
Illumine Consulting
With the real estate market cycling ever lower and with resultant risk
changing as neighborhoods become partially deserted from once bustling
environments, it is important to make sure the true nature of the risk is
understood and that sufficient information is submitted to the underwriter
for appropriate evaluation and pricing. This is a challenge for producers
who are trying to assist the homeowner in asset protection, while ensuring
the underwriter has sufficient information to make an objective analysis of
the risk.
Provided the prospective insured meets eligibility requirements,
there are three key underwriting considerations: location of the premises,
the type of construction, and the values associated with the covered
property. The producer will also want to uncover how the property is used,
i.e., home-based business activity.
Dwelling Environment and Risk
Evaluation
When analyzing the location of the premises, the
underwriter will evaluate the surrounding environment and placement of the
risk. Multiple massive storms in the Midwest have caused underwriters to
look beyond the obvious coastal hurricane zones to consider more carefully
other weather-driven risks of loss: tornadoes, ice storms, and high winds,
to name a few. The availability of historical weather event occurrences
makes it relatively easy for the underwriter to assess the potential for
storm damage, the potential extent of damage, and the effect the surrounding
terrain and environment may have on any potential or expected damage.
Comprehensive Loss Underwriting Exchange (CLUE) reports are another tool
used to ascertain the history of the property for further review or
evaluation.
The second consideration regarding location of the premises is
the availability of skilled, knowledgeable fire professionals who have the
tools and equipment to respond quickly and appropriately. It’s not enough to
look at hydrant placement; an evaluation of the overall capability and
ability of emergency personnel to respond is required. For instance, a
hydrant within 50 feet of the insured’s driveway isn’t much help if the home
is behind a protective enclosure or physically situated toward the rear of
the property away from the road. It should also be noted that in recent
years, many counties and cities have upgraded hydrant placement, fire
houses, and equipment, and have initiated advanced training procedures. The
underwriter may not be aware of these upgrades, especially if an agency,
such as Insurance Services Office, Inc. (ISO), has not conducted an
evaluation in over 10 years.
Another area that weighs heavily on the
underwriter’s decision is the dwelling’s construction. Frame structures are
highly susceptible to fire and windstorm loss. Masonry construction is a
better risk but remains susceptible to fire and windstorm loss due to
weaknesses of most roof construction. New construction codes and processes
are being introduced primarily along coastal areas to provide superior
protection against risk of loss. Most of these new construction methods have
been tested only on a limited basis and appear promising.
Some
construction has been proven to withstand very high winds—roof strapping,
tie-downs, and breakage resistant glass. The underwriter will need to know
if the insured has completed retro-fits by adding protective techniques to
the dwelling which will reduce the overall risk of loss.
Probably the
biggest challenge in a tumbling real estate market is proper valuation of
the insured property. Methods for valuation can be inadequate and lead to
inaccurate or insufficient coverage. The prospective insured may believe
that the policy should cover the sales price of the dwelling, not realizing
that the land is not covered by the policy, and that market value is not a
factor when determining replacement cost. It is conceivable in today’s
market that the replacement value of a dwelling may far exceed its market
value leading to a point of contention with the prospective insured and the
possibility of under-insurance.
With the advent of building ordinance
coverage, an additional consideration is in order. The cost of repair and
replacement of an existing structure may be significantly higher due to new
building codes. The cost to add wind and fire resistant roofing,
reconstruction to include earthquake protection, and other improvements can
be significant. Due to the additional costs that may be involved, the policy
valuation may be dramatically different than the cost to repair or replace
to pre-loss condition, especially for older dwellings in damage prone areas.
Personal Property Risk and Valuation
After evaluating the dwelling
risk, the underwriter will consider the personal property risk and
valuation. Here again, it is important for producers to consider the
economic standing of the prospective insured, to ask questions, and if
possible to inspect the personal property at risk.
Typically, insurers use
a formula percentage based on the valuation of the dwelling. However, as we
have seen, the dwelling valuation can be affected by many external factors.
Asking detailed questions about hobbies and interests are as important as a
discussion of the limits in the policy with respect to loss to jewelry,
antiques, etc. Young people who otherwise might not be expected to own high
priced personal property will be inheriting art and collectibles from aging
relatives. This is an area where unfounded assumptions by the producer can
lead to inadequate coverage—and a potential for errors and omissions (E&O)
exposure to the agency.
Underwriters also consider the overall appearance
of the property. Personal inspection and photos can help relay a true
picture of the risk. Maintenance, upkeep, and general housekeeping of the
external and interior premises are indicators of physical hazards that the
insurer may not want to accept or hint to broader problems with the
prospective insured. On the other hand, for borderline risks, photos may
sway an underwriter to accept a risk despite other downfalls or
contra-indicators. Consideration of moral and morale hazards, or lack
thereof, can be supported through the use of photos.
Finally, it’s
important to determine whether the prospective insured has a home-based
business that might alter the risk, or provide exposure not covered by the
homeowner’s policy. Home-based businesses are the fastest growing segment of
the economy, and with a continued bleak economic outlook, we can expect this
trend to continue or even accelerate. Understanding the extent of business
activities conducted from the home, the amount of equipment or inventory
stored there, and the economic gain anticipated by the prospective insured
are all important considerations when determining the risk involved. Some
insurers now include limited home-based business coverage as a standard
addition to their policies, or there are endorsements that may be useful in
covering the exposure.
Conclusion
It is important for producers to
focus on understanding all of the risk exposure, to not make assumptions,
and to ensure the underwriter is aware of factors that could affect the
likelihood, and eventual outcome, should a loss occur. The producer’s use of
checklists, personal inspection, and in-depth conversation with the
prospective insured will reveal risk exposures and coverage needs that the
underwriter will need to be made aware of.
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