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Personal Lines Insurance

The Underwriting Submission—Homeowners Insurance

Elise Farnham | March 1, 2009

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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.

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.


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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