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  • Writer's pictureChris Burand

A Misdiagnosis

This was the headline from Insurance Law360: "Lawsuits filed by Colorado homeowners and businesses against their insurance companies for coverage of wildfire losses are a symptom of a broader underinsurance problem in a state where climate change now..."

I'm sorry but this is not the issue. Climate change is a red herring. As an almost lifelong resident of Colorado and a 35-year veteran of the insurance industry including at one time being an underwriter whose state was Colorado to underwrite, the issue is mostly one of incompetence by multiple parties.

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The replacement cost estimators being used have much too large of a margin of error. I've tested this on my own home, in Colorado, and the estimated replacement cost varies by at least 30%. 30% exceeds the co-insurance requirement.

Additionally, and I have this in writing, a major provider of replacement cost estimators is not sure the degree to which their estimator includes replacement cost at the new ordinance level. That is a major problem in and of itself because most homeowners policies only provide coverage for the home on an "as was" basis, not on an "as needed to comply with current ordinances" basis. Many policies include an automatic 10% "throw-in" amount for Ordinance and Law coverage, but that is often peanuts, especially in a state like Colorado.

Colorado politicians have a strong green streak, and they pass laws willy-nilly without thinking through the implications. A near perfect example is that some of the municipalities affected by that fire had to rescind their green building codes so that people could afford to rebuild. The new building codes simply drove the price of rebuilding so high that rebuilding was not possible. This means insureds are far more immediately affected by poorly considered environmental laws than a changing environment. The politicians are incompetent party #1.

If the replacement cost estimator includes the cost of rebuilding to current code, but the policy does not provide coverage for rebuilding to current code, then possibly a situation of unnecessary premiums exists because insureds are then paying for a higher Coverage A than the policy will pay. If that is accurate, then, "Houston, we have a problem."

Assuming for now that the replacement cost estimators are not including rebuilding to current code, then the accuracy of the replacement cost estimators are such that some kind of wider margin of coverage is required to cover the wide margin of error. Exacerbating this problem is that inflation in general has been increasing faster than replacement cost estimators can keep up. This problem is then further exacerbated by the extra inflation created in most all disaster zones as demand for materials and labor exceeds the available supply. In several wildfire areas in Colorado, the shortage of housing was so severe that construction workers could not even find a place to live. The same situation has occurred in hurricane zones. This combination of factors means that under-insuring a home, completely unintentionally and having made a quality effort at completing a replacement cost estimator correctly, could still result in a major under-insurance issue.

Many of these issues could be addressed though with the right insurance coverage. Returning to the ordinance and law issue, insureds generally now need two different replacement cost estimators because the politicians have caused replacement costs to increase so significantly with their new building codes. The first replacement cost estimator is specific to the historic, traditional estimator. The second is specific to rebuilding to code. I do not think a specific replacement cost estimator exists for this point and therefore, the insured or the agent needs a contractor's input. Use that information to calculate how much ordinance and law coverage is required.

Inadequate replacement cost estimators are a partial incompetent party #2. Partial because part of the problem cannot be reasonably expected to be solved given the inflation issues but distinguishing between regular replacement cost and ordinance & law replacement cost is different. Alignment on this point is important for all involved. The margin of error needs to be narrowed too, but I appreciate the difficulty here.

It's not the job of the insurance company to assure the insured they have adequate coverage. Insurance is a legal contract between the insurance company and the insured, and just as with any contract, each party has a duty to protect their own interest. Agents though typically are there to help the insured protect their interests in this situation. However, because of the way the standard of care case law/statutory law has been written in most states, agents are often nothing more than order takers. This is especially true with captive agents who truly work for the carrier and not the insured.

Politicians could do a major favor to insureds by distinguishing the types of agents and creating notifications as to whether an agent is an order taker or will be held to a higher standard. Optional participation in one or the other would be great. I was once told by an insurance commissioner that if I made such a proposal, someone would serve my head on a silver platter because politicians and insurance commissioners do not want clarity on this point. It would make their jobs harder.

Regular people have quite limited ability to calculate the replacement costs of their homes. They need help. Distinguish between whether the insurance company has such a responsibility or the agent, and if the agent, distinguish between the agents working for the carrier and true independent agents.

Party #3 are the agents. I teach coverages and I do E&O audits. Likely a majority of people in agencies with whom I interact do not adequately understand ordinance and law coverage so extra coverage is not discussed. Additionally, many do not read and understand the differences in different companies' guaranteed replacement cost endorsements. Some of those endorsements provide awesome coverage, but some don't. Ignorance should not be an option on these points.

Party #4 are the carriers. Some of the carriers seem highly reluctant to accept the higher replacement costs that are reality sometimes making it difficult for agents to obtain the right coverage for their clients.

Additionally, some carriers make the claim process a nightmare. I encourage everyone to read the Bloomberg News article regarding a certain consulting company who advises certain insurance companies regarding how to delay claims (points the carriers refuted, to be transparent). I saw a sign though at a wildfire sight advising people to count their socks because a particular carrier would demand to know how many socks they had prior to writing a contents check. The house burned to the ground. Write a check for policy limits. This is not a difficult claim to resolve unless the carrier makes it difficult.

Climate change has absolutely nothing to do with the Boulder, Colorado fire. I lived in Boulder, and it is common to get 75mph + winds. It's been common since the Ice Age and it is one reason trees do not naturally grow in and around Boulder except in deep depressions protected against the wind. The fire started from a trash burn and possibly power lines, not global warming, exacerbated by the refusal to cut tall dead grass. The claim situations were exacerbated by a series of incompetent parties, all of which are correctable by humans within twelve months and without any climate change factors to consider. These improvements have two simple prices: The first is a willingness to think through the issues from multiple angles rather than single focus angles. This includes all parties becoming much better educated. The second is the willingness to make hard decisions instead of blowing with the wind, like the fire did. We all saw what happened there. No need exists to repeat an unnecessary inferno.


NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.

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