The Importance of Reviewing Your Coverage Limits
By Sabine Voigt, Loss Control Consultant; Sherry Taylor, Manager of Product Development and Support; and Greg Gonnering, Vice President of Mutual Assistance
Now may be the time to review your book of business to ensure the coverage limits are adequate in the event of a total loss.
The Construction Cost Variable
Construction costs have soared over the past year. Lumber prices, for example, have risen by 340%. This affects the price of framing, cabinetry, doors, windows and flooring replacement. Other building component costs also have risen, although to lesser degrees. The price of gypsum (drywall), for example, has increased by 7%. Altogether, the cost of new construction on an average single-family home has increased by 36% in the last 12 months.
Limits of Coverage Modifications
Given cost increases, it is important to consider both inflation guard protection (automatic adjustment of limits) and inflationary limit increases of coverage in tandem.
Evaluation of replacement cost is done to ensure the limits afforded are in line with the current replacement cost and annual inflation.
Inflation affects:
- Dwelling coverage
- Contents coverage
- Other structures
- Additional living expenses
Many companies apply an inflationary increase of between 2% and 5% to the limits at each policy renewal. However, this increase is at the company’s discretion and applied only on an annual basis at renewal. As a result, the limit shown on the declarations page is the limit that applies.
Within the industry, some insurers apply the annual inflationary adjustments of limits to dwelling coverage only and others apply it to dwelling, contents and other structures. Some may apply it to all four coverages.
Inflation guard, on the other hand, is grounded in policy language and adjusts the property limits shown on the declarations by a stated percentage during the term of the policy, typically on either an annual or quarterly basis. The percentage applies only to coverages stated in the language of the policy. Many insurers (in conjunction with the agent and insured) select an annualized increase between 2% and 4%. The percentage must be shown on the endorsement or the declarations (there is often a charge associated with this endorsement). The endorsement provisions indicate that if the insured suffers a loss, an adjustment could be made based on when during the policy term the loss occurs.
For example, if the endorsement indicates that the adjustment is 2% per quarter and the loss occurs at six months into the policy term, an additional 4% of the limit available for the loss would be available. Note that just because an inflation guard endorsement (adjustment of limits within the term of the policy) is added to the policy, the renewal limits will not necessarily increase by the same percentage. The endorsement may or may not have a provision indicating that renewal limits will also be adjusted by the indicated percentage. Please review any endorsement that you are attaching to be certain how the inflation percentage is to be applied.
Coverage Limit Recommendations
- Consider adding inflationary limit increases if you do not already and determine which percentage increase is most appropriate.
- Re-evaluate reconstruction cost every three to six years. Valuation software offered through a vendor such as e2Value simplifies this process for you.
- Gather information about the quality of exterior and interior construction for greater precision.
- Reach out to policyholders to offer a personal insurance review and remind them to notify you of any changes that may require additional coverage or an increase in coverage amounts.
- Consider offering an Automatic Adjustment of Limits endorsement to be applied during the term of the policy.
Sometimes, homes or other buildings may end up being over-insured. This is a risk particularly when a valuation has not been completed in years and annual inflationary increases have compounded.
In the absence of extended and guaranteed replacement cost coverage endorsements, it is critical to ensure that the limits are adequate.
Rate Adjustments
Smaller, more frequent adjustments may be accepted better by customers than larger, less frequent increases. With inflationary increases, the premium will go up with the increased limits, but not by the same percentage.
When considering a rate increase, examine other aspects of your business to determine if other adjustments are needed. When was the last time you considered a deductible shift? Most carriers are now considering $1,000 for the base deductible with no credit and lowering the credits for the higher deductibles. What about putting limitations or exclusions on roofs of outbuildings? We find that most larger losses are a result of hail damaging outbuildings. Sometimes the limits of that building are paid for the roof alone.
In addition to these changes, it is always worthwhile considering whether to adjust policy fees and claim surcharges. The goal in making these adjustments is to keep up with the ever-increasing costs of claims, technology, medical care and other aspects of your business. These small adjustments could make a big difference in your mutual making an underwriting profit, especially over time.
If you have any questions or would like more information, please contact us.