October 2011

Benefits of property insurance appraisals

By Richard M. Terlecki

An entity that purchases property insurance has an expectation to be made whole again after a loss. In other words, the insured expects the property to be put back into the same condition as it was prior to the loss. But how much insurance should be bought?

Some just guess at the value and then buy a little bit more than that, hoping they have enough coverage. But if you are buying “more” insurance than you need, you are wasting money. So, what do you do? Get an appraisal. Property insurance companies expect, and usually require, an accurate report of the insured’s property values at 100 percent replacement cost to ensure there will be sufficient insurance to cover the loss.

A formalized property appraisal program has the following tangible benefits.

• It determines the adequacy of insurance coverage by:
  • Providing a complete and up-to-date property listing (photos, plot plans, geographic information system coordinates, etc.);
  • Ensuring the accuracy of insurable values;
  • Removing the uncertainties of trending (indexing) values over long periods of time (the accuracy of cost trends diminishing after 5-7 years); and
  • Ensuring there are no surprises at the time of loss.
• It aids in improved risk management by allowing the insured to make informed decisions and use a consistent approach to quantification of its risks.
• It improves the marketability to underwriters. The recent soft insurance market is starting to harden, and a well-engineered property portfolio with supportable values receives preferred treatment by underwriters (including secondary building characteristics that can mean a 20 percent to 30 percent reduction in premium).
• It is the basis for equitable allocation of premiums across all participants of SORM’s property program.
• It would serve as the basis for preparation of a “proof-of-loss” should the insured suffer a loss, and it would accelerate the payment process.
• It allows underwriters to use accurate COPE (construction, occupancy, protection, and exposure) data to rate the property risk, rather than defaulting to a worst-case scenario.

Appraisals are good for the insured who wants to mind premium dollars and be paid 100 percent of the loss. Entities interested in further information on appraisals may contact SORM Insurance Specialist Robert Morales at robert.morales@sorm.state.tx.us or (512) 936-1454.

Richard M. Terlecki is Area Senior Vice President for Arthur J. Gallagher Risk Management Services, Inc., which SORM selected as the current broker of record to service its statewide property insurance program.