Homeowners - the new #1

by Curtis M. Pearsall, CPCU, AIAF, CPIA
Special Consultant to the Utica National Agents E&O Program

For many years, commercial casualty (GL, Umbrella) was the #1 underlying loss type. However, in reviewing final 2010 results, there is a new #1 in town … Homeowners. Just short of 20% of all Errors & Omissions claims allege issues dealing with the Homeowners line of business.

Drilling down further, there are several issues to look at. Valuation is one of the major issues; dogs are not exactly E&O’s best friend; and carrier binding guidelines round out the top 3. In addition, Utica is experiencing claim activity dealing with issues surrounding personal property that would be better covered under an inland marine policy or floater. Let’s examine each of these in more detail.

Valuation
For many years, carriers have been providing their agents with various tools to determine the appropriate Homeowners limit. These are designed to provide, when given the proper accurate inputs, a respectable, somewhat accurate estimated value for the home. The key is “proper accurate inputs,” as without these, the output may not be a valid representation of an appropriate Homeowners limit and definitely should not be relied upon.

Many would contend that even with the proper inputs, the calculated value may not be accurate due to significant fluctuations in the price of homebuilding products. When calculating the amount, advise the customer in writing that this is not a guarantee the home can be replaced for this amount.

For homes with a degree of uniqueness, it is questionable whether the estimators should be relied upon at all. In many of these situations, calling in a licensed appraiser may be the best answer.

Based on the economy in your area, it is possible for customers to buy a home for much less than it would cost to actually replace it. Communicate to your customers that there is no correlation between market value and replacement cost. Related to this approach, some individuals contend the customer should advise you, as the agent, the amount for which they want the home insured. This does have some merit, provided the customer thinks of what it would cost to replace the home as opposed to its market value.

Dogs
This is becoming much more of an issue, largely due to the unknown breed of many dogs. If your customer contacts your agency to state they are getting a dog, they might not know the actual breed combination given the cross-breeding that takes place. With carriers experiencing losses involving dog bites, they are trying to find ways to address this issue.

When you receive that call, advise your customers, verbally and in writing, that there are certain breeds insurance companies have put on their “prohibited” list. To avoid any problems down the road, the customer should try to ascertain the breed of the dog they are considering. Posting this information on your Web site would be beneficial for those customers who might not contact you verbally. It wouldn’t be surprising at some point for carriers to include in their policy form a list of dog breeds excluded in the policy.

Carrier guidelines
Each of your carriers has specific guidelines detailing the circumstances that allow you to bind without first securing their blessing. They do this for a reason. It provides your agency with the ability to bind coverage for those risks that meet the guidelines. It also provides your carriers with recourse against your agency if a risk you bound without their blessing and that does not meet their guidelines suffers a loss. As noted by the claim example below, carriers take these guidelines seriously (and so should your agency):

The agency wrote coverage for a log cabin for an insured through a carrier they represented. The client had been with another carrier, and had a history of late premium payments and reinstatements. The new carrier claimed they would not have written the risk had they known of the prior history of the risk and, in addition, stated they do not write coverage for log homes. The insured knew it was log home, but did not disclose that to the carrier. After paying a loss of $532,117, the carrier filed suit, alleging the credit history and distance from a firehouse (which was understated) were not disclosed, and had they been, they would not have written the risk. They did not bring up the aspect of the house being a log cabin. There was also a question of fact regarding a discussion between the agent and the carrier before the risk was written. The agent said she disclosed the credit history over the phone and was given a green light to write the risk. The underwriter denies this. The case was settled by paying the carrier the full amount, $532,117.

Some “lessons to be learned” from this example:
1) Provide your carrier with a full and accurate description of the risk.
2) If you discuss the risk with the underwriter and they give you the go-ahead, document the conversation back to the underwriter and put a copy of this documentation in the file.
3) Stay on top of the guidelines and don’t bind a risk you don’t have authority to bind. There is no upside to misleading your carriers.

Homeowners coverage or inland marine floater?
There are many scenarios where there are coverage differences between insuring an item under a Homeowners policy as part of the contents limit as opposed to insuring those items on an inland marine floater. While there may be some coverage for jewelry under an HO policy, with most forms, mysterious disappearance is not a covered peril. This peril is typically covered under a jewelry floater. Plus, items that are breakable would probably not have breakage coverage unless insured under a floater. In addition to these peril issues, establishing the proper value is more common with a floater and thus at claims time, the customer is more apt to get a fairer settlement.

It is definitely recommended you advise your clients, verbally and in writing, that when they receive their policy they must review it to ensure everything is in order. The agency should also review the policy to make sure it matches what was requested.

Take the time to educate your staff on these issues. With Homeowners now the leading underlying line of business in Errors & Omissions claims, this education may just save you from such a claim.