Hurricanes in the South and fires in the West have led to one common discovery
across geographies and disasters – many homes are insured for far less than their replacement cost. Don Robinson, a California biologist, had his four-bedroom home insured for $233,000; after wildfires destroyed it a contractor estimated the replacement cost at $460,000, the Associated Press reported.

After the Northridge earthquake in 1994 was followed by a few other natural disasters, insurance companies largely quit writing guaranteed replacement cost coverage. Now they will typically pay the repair or replacement cost up to the value that a home was insured for. Homeowners can buy additional coverage if they think custom features mean the replacement costs are higher than the appraised value. Many homeowners still think their policies cover the cost of replacing their home, in part because of suggestive marketing by carriers, according to one industry expert.

Underinsured homeowners who lose their homes can face severe financial challenges. In several states disasters have led to a flurry of lawsuits and pressure on insurance carriers by regulators who want them to pay beyond the coverage they have written. So the insured value required by a mortgage isn’t necessarily enough to provide the security a homeowner needs.

Mortgage applications generally require insurance to cover the cost of replacing a house, but the process is not as clear as it appears. Most lenders will accept the level of coverage that an insurance agent says is adequate.

“The lender has the responsibility to make sure the coverage meets their underwriting guidelines,” said Bluebook International, a Microsoft Insurance Value Chain participant, which provides replacement values for 91 percent of the houses in the US through its Web site. The lender’s responsibility extends to the investors who buy the mortgages in the secondary market, she added.

Bluebook allows users to easily determine replacement, actual cash value, depreciation, structure value, property risk and repair costs affordably within minutes from a single source over the Web.

“By using ACORD standards and XML for data exchange, Bluebook International is a great example of the Insurance Value Chain in operation,” explained Bill Hartnett, insurance industry manager at Microsoft. “While home replacement values are useful by themselves, they are far more valuable when they can be integrated into underwriting, policy administration, and mortgage applications. Performing all this work computer-to-computer cuts costs, reduces errors, saves money for home buyers and speeds up the process of buying and insuring a home. It is easy to learn and use, and it makes appraisers more efficient – what we at Microsoft refer to as People-Ready software. More importantly for the customer – the home buyer or homeowner – it makes home ownership People-Ready as well.”

When disaster hits a home that is underinsured, the losers include homeowners, who find themselves unable to rebuild with the proceeds of their policies, insurance companies that are sometimes responsible for replacement coverage that far exceeds the value of the premiums they are collecting, banks that find their collateral doesn’t really exist, and owners of securitized mortgages, including Fannie Mae and Freddie Mac.

Some popular insurance underwriting software programs require only a bit of information, such as age of the house, square footage, and number of bedrooms to produce an approximate appraisal. More detailed questionnaires that ask about custom features and recent improvements can add hundreds of thousands to the appraised value, and hundreds of dollars to the annual insurance premiums.

Sixty-seven percent of homes in the United States are underinsured by 25 percent or more, said an industry expert at a North American real estate consulting group. His company promotes software from Bluebook to obtain more accurate estimated replacement costs.

Just as real estate agents sometimes win listings by inflating the value of a seller’s home, insurance agents will occasionally suggest a lower appraised value to keep the premium low and get the business. Carriers have relied on the agent, but they want to make sure their book of business is realistic. Traditionally, they have reviewed appraisals every five years; now they are also conducting spot checks to see if they have properties that are underinsured.

If disaster strikes, especially on a large scale like hurricanes in Florida, Mississippi and Louisiana or the fires in California, finger pointing among market participants, coupled with aggressive action by insurance commissioners and attorneys general, opens the way to reputational risk, at the least, plus legal and financial risk.

“At the end of the day, if everyone walks away and says it is not my fault, when the homeowner comes up from underneath this issue and they do business again, what impression do they have of their lender or their insurance carrier?” asked the consultant. “In terms of customer retention it makes a lot of sense to go back and review your portfolio with a data aggregator like Bluebook.”

J.D. Powers reported that customer satisfaction with insurance companies was 10 percent lower in Florida after the hurricanes than it was in the rest of the country. The company found that 37 percent of homeowners who made substantial improvements to their homes didn’t report the changes to their carrier and only half had had the appraisal of their home updated.

Bluebook’s InsureBASE provides cost data for carriers, mortgage holders, consumers, and capital market purchases of home mortgage portfolios.

It relies on 45 years of cost data across the US, grouped by more than 70,000 neighborhoods. It provides users with an estimated value of a home and offers an opportunity to drill down for more information such as custom features and land-to-structure ratios so investors can determine whether a particular portfolio meets their needs.

For Anthony Merlo, president of eAppraiseIT, Bluebook’s InsureBASE proved attractive because it is both very accurate and easy to use.

With several hundred staff appraisers and thousands of contract appraisers, the company does appraisals for the top 15 or 20 banks and other mortgage lenders. By providing an intuitive tool that produces accurate valuations, eAppraiseIT makes work easier for its appraisers and reduces the time it takes them to deliver results to their mortgage lenders.

“What we like about InsureBASE is its integrity, depth, and breadth of data. But one of the features that really attracted us is its ease of use. It is very easy for an appraiser to learn it and deploy it every day,” he explained. “There are only so many appraisers in America and there is just so much they can do in a day. If we give them the tools to eke out one and a half more appraisals a week, they are happier and our clients are happier because the turnaround is faster.”

Before moving to Bluebook InsureBASE, eAppraiseIT tested the valuations it produced, he added.

“We found Bluebook to be right on the money,” he said.

www.bluebook.net
www.eappraiseIT.com
www.firstamres.com