The issue of underinsured properties returned to the forefrontin the wake of the November 2007 California wildfires. Some stateofficials suggested the problem arose from a “lack of clarity” incontract language and possible “bad advice” to consumers fromagents and insurers. So we asked National Underwriter readers whatproducers and insurers should ethically do to have propertiesproperly insured.

Very few responding believed there was no ethical responsibilityfor producers to offer advice as to insurance-to-value. On theother hand, no one claimed there was any legal duty to do so,either.

One Illinois producer, while clearly stating there was anethical duty for producers to advise clients aboutinsurance-to-value, took issue with the industry's critics. “Fewagents give 'bad' advice to clients about insurance-to-value,” hesaid. “Policy language is not part of the problem–no one readstheir contracts anyway. How could they be confused?”

Yet one Florida producer assessed part of the blame forunderinsurance on producers who do not give advice. “Agents mustexplain the importance of good value and how that value may becalculated,” he said.

A catastrophe adjuster agreed, noting that “agents shouldregularly contact insureds regarding adequate values for insuredproperty.” Another producer simply put it this way: “It's theagent's responsibility to remind homeowners to insure to 80 percentof replacement value.”

A compliance analyst for an insurer believes that “agentsethically must see that initial limits are adequate up front, offeran inflation guard, and tell the insured to report any changes madeto the property insured.”

Another respondent said producers should “educate insureds atthe time of purchase about insurance-to-value, replacement-costprovisions and options, and all available contractual automaticlimit-increase options. The same service should also be offered atrenewal.”

This “educate the consumer” ethical obligation was reinforced bya Kentucky producer: “Almost no insured remembers being educated bytheir agent. 'Value' has many meanings to them. Any informed buyerwould want to know how their property will be valued at time ofloss. However, a price-shopping insured would not care.”

A producer who was once a marketing representative for aninsurer blames a lack of attention to the problem at the agencylevel: “Personal service and personal contact seem to have beeneliminated. This is further exacerbated by a lack of follow-up atrenewal to see that limits are adequate.”

An insurance executive placed the ethical and legal dutiessquarely on the insured: “My impression is that the law in mostjurisdictions is that it is the insured's duty to decide oncoverage and limits–not the insurer or the agent. The insured knowsbest about the values of properties in their area.”

However, he partially exonerated the insured in catastrophesituations: “The problem with post-catastrophe loss is thatreplacement costs skyrocket due to cost increases from suddendemand for labor and materials.”

The Illinois producer placed no blame on insurers:“Underwriters, not living in the area, have no idea of localvalues.”

The Florida producer said that “insurers have no ethical duty tothe insured if the insured does not seek adequate coverage.”

An extremely limited exemption to any ethical duty of an insurerwas offered by the catastrophe adjuster: “If the insured isinformed of policy requirements, reported changes in values and hadtheir home inspected, the insurer should do nothing pre- orpost-loss.”

The Kentucky producer cited no ethical duties, but said carriersor agents are part of the problem: “The insurance business is moreconcerned with selling the price of their product rather thanselling their product, properly priced. Agents also tend to relytoo much on the price of the product rather than the quality of theproduct. There is no effort to educate the public on any insuranceissues.”

An Oklahoma producer indicated that the insurers he representshave already taken some action: “My companies demand areplacement-cost estimator with every replacement-cost policy, andwill only allow a small variance one way or the other.”

As a side comment, he wrote: “It amazes me how we see thisproblem consistently on the East and West coasts, but not so muchin the middle of the country. Even with [Hurricane] Katrina, thequestion posed most often was not one of property value, but rathera wind vs. water discussion.”

The catastrophe adjuster wrote that the problem began withinsurers, which “started the problem with 'full replacement cost'policies. They also offered an inflation guard to help with theunderinsured problem.”

A New Jersey claims consultant put insurers in “good, bad andugly” categories: “Good is requiring a full inspection at placementand follow-up at renewal. They also ask adjusters for comments onproperty condition and values any time there is a loss. Bad islittle or no inspection, or even photos. Ugly is when an insurerjust accepts information on the application.”

The Florida producer supported the consultant's position:“Companies must get realistic values, use inflation guard as partof the policy–or at least as an option–and use renewalquestionnaires to get value information.” He also–as did mostrespondents–put part of the responsibility on the consumer.

The compliance officer believes “insureds must report changes tothe property, have an agent physically review a renewal, and callfor an update when needed.” This was supported by the Illinoisproducer, who suggested that the “principal cause of underinsuranceis the failure of the insured to report improvements.”

Another producer noted a problem in dealing with insureds:“Getting a homeowner to accept suggested limits or do an appraisalis like pulling teeth, only the sound is worse!”

Another adjuster summed up all comments toward insurers andinsureds: “Insurance is like the police–you don't want to deal withthem until you need them. People refuse coverage increasesuggestions and underreport square footage. Insurance companies donot go out and look at properties”

A loss control executive echoed the adjuster's comments byasking: “Why haven't insureds increased limits after all thestories on the news about underinsurance were trumpeted in thepress? Did they pinch pennies? Did they say, 'It will never happento me?' Why didn't insurers inspect to see if homes were insuredfor value?”

In summary, those commenting on the ethical duties of producersuniformly agree that valuation methods must be explained toinsureds, automatic coverage increase options should be offered,and insureds must be instructed to report changes made toproperties that affect values.

Insurers should require some verification of values, withappraisals the best option. Insurers should also offer automaticvalue increases.

Ethically, consumers must give accurate information about theirproperties and, if needed, seek assistance in helping determinevalues.