Whose fault is it when properties are underinsured? Thepolicyholder? The agent? The insurance carrier? That's the questionwe posed to NU readers following last year's California wildfires,for which many homeowners reportedly lacked adequate coverage torebuild. NU's ethics columnist, Peter R. Kensicki, compiled theresponses (many of them from readers of my blog) and came up withthe following trends.

Whose Fault Is It When Properties Are Underinsured?

BY PETER R. KENSICKI

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 from agentsand insurers. So we asked what 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 about insurance tovalue, took issue with the industrys critics. Few agents give badadvice to clients about insurance-to-value, he said. Policylanguage is not part of the problem–no one reads their contractsanyway. 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: Its the agentsresponsibility to remind homeowners to insure to 80 percent ofreplacement 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 at thetime 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 by aKentucky 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 insureds duty to decide on coverageand limitsnot the insurer or the agent. The insured knows bestabout 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 local values.

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 is informedof policy requirements, reported changes in values and had theirhome 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 coast, but not so much inthe 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 costpolicies. 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 consultants position:Companies must get realistic values, use inflation guard as part ofthe policy–or at least as an option–and use renewal questionnairesto get value information. He also–as did most respondents–put partof 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 dont want to deal withthem until you need them. People refuse coverage increasesuggestions and under-report square footage. Insurance companies donot go out and look at properties

A loss control executive echoed the adjusters comments byasking: Why havent insureds increased limits after all the storieson the news about underinsurance were trumpeted in the press? Didthey pinch pennies? Did they say, It will never happen to me? Whydidnt insurers inspect to see if homes were insured for 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.

(Peter R. Kensicki is a professor of insurance at EasternKentucky University in Richmond, Ky., as well as a member of theEthics Committee of the CPCU Society in Malvern, Pa. He may bereached at [email protected].)