Recently the trade press has published several interesting articles that discuss the best way to determine a proper limit for liability insurance. Ideas have ranged from the formulaic (typically referring to the net worth an insured wants to protect from being lost to litigation) to the broad brush. ("Insureds should buy all the insurance they can afford.") Often the dreaded errors-and-omissions phantom raised its ugly head, suggesting that an agent who fails to sell a client the highest limits available invites a malpractice claim.
One possible path to enlightenment in the ongoing search for "adequate" coverage limits may be to simply ask, "How much does the insured want to carry?" Once any minimum requirements arising from contracts, laws, regulations, licensing or other matters are met, doesn't the insured ultimately choose a limit after weighing the theoretical loss that could result from a claim against the definite loss that results from paying the premium?
The film "Cool Hand Luke" included a line that has become a movie-lore classic. Whenever one of his chain-gang prisoners would fail to meet with his approval, the prison overseer would confront the offender and, with a Southern drawl, deliver the sinister line, "What we have heah is a failure to communicate." Then the beatings (or worse) commenced. As a kid watching that movie, I learned a valuable lesson: Eating too many hard-boiled eggs at one meal is a really stupid idea-and also that communication failures can kill you, so talk to your insureds.
Consider the homeowners limits for personal property. Sometime back in the Middle Ages, forms drafters gathered in a small monastery, locked the doors, and conferred on what they would anoint as proper coverage C limits. At last, the faithful were overjoyed to see a sign that consensus finally had been reached. For the first time in days, smoke rose from the chimney above the abbey! It turned out that the conferees were burning old copies of the New York Standard Fire Insurance Policy for warmth, but they did ultimately agree that Coverage C should be 50% of Coverage A.
The decision proved so enlightened that its universal sovereignty has been questioned only once. When considering replacement cost for contents, many carriers were haunted by the possibility that if 50% of A were truly a proper limit for an ACV settlement, some additional amount was necessary to cover full replacement cost. After some false starts and rebellion, the industry eventually agreed that 70% of A was advisable. And lo, it was done, and the powers that be saw it and said it was good.
But is it? Consider a typical homeowner. How much of his or her stuff really has sufficient financial value to make the cut for "must be replaced in case of loss"? I'm not suggesting that most of what the typical person owns may once have had real value but now ranks as glorified junk-or come to think of it, that's exactly what I'm suggesting! Regardless of how much some other junk junkie will bid for an item on eBay, its true value is measured at the time of a homeowners loss.
For example, when Mom passed away, we kids had to sort through a ton of things in her apartment. Although initially we considered everything valuable "because it was Mom's," we gradually realized we were talking about emotional value rather than financial value. In terms of the former, the items, no matter how trivial, were priceless. Many had associated stories, explaining how they came into Mom's possession or why she prized them so much. Such possessions are the touchstones of a life, giving us a sense of connection with their former owners.
But what does that have to do with homeowners insurance? In our business, we must determine the finan-cial-not the emotional-value of damaged or destroyed items. Sure, a coffee cup may have been Mom's favorite because her 5-year-old granddaughter gave it to her as a birthday present after buying it at the dollar store with her allowance. But for adjusting purposes, it must be valued just as an inexpensive (and cracked) coffee cup. If we assess Mom's things with an eye to financial value, what do we come up with? Not much. There was lots of neat stuff (old and new) in her apartment but little of real monetary value.
Applying the same principle to the personal-property insurance needs of our typical homeowner, we can see that we must change the way we ask questions to get valid answers. Forget about obtaining an extensive inventory, listing every shirt and pair of shoes along with receipts. Instead of asking, "How much stuff do you have and what would it take to replace it all after a loss?," try, "Of all of your current possessions, which would you actually replace following a total loss?" Then allow homeowners the option of carrying an adequate amount of coverage for only those items.
Let's face reality. A homeowner may have countless possessions lying in the attic, stuffed into closets and stored in mini-warehouses-all gathering dust until the next yard sale, eBay auction, Goodwill donation or sorting by the family after the funeral. If it all burns up, however, no one is going to replace each item, even if an accurate inventory is available.
After careful consideration, your insureds might find that their limits exceed what they truly want or need. On the other hand, they may determine that their current limits are inadequate, since their possessions are far more valuable than you ever imagined. Or, perhaps their limits will be just right. But no matter what the final reckoning, both you and they will better appreciate their protection. People value what they choose to buy far more than what they are forced to buy. Isn't it time to involve the insured in the process as more than a reluctant draftee?
There's a word for such involvement-it's "communication." Unlike Cool Hand Luke, insurance agents are not likely to get shot for failing to communicate. But continuing to dictate insurance limits to insureds without considering their personal preferences and needs certainly could prove counterproductive to good client relationships. Speak and prosper!
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