Down to Cases- Cost guide software isn't perfect

The agent who makes a promise must fulfill it. In Peterson v. Big Bend Insurance Agency Inc. (202 P.3d 372 [Wash.App.Div.3 03/05/2009]), the Washington Appellate Division explained why insurance agents or brokers who make promises to an insured must fulfill that promise or be severely punished. The court concluded that a promise made by an insurance agent or broker, in order to calculate the full replacement cost of a client's dwelling, imposed an obligation to fulfill the promise and found that the failure allowed the insured to receive damages for negligence and for violation of Washington's Consumer Protection Act (CPA). When calculating replacement cost using a cost guide, it is prudent to explain the limitations of calculators and that they are neither a guarantee of accuracy, but merely a means of estimating replacement cost. Cost guides include the Boeckh cost guide–what Big Bend used–and other replacement cost guides such as those published by Marshall & Swift or the National Repair Replacement Guide. By explaining the limitations, an agent may convince the insured to buy a policy with an enhanced or guaranteed replacement cost language where the insurer agrees to pay full replacement cost up to a certain percentage over the policy limit. Nothing is certain in construction, and fire reconstruction is usually more expensive than new construction. To avoid Big Bend's adverse result, a detailed and truthful explanation would have protected the insured and the insurance agency. Case background
The problems started in September 2004, when Roger and Larae Peterson obtained a home insurance policy from the Grange Insurance Assn. Prior to obtaining the policy, the Petersons spoke with Jack McCalmant of Big Bend Insurance Agency Inc. and explained their desire to have their home insured for the full replacement value. On Nov. 27, 2004, the Petersons' home was destroyed by fire. Grange paid the Petersons $193,000, which was the replacement value limit under their policy. The full replacement value of their home was $328,843. The trial court found that McCalmant agreed to provide an estimate of the replacement value using the Boeckh cost guide formula, which would have resulted in an estimated replacement value of $240,000 and an increase in personal contents coverage of $23,500. The court dismissed the bad faith and CPA claims against Big Bend and the Grange, and denied the Petersons' request for attorney fees. The Petersons appealed. The Court of Appeal affirmed the decision of the trial court except as it related to the agent, Big Bend, and sent the case back to the trial court to calculate the damages the agency must pay the insureds. Jack McCalmant, an insurance agent and part owner of Big Bend Insurance Agency, discussed home insurance with the Petersons. He explained that they had replacement value coverage with a limit of coverage of $179,800. The Petersons explained that they wanted the house insured so that it could be replaced if it was destroyed. The Petersons indicated that they did not know what the cost of this coverage would be or how such a figure would be determined. McCalmant told the Petersons that his agency would use a formula that involved plugging in certain items, such as the square footage, the type of construction and certain upgrades. McCalmant told the Petersons that he would handle this task for them. The formula used by McCalmant for determining replacement value was a computer software program designed by the E. H. Boeckh Co. that is known as the Boeckh cost guide. Use of this software, or a similar program, is a standard in the insurance industry for determining the replacement value of homes. It was Big Bend's policy to use the Boeckh cost guide to estimate the cost to replace a home in the event of a total loss. The cost guide was not usually provided to the client, but Big Bend's agents would usually go over the report with the client when they discussed policies and renewals. Later, Jody Piper, a customer service representative for Big Bend, ran the cost guide formula on the Petersons' home, using the information that McCalmant obtained from his inspection. Piper did not have the information from the standard Boeckh questionnaire and she did not have information about the home's numerous upgraded features which would have increased the replacement value. Had she used the appropriate information, the Boeckh cost guide would have resulted in an estimated replacement value of $240,000 and an increase in personal contents coverage of $23,500. Instead, the policy issued had a limit of liability of only $193,000. In late January, after their house burned, the Petersons obtained a bid from a general contractor totaling $310,030.57. Grange continued to reject the Petersons' claim for replacement costs in excess of $193,000.

An agent assumes only the duties of an agency relationship unless assuming additional duties by contract or by holding himself out as having an extraordinary skill. The duty of care an agent owes the client excludes the obligation to procure a policy affording complete liability protection. Big Bend breached its duties to the Petersons by:

1 Not using the standard cost guide questionnaire to obtain accurate, detailed information from the Petersons

2 Not entering complete information about the home into the cost guide software 3 Not using the formula to calculate replacement value limits on the home 4 Not informing the Petersons that the cost guide formula was not used to estimate the home's replacement value for the policy. The trial court's findings that McCalmant agreed to run the Petersons' numbers through the cost guide formula was supported by substantial evidence. The court's findings supported that the Petersons' damages should be based on the $240,000 figure obtained through the application of the cost guide formula. The court concluded the Petersons proved their claim by showing that Big Bend provided a replacement value figure that was not based on the cost guide formula. The Petersons established that Big Bend engaged in an unfair or deceptive practice by violating RCW 48.30.090, which states, in part, that no person shall “make, issue or circulate, or cause to be made, issued or circulated any misrepresentation of the terms of any policy.” The lesson is that although cost guide software is often accurate and reliable, it is not perfect. Never promise to calculate replacement value using such a method unless you use the software properly to calculate the true replacement cost. Agencies should also establish that their agents are trained to use the software and advise the insured they cannot guarantee the accuracy of the estimate created by the guide.