To Repair Or Replace: Using Data to Decide

Property claims databases can be a treasure trove of insights, and can shine a light on valuable opportunities and trends. For instance, I've been mining data that indicates an average overpayment of at least 50 percent on several common elements of residential claims, namely damage to cabinets and furniture. Data extrapolated from a report generated by Xactware for 2009 upper and lower cabinet claims shows such claims-paid totals exceeded $1 billion in the review period. That means that the amount of overpayments likely exceeded $500 to $600 million, while customer satisfaction likely suffered.

The totals I cited would be far higher if costs related to replacement—for example, electrical, plumbing, flooring, counter tops, molding—were included. However, for illustrative purposes, I counted only item-specific replacement costs, those being the $650 million for upper and lower cabinets. Our records at National Restorations LLC show that approximately 75 percent of cabinet claims are candidates for restoration at a cost of 50 to 60 percent of full replacement. Additional data from the five-state area surrounding our location in Richmond, Va. shows that furniture replacement estimates over the last four years have been similar to the cabinets in frequency and amount. 

Understanding the Trend

Why have such large overpayments become the rule, and not the exception? I believe the data points to a trend. Experienced adjusters are increasingly likely to choose to replace without effectively considering the repair option, while young adjusters coming into the industry are less likely to even ask the question.

Prompted by the information I described above, I've been conducting a survey of sorts with claims managers asking  basic questions such as, “Has there been a significant change in the ratio of your claims that are settled by repair rather than replacement?” or “Are you satisfied with that ratio?” The answers are almost always, “Yes, the percentage of settlements involving replacement is higher than it should be,” and “No, we would like to see repair used more.” 

Speaking From Experience

I, too, would like to see the repair option utilized more frequently, a conclusion I've reached based on my 40 years of experience with the evolving practices and processes of claims estimating. I'm fortunate to have had a front-row seat to the progress that has transformed the tools available to the people on the front lines. I began as a multi-line (auto and property) adjuster in an era when our latest technological equipment consisted of a calculator, a Polaroid camera for documentation, and one of those newfangled fax machines. Later, I spent nearly 20 years helping to develop technologies and services that are now widely used to improve the speed and accuracy of claims settlements, and customer service.

The first tools I was issued for property damage estimates, vintage 1972, were little more sophisticated than a paper and pencil. I was trained to rely on local relationships with lumber yards, contractors, and appliance and furniture stores to estimate prices. By the late 1970s, tick sheets, a long laundry-list of items that you checked off as being needed, and the associated action of repair or replace came into use. As computerization became more commonplace, my career path shifted, and I was privileged to be involved with software-based estimating systems and sharable databases of timely, market-specific pricing of labor and materials.

Today, property estimating systems can receive pre-populated assignments from a carrier over a secure Internet connection, either in their office or via Wi-Fi in the field. The database prices are updated quarterly, or even more frequently during catastrophic events. Laptop or table-based software can walk the estimator through the process line item by line item, drawing rooms, automatically calculating material amounts and labor pricing, and including associated taxes and fees.

Despite this, the estimating portion of software estimating systems is based not on repair versus replace, but rather remove, replace, or both. Achieving an estimate to repair a damaged piece is typically left to the discretion of the adjuster. Generally, because specific expertise in woodworking is required, a bid item is entered if even considered. 

As a result, in many claims, an entire kitchen is replaced when restoration of partially damaged cabinets would be significantly more efficient. In some cases, entire sets of furniture are replaced despite damage being limited to one chair or table. Again, claims data analysis indicates restoration costs on such claims are on average more than 50 percent lower than replacement costs.       

Most property policies give the carrier the option to decide the best route to recovery, whether it's repair, or replace. The claims data indicates, however, that many adjusters may only seldom compare the cost of repair versus replace. Why? The answer almost always involves some combination of tight resources, reduced cycle time, lack of experience, software systems based on “remove and replace,” or all of the above. 

Benefits of Repair

There are important reasons for your organization to evaluate its ratio of repair versus replace settlements for property claims that involve such readily repairable items as cabinets, furniture, and other woodwork. The money that could potentially be saved by repairing damaged goods could be shared with policyholders, improving loss ratios and helping to moderate premium increases.

When appropriate, repair instead of replace can improve control of indemnity expense, reduce additional living expenses (ALE), and reduce corollary damage caused by the replacement process. In addition, appropriate repair determinations can result in faster job completion and improved customer satisfaction. Repair is the “green” alternative, reducing waste due to disposal of materials and the consumption of resources to replace restorable items. Restoration might often be the preferred choice by the policyholder, particularly if the item has sentimental value, is part of a larger and desirable set of furniture, or is of a style no longer available. 

Take the Next Step

Depending on the systems already in place at your organization, it may be necessary to go back to some of the basics of estimating and negotiating. To maintain claims consistency, obviously adjusters should not be left on their own (as I was in the 1970s) to form local relationships in order to price claims. Repair will be a realistic option for your adjusters if you provide them access to a network of craftsmen who are pre-qualified for experience, quality, and credentials, like adequate liability insurance and criminal background checks.

If you are an independent adjuster, don't wait until the last minute to conduct your own qualification of local restoration firms and to establish relationships with experienced craftsmen you can count on. Make sure the restorer you choose has the skills and equipment necessary to handle more than superficial, cosmetic jobs. A shop should be more than happy to provide you with a tour of the facility and an explanation of how they handle insurance claims. A qualified shop should be willing to provide a multi-year warranty for the repairs as well as proof of current liability insurance. Work out in advance how to handle trip or estimate fees with your qualified restorer(s). Some will charge, some won't, and some waive the fees against the job if assigned. Ideally, it should never be necessary for the adjuster to ask the policyholder to “get an estimate,” since the results can vary widely and include repairs to damage not related to the claim itself. And after all, shouldn't an accurate and timely estimate of repairs be part of our service to our policyholders?

Despite the extra work that it may take to implement these changes, having the option to replace available could prove to be worth the effort for a variety of reasons, not the least of which are the time and money saved.