WHAT S IT WORTH TO YOU?

Transcription

1 WHAT S IT WORTH TO YOU? IMUA Annual Conference Atlanta, GA May 21, 2013 Rick Lunt Technical Director, Business Resilience Phil Moretti Executive General Adjuster

2 Property valuation Business interruption/ee Contingent business interruption Supply chain disruptions and coverage Don t forget property values 2

3 Firm insures building for market value, limiting options A fire destroyed the tenant portion of a building owned by our manufacturing client. The firm operated out of an old mill building constructed of heavy timber, a particularly expensive construction technique. Given the limited market for the facility, our client was able to purchase the facility for $2.2 million. Unfortunately, it appears that the client elected to insure the building for the purchase price. The replacement cost for the damaged portion of building alone was $10.5 million. 3

4 Building owner considers converting land into a parking lot Our customer owned a commercial rental property. The roof collapsed in a substantial rain and much of the building was damaged. Sections undamaged by the collapse were torn down to comply with local building codes. The policy limit of $450,000 left the policyholder $750,000 short of $1.2 million required to replace the building. Given the shortfall, the owner was considering converting the site into a parking lot. 4

5 Insurable property values Underinsurance exposed 60% of properties less than 75% of replacement cost 30% of properties less than 50% of replacement cost Source: Marshall & Swift/Boeckh (MSB) 2011 Industry Data 5

6 Undervaluation (MSB) Marshall & Swift/Boeckh (MSB) 2011 Industry Data 6

7 Types of value How many flavors are there? Absorption value Amenity value Attached business value Book value Capricious value Cash value Condemnation value Commercial value Cost value Created value Depreciated value Economic value Established use value Exchange value Face value Fair market value Forced sale value Going concern value Good will value Improved value Income value Insurance value Intrinsic value Investment value Justified market value Leasehold value 7

8 Types of value Liquidation value Market value Mortgage value Nuisance value Physical value Plottage value Potential value Quick sale value Realization value Real or true value Rental value Replacement cost new Reproduction value Sale value Salvage or scrap value Sentimental value Service value Sound value or ACV Speculative value Stable value Summation value Tangible value Tax value Utility value Value to appreciative buyer Warranted value 8

9 State differences on actual cash value Some jurisdictions use varying definitions of actual cash value when NOT defined in the policy Differing definitions of actual cash value Fair market value Repair/replacement cost less depreciation Replacement cost less depreciation Broad evidence rule 9

10 Examples of ACV in various states (when not defined in policy) Alabama Fair Market Value California Fair Market Value (exception Fire Policy/partial loss R/R Less dep.) Florida Broad Evidence Rule Illinois Replacement Cost Less Depreciation Michigan Broad Evidence Rule Mississippi ACV Equivalent to Replacement Cost New York Broad Evidence Rule Pennsylvania Replacement Cost Less Depreciation 10

11 Examples - you thought you knew what it meant!!! Scenario: A 50 plus year steam turbine generator suffers damage during a breakdown and fire resulting in a major overhaul required of the entire unit. The insured decides not to repair or replace the unit. Policy valuation:.the actual cash value (ascertained with proper deduction for depreciation) thereof at the time of the loss, but not exceeding the amount which it would cost to repair or replace the damaged property with material of like kind and quality Issue: how do you measure the loss? 11

12 Steam turbine generator damage photo Photo taken by RAC Adjustment (Independent Adjusting firm work for and paid for by Zurich). 12

13 The who Rate x value = premium Underwriting focus is on coverage and rates Engineering focus is on risk identification and prevention Customer focus is on coverage and premium Who is addressing values? 13

14 The why Directly impacts premiums Accepted level of risk is accurate Accurate recognition of exposure by Risk Engineering & UW Line setting / retention (Treaty & Facultative reinsurance needs) Approval levels 14

15 The why Accurate loss estimates and risk classification Agreed value - no coinsurance requirements Value blanketing consideration Reduce broker s E&O exposure Eliminate surprises 15

16 Starting with proper values There is no document prepared in the normal operation of a business that provides an insurable replacement cost! Where do values come from? Value estimating software Company records Don t know where they came from, they were here when I got here I think it s worth. Appraisal (market value, liquidation value) Our experience - reported values are -90% to +900% of actual. 16

17 Examples - you thought you knew what it meant!!! Scenario: A very old bridge crane suffers damage as a result of a wind storm event resulting in the crane toppling over. The crane is not repairable. These cranes are no longer manufactured due to cost, lack of efficiency and other economic factors. Policy valuation:.typical repair/replace coverage if replaced with actual cash value if not replaced Issue: how do you measure the loss? 17

18 Building shape 18

19 Building occupancy Most to least expensive (buildings only) Office Manufacturing Parking Garage Hospital Warehouse 19

20 Building location Most to least expensive (building only) Detroit Chicago Atlanta San Francisco Tampa Los Angeles Boston 20

21 Factors determining building value What to look for Construction (ISO class - steel or concrete frame, brick walls) Superstructure represents 20-30% of total cost Shape and configuration Spans (clear area between columns) Story height (not total height) Occupancy What was it built for? Location 40%- 50% difference across the country 21

22 Building valuation Building values include All materials, labor, applicable fee s & reasonable overhead and profit Foundations - underground piping & wiring Anything that remains with the building if sold Permanently attached to the land 22

23 Property valuation Building values don t include Land Increased cost due to ordinance & law Debris removal Demolition costs Yard Improvements including roadways, parking lots, lights Financing or project costs beyond normal 23

24 Property valuation Personal property includes Production machinery and equipment Foundations, taxes, delivery/freight charges and installation costs Furniture and fixtures Tooling Personal property of employees Property of others in C. C. C of insured Note: Location generally does not impact PP replacement cost 24

25 What you can do Verify reported values are 100% - not reflective of Coinsurance Inflation have costs trends been applied to the reported values? Appraisals Is a replacement cost appraisal available? Should you request an appraisal? Value changes Have values changed dramatically why? 25

26 What you can do Are reported values consistent Calculate the cost/sf (buildings and contents) Compare values from one account to another of similar occupancy Check the Internet for information Company internet site Google Earth aerial photograph Microsoft Virtual Earth 3D aerial photograph Ask for interior and exterior photos 26

27 Real property replacement value cost trends 27

28 Personal property replacement value cost trends 28

29 Value Discrepancies Real Property (buildings) Inaccurate square footage (net vs. gross) Tenanted space are Improvements & Betterments being reported? Included in reported personal property value? One of a kind structure Registered historical landmark Old and ornate 29

30 Value discrepancies Personal property (contents) Improper identification of primary occupancy (not SIC Code) Special or significant amounts of tooling Tends to be forgotten when discussions focus on pieces of M&E Vacant/underutilized areas in the facility Does the insured purchase used M&E on a routine basis? High or low density of M&E Is stock reported at selling price or cost? 30

31 Example - Builder s Risk Claim What s Insured? Scenario: A large contracting firm does site improvements at large commercial and industrial development sites throughout the eastern U.S. While doing site work at a new industrial park, heavy rains during a tropical storm eroded drainage basins (mainly land and also areas w/plantings, rip-rap and geo-fabric). In addition, several large pieces of excavating equipment were damage during the surface water flooding. Issue: What is the insured property? 31

32 Example - builder s risk claim what s insured? Photo taken by RAC Adjustment (Independent Adjusting firm work for and paid for by Zurich). 32

33 Example - builder s risk claim what s insured? Photo taken by RAC Adjustment (Independent Adjusting firm work for and paid for by Zurich). 33

34 Example - builder s risk claim what s insured? Water Line Photo taken by RAC Adjustment (Independent Adjusting firm work for and paid for by Zurich). 34

35 How do you handle the damage to the property? Policy wording property excluded: Land, (however the foregoing shall not exclude earthwork incorporated in the INSTALLATION WORKS and to the extent the value of same is reported for coverage and premium purposes), excavations, gradings, landfills Installation works - the scope of construction work the insured has agreed to undertake by contract or subcontract agreement with another party(ies) to the contract. Issue: what do we pay for in this case? 35

36 Example - builder s risk claim how do you value contractors equipment? Policy wording valuation for contractor s equipment: Where damage can be rebuilt or repaired,.pay expenses necessary incurred to restore to its former state of serviceability If the cost of above equals or exceed the actual value (per schedule of items on file with the company) settlement as below. In cases where an insured item is destroyed.pay for the lessor of Replacement with similar property of like kind, capacity, and quality, or The stated value of the insured item as shown on the schedule of values.. 36

37 Property valuation Take ownership Accurate reported values don t always just happen Be an active participant in the process Use the opportunity to work with your customer 37

38 Property valuation Estimating software Treat as a system to check reported values Know the limitations Accuracy in estimating is a matching exercise Competitive bidding 15% spread is normal 38

39 Property valuation Realistic expectations Limited building data available Typically (5) pieces of information Personal property Asset records vs. Inventory Stock From the customer 39

40 Property valuation Good Judgment and Experience Value consistency across the account Meaningful discussions when to question Selling proper values 40

41 The information in this presentation was compiled from sources believed to be reliable for informational purposes only. Any and all information contained herein is not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this presentation, including any information, methods or safety suggestions contained herein. Moreover, Zurich reminds you that this cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances The subject matter of this publication is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy. 41