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Maybe a newer member can post a scenario where a coinsurance calculation based on ACV would be higher than an RCV calculation.

Point well taken Leland, but coverage decisions will come down to the carrier in the end.  The IA's estimate & ITV (if even applicable, since many commercial policies I work with do not even have coinsurance provisions), are just that...."estimates" and "estimated ITV's".   Depending on the carrier, there are also HO policies with guaranteed RC coverage endorsements that over-ride any coinsurance provisions often seen in HO forms.

Once the IA has provided the loss scope, repair estimate (both RC/ACV), and ITV per the software the IA uses...the carrier then hopefully has the necessary information to settle the loss as warranted. There are often (usually) factors that will play in.  Some of these include: upgrades or additions to the structure since policy issue, quality/square footage of the property wrongfully reported at the time of application, etc. 

In other words, the coinsurance calculator is only a tool for the IA to use and it will point out whether there is a potential issue that needs to be addressed.  Just like a bunch of bananas, they might all look alike when you buy them but they taste different after a day or 2 or 3.  

HO3 forms don't have coinsurance clauses that I have ever seen. I'd like to see an example. Sometimes HO3 policies require the dwelling to be insured 80% to value for the insured to be entitled to replacement cost benefits, but that's not a coinsurance clause. It's kinda similar, but its not coinsurance.

You're right that ultimately everything is the carrier's decision, but when I do a coinsurance schedule in my current job that is how the insured is going to get paid. I have never in the last eight years had a carrier question, change, or override the numbers on my coinsurance schedule. They have every right to, they just never have. And I work for a lot of different commercial carriers. So for me, doing daily claims in California, the coinsurance schedule is not a worksheet to illustrate a "potential issue" of underinsurance, to be submitted upstairs. For me, it is how I adjust the claim and how the insured gets paid. My coinsurance schedules get mailed to the insured and the insured's attorney, if they have one. This is how the carriers I work for expect their claims to be handled. Sometimes a decision is made to not apply coinsurance when it might be warranted but those decisions are normally in response to my questions. However, I do understand that for CAT adjusters, the carrier might not even care to have coinsurance considered. When I worked Hurricane Ike commercial claims, the carrier told us adjusters to look at coinsurance, and if we thought it might be applicable we could mention it in our narrative. We were never asked nor expected to calculate it.

Part of the reason its different for me is that I am doing daily claims, but another reason is that in California, the ACV of the building is not determined the way it is in other states and it is not a subjective issue for the adjuster the way it might be elsewhere. In California we can't legally use Xactanalysis or Marshall & Swift programs to calculate a reliable number for coinsurance calculations.

While I have worked claims involving residences where the policy had a co-insurance clause, a run of the mill HO-3 has a replacement cost clause, generally set at 80%.

My suggestion, when handling claims on policies containing co-insurance clauses, is to set up an Excel work sheet to do the actual calculation as accurately calculating co-insurance on an Actual Cash Value (ACV) policy requires precision.

A quick, accurate way of completing an array of complicated calculation is helpful in settlement negotiations.

The 80% clause in an HO policy, generally called "guaranteed replacement cost" or something very similar, is problematic at best. One of the major problems is that the cost of construction steeply rises after a catastrophic event. A home that was insured to 80% of value before the storm may cost 200% of the policy limits to rebuild because of inflated post-catastrophe pricing. Many California policies have provisions that offer an amount up to 150% (for example) of policy limits to rebuild a home. According to the stories told me by my boss, even these provisions were called into question by numerous lawsuits after the 2003 wildfires and some people were paid 2, 3, or even more times the policy limits for rebuilding their homes. Companies like State Farm sell an inflation guard endorsement that automatically raises the limits of insurance at each renewal to offset inflation and with the additional proviso that the guaranteed replacement cost clause is then rendered moot.
Chuck has been around longer than I have and I can believe he has seen co-insurance clauses on an HO or Dwelling policy. I have not, but I have worked for commercial carriers who take the co-insurance clause very seriously. In my opinion, this is also problematic since the application of co-insurance penalties is usually based on use of the valuation software attached to estimating programs. Very few adjusters, in my opinion, have the expertise to accurately value a building using estimating software. Often this software will give one options like "Low", "Low Average", "High Average", "Good", and "Best" for options as regards construction quality. I would posit that one person's High Average is another person's Good, and there are several levels of Best. We can, at most, be approximate in our calculations and we should err on the side of the insured if there is any doubt. Market surveys as a method of obtaining replacement cost value on a building are likewise flawed because location and land value are always included in selling prices but are excluded in the application of co-insurance.
My preference is to work with policies where co-insurance is waived, and I breathe a sigh of relief when I find a potential co-insurance problem and the policy turns out to have no co-insurance clause.

BTW, I handed in my resignation today, effective October 1. I hope to see some of you on the road again soon as I am returning to catadjusting after five years of working on staff.

Steve, just a minor point, my post uses the word policy. I did not mean to infer ISO HO or dwelling policies.

Another difficulty is that frequently the adjuster attempts to avoid the difficulties associated with replacement cost and co-insurance. Turn and burn is the term. Make the replacement cost fall into the confines of the policy and go to the next claim. Also, many adjusters are not familiar with commercial ACV policies and cannot do the math required to calculate co-insurance. These ACV policies are common South of I-10 in Louisiana.

Posted By Medulus on 28 Aug 2012 04:58 PM
BTW, I handed in my resignation today, effective October 1. I hope to see some of you on the road again soon as I am returning to catadjusting after five years of working on staff.

Congratulations Steve! It's a great day when you can choose which path to take in this industry. Not many can do that. For those who can and do, well that is a testament unto itself!

It's not the first time I've done something totally crazy, Robbie. Five years ago I decided the time was right to come in off the road. It was a good decision, better than I knew. I'm hoping to be that lucky (or blessed, depending on your theology) again.

Hi Leland,

Thank you for your comments about CADO and the Calculator, I like your suggestions and will get started on the revisions.

Take care,

Roy