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Please, never ever tell any insured that the loss is a "total loss".

Posted By RJortberg on 06 May 2009 05:39 PM

 

...For example,  if a tornado destroys half of a house, but the remainder is sound (assuming an engineers report is provided), when would you consider it appropriate to total it?   Offhand, I would probably prepare an estimate for 1/2 house reconstruction and then compare that to the cost associated with a demo of the other half and a rebuild of the entire house which should have cheaper economies of scale...

What Bob & Chuck said......it depends on which 1/2 is damaged/totalled.  Also, what was the cause of loss.  In the case of fires, you might have considerable interior damage (maybe 70% of the insured value), but the shell is OK.  Those aren't totals.   But, if it's tornado, it might look like 40-50% damage but end up being 80+% after an expert/contractor actually gets involved.  Then it just seems sensible to start from scratch.   And be sure to advise the carrier of that possibility, if there is a "guaranteed replacement cost" coverage endorsement, which can throw the policy limit out the window.  Had a case several years ago as a beginner staff guy, with a home insured for about $140K.  Cost $320K to put back LKQ.  No co-ins requirement with that endorsement.  The claim was severely under-reserved for the first 3 months, until someone up the ladder discovered the extra coverage.  My arse was saved, as a result.      

The word "total loss" doesn't usually appear in the policy. You might want to avoid using it, especially when speaking with the insured, as it can cause misunderstandings. Sometimes you will hear "constructive total loss" which could mean the damage is so great that even though the dwelling is not completely destroyed, the cost to repair is greater than the value of the structure or greater than the policy limit.

If you study the policy you might find that the insurance company owes the value of the repair OR the ACV of the structure (not including land, but including demo) whichever is less. In that case you would do your estimate for repair and also request an appraisal (if the company wants one). You can probably recommend payment of the smallest of the 3 figures between repair, appraisal, and policy limit (assuming it is not a guaranteed replacement cost policy). Obviously if there is co-insurance thats another reason to do an appraisal. If you have a policy which covers more than one building with no sublimits, you migh need two appraisal figures: one for the damaged building (because the insurance company will not pay more than it is worth) and a second number for the two buildings combined (for coinsurance calculations).

Obviously you need to read the policy.

The insured can do whatever they want with the money- repair to original condition, repair to a lower standard, repair to a higher standard, sell as is, demolish and rebuild etc. If the insured thinks their house is not worth rebuilding and they want to call it a "total loss" they can do that. If they decide to demolish the home and sell off some of the fixtures, and don't think of the situation as a "total loss" so be it.

Consider the following question:

"Is it better to rebuild or tear down?"

This is a great question for the insured to ask a contractor but it isn't really an adjusting question, in my opinion. If you want to give the insured your input on this question go ahead, but it is not really a question you need to ask yourself in order to adjust the policy.

Theoretically you could have the following conversation with the insured:

INSURED: Mr. Adjuster, is my house a total loss?

ADJUSTER: Well, let me explain it this way- my estimate for repairs is $125,000. The appraiser says the building, not including land, is worth $112,000. Your policy limit is $100,000, so the most the insurance will pay is $100,000., which you can use in any way you like. I also want you to know that there is an additional $10,000 for code upgrades if you do decide to rebuild.

INSURED: Oh, so my house is not a total loss, I paid $300,000.00. Also my contractor said it would cost 170,000.00 to rebuild so based on what your telling me I will not have to spend that much.

ADJUSTER: Mr. Insured please realize that the $300,000 you paid is for the land and the building combined. My repair estimate does not include anything but the repairs to put the building back the way it was. Also I want you to know the actual cost might be more, once I knew the estimate was going well over the $100,000.00 policy limit I stopped estimating. Also the code upgrades the city will require could be more than $10,000. So the $170,000.00 your contractor quoted could be accurate.

INSURED: Well if you didn't finish your estimate I want you to go back to your office and finish it today so I can give it to my CPA for my tax write off.

ADJUSTER: The company doesn't authorize me to spend extra time estimating but you are welcome to request that in writing and I will ask my management. [note: this response is based on typical DAILY CLAIMS adjusting. In a CAT situation the adjuster would probably be OK to compete the estimate and bill for it] Perhaps you can use your contractors estimate for your taxes but I can't give you tax advice.

First, co-insurance is not a feature of any common homeowners policy.
Second, never, ever describe a building loss as a "total loss". When the insured sues for policy limits your comment will be noted and the insured will most likely get a favorable judgment based on your comment. Before you start tossing the "total loss" comment about review your E&O coverage.
Third, it is never the best idea to stop estimating at the limit of coverage. Write the estimate to cover all the damage. In today's world going to court and having your estimates entered into evidence is becoming more and more common. Most companies hire and rehire adjusters that do professional work.

I read your original question again:

"For example, if a tornado destroys half of a house, but the remainder is sound (assuming an engineers report is provided), when would you consider it appropriate to total it? Offhand, I would probably prepare an estimate for 1/2 house reconstruction and then compare that to the cost associated with a demo of the other half and a rebuild of the entire house which should have cheaper economies of scale. I'll bet there are better ways / rules of thumb to cut to the chase about this issue to get the estimate finished faster."

I apologize for not specifically answering this question.

If I understand correctly you are asking "if it is cheaper to start over from scratch vs an extensive repair, can the insurance company pay the lower amount?"

the answer (in my opinion) is YES.

Also, I went and read one of the policies I work with and was surprised to see the words "total loss" under the "LOSS SETTLEMENT" section. As always, "read the policy".

Its a DP policy (dwelling, not HO) and here's what it says:

LOSS SETTLEMENT. Subject to CONDITION 2. (Insurable interest and limit of Liability), we will pay the following amounts for covered property losses:

a. Coverages A and B losses: For losses to covered property described in Coverages A and/or B, the following rules apply:

(1) Total loss: If the greater of the cost either to reconstruct or replace the damaged part of the property exceeds the actual cash value before the loss of all covered property described in coverage A and B, we will pay such actual cash value.
(2) Partial loss: In the case of losses that are not described in (1) above, we will pay the least of the following amounts:
(a) the lower of the cost either to reconstruct or replace the damaged part of the property, less a reasonable amount for depreciation; or
(b) the actual cash value before the loss of the damaged property.

What this section is saying to me is that if we have a house like you described, and the repair to replace half the house is 125,000, but the appraised value (Actual cash Value) is only $110,000, the insurance would only owe $110,000. (on this particular DP policy) .

The policy is basically giving a definition of "total loss" but more importantly it is telling you how the settlement is calculated.

Consider the following scenario:

An older victorian triplex in a rundown neighborhood. One unit of the three is consumed by fire. The middle unit has smoke damage, the last one is OK. Because it is a run down neighborhood, the appraised value is only $120,000. Because of the victorian woodwork and quality, the repairs would cost $130,000. Everybody recognizes that the insured could simply demo the damaged unit and convert the building into a duplex. This scenario would nevertheless be a "Total loss" as described in the policy language above. So even if the insured could spend $30,000 turning the triplex into a perfectly good duplex, it would be a "total loss". See how the term "total loss" can be confusing? Thats why I often avoid using it.

But what you are asking is a little different. My examples are comparing repair with ACV. Your question is really, in my opinion, comparing two different methods of repair.

Lets say that a chimney has broken part way off on a second story, and fallen into the upper bedroom, damaging the hardwood floor.

The public adjuster writes an estimate that involves very careful dismantling of the chimney, special structural reinforcing of the remaining portion of the chimney, extra labor for weaving in the new hardwood floor boards with the old boards etc. etc.

The contractor for the insurance company takes one look and says that he can simply remove all of the flooring and do the floor completely new, and he can knock down whats left of the chimeny and rebuild it completely from scratch, and he says it would be $3000 cheaper to do so.

In this example the insurance company would owe the lower cost method, as long as it was reasonable and like kind quality etc.

So in your example I think its the same thing: what is the most reasonable (cost effective) method of repair? AFTER you have determined that number (whether it is build back from scratch or extensive repair) THEN take that number and compare it with the ACV.

Now in your example I would be a bit skeptical that a total rebuild would cost less than building back half the house, but it is possible. If I had a claim like yours the carrier would probably want me to:

1) get a contractors estimate for repairing 1/2 the house, due to the size and complexity (structural engineering) of the loss. The carrier would also likely want an opinion from a structural engineer.

2) get a contractors estimate for the total rebuild, based on my recommendation if i thought it would be more cost effective.

3) get an appraisal, based on my recommendation, if it appeared that the value of the house was less than the repair cost.

In situations like yours it is not unusual for the city to come out and say that the house can't be repaired. If the insurance company has a structural engineer that says it can be repaired but the city says no, it might be difficult to pay for a repair only. Of course the insurance companies engineer could discuss it with the city but this would obviously be a bit challenging.

I do CAT claims and daily claims both. I have been specifically instructed (on daily claims) not to keep estimating once policy limits are well exceeded. The insurance company has no legal duty to keep estimating once policy limits are paid. Think of it this way- the insured is not paying a premium for an estimating service.

If an insured was paid policy limits and sued the adjuster or company for not doing a full estimate it would get laughed out of court. If you do daily claims and write an estimate that is not complete, all you have to do is indicate on the opening paragraph that it is not complete.

If you are working a cat claim for a $400,000 loss and the insured has $100,000 in coverage, and your vendor says do the full estimate and set your fee based on a percentage of $400,000. then by all means go for it. Just realize that there is no legal duty for the carrier to do that good of an estimate.

I can guarantee that if you did an estimate like that on a daily claim the carrier would be pissed if you billed them the hours to do a $400,000 estimate when the limit was only $100,000.

All good info; But I never saw any mention of ACV loss and RC cost being in this decision, it should always be in the estimate. Remember the property has condition about rebuilding that are very germane.

A few clarifications and thanks for the feedback (especially Leland). Basically, I have heard the expression "total loss" in conversations. I was not aware (Chuck) that this type of terminology would create liability, and I'm not clear why this is the case, as this seems to me to be an economic question and not a pejorative or liability generating comment. I'm thinking that a "total loss" or whatever you want to call it is when one pays the lower cost of 1) a partial rebuild or 2) a scrape and build from scratch. At some point the scrape and rebuild is cheaper than the partial rebuild... kind of like the chimney example. This is a hypothetical issue; I want to be clear of a good approach when I face this kind of claim in the future, and I'd also like to use the best terminology. No questions about ACV vs RC in this example. Husker, your comments make lots of sense for exterior vs interior damage etc.

This question came up after friends of mine were talking about Katrina, and one mentioned that the "total loss" claims or whatever one wants to call it were so much easier to write up than partial losses when one had to do very complicated estimates. In the case of a total loss, my friend would multiply the square footage of a structure by the appropriate cost per square foot, and that would be the estimate. But in the case of a partial loss, he would have to do very detailed estimate of the different elements needing repair. The second type of estimates were much more time consuming to write up obviously, but I am not sure just what circumstances dictated when he would go with one estimating approach vs. the other. I'll be asking him this question in a month or so in a meeting.

Basically, I assumed that the scope of the estimate was not dictated by exceeding the policy limits, but Leland and Bob, your points are well taken about the $400,000 estimate for a claim w/ a $100,000 policy limit. Stop the estimate already, but there seems to be some disagreement about that from others.

Thanks again,

RJ

Ok, don't get me wrong, this IS a cat adjusting website, as far as CAT adjusting most vendors have an understanding that the adjuster can write the estimate for the whole loss and bill on a percentage. That's how I would do it too. It's just not always done that way on daily claims. Most independents that work out of a regular office doing daily claims bill by the hour, filling out a timesheet for every phone call, fax, etc. I don't know if its the same way for adjusters who get a claim once in a while and work out of their home. If someone can tell me how the fee schedule is on those claims I'd like to know.

CAT adjusters are also less likely to order appraisals or contractor estimates, although I talked to some CAT adjusters working the previous Santa Barbara fires and they told me they were required to get a contractors estimate on every job. As far as appraisals go a lot of carriers will not apply co-insurance or pay at ACV unless they have an appraisal to back it up. All kinds of things get paid in a CAT that wouldn't get paid as easily if it wasn't a CAT.

If you want to be a CAT adjuster only its still good to understand how daily claims work because it will help tremendously in doing commercial claims (where the money is). Your staff supervisor at the storm site also likely has a daily claims mentality, certainly the file examiner will.

Sure you could have liability for things you say. If you tell someone they will get policy limits; their loss is a "total loss"; the depreciation is recoverable; etc. and they end up not getting all the money they thought they were getting (coinsurance?) you could have a problem. Certainly they will be mad at you.


Your absolutely right, a "total loss' is easier money for a CAT adjuster.The claim is easy to settle. If a daily claims adjuster has a million dollar policy limit and a repair estimate of $600,000 there is a lot of room for argument- potentially a $400,000 argument. The daily claims adjuster would be paid by the hour to adjust such a claim. On that same kind of claim a CAT adjuster would be burning up lots of time for no extra money.

Your friends way of writing up "Totals" is unacceptable to most carriers. I would kick those back. Most carriers require a stick built appraisal. One quick and neat way to complete a detailed estimate of damages in Xmate is to do a complete and accurate evaluation. then save it as an estimate and it will include everything needed (more or less) to build that structure.

Quick story - Following the snow storm in February 2000, (17" in East Texas and Arkansas) an agri carrier started loading our boat on collapsed chicken house claims. What we did not know was that they were sending our competion across town the same amount of claims. There were 2 types of house, either wood truss or metal truss depending on age. There were 2 common sizes, 40 x 300 and 40 x 400. We sat down and stick built 4 chicken houses in Power Claim, one of each type and size. We included all of the waterers, feeders, fans, etc. Our appraisals were complete and about 12 pages long. Every time we went to another farm all we had to do was pick the type and size in Power Claim, change the insured's name, claim #, etc and we were done with that file. Our competion was writing them up as 16,000 SF @ $40 P.F. = $640,000 = Total Loss, pay policy limits. When the carrier starting receiving the claims they advised the competion to close all of their files. They sent them all to us. Over the course of the storm we inspected over 600 chicken houses.

Several states write Guaranteed Replacemant Cost policies and you must be VERY careful ehen you are trying to run and gun. It is a lazy adjuster who does it the easy way on a sq foot basis. We had this option on IKE claims . If you SF and determine its a "total loss ..to insurance" you should only be paid that amount. I have worked clean up behind the Jesse James gang don't get this reputation... remember we all know the bottom adjusters from their work  as well as the top.

RJ, this business is like any other business, the devil and the money is in the details. It is just that in this business there are a myriad of details. As an adjuster, Cat or daily, you are an agent of the company (the principal). As such your opinion and your use of words needs to be considered. Telling an insured that the loss is a "Total Loss" creates a legal situation. A situation that leads an insured to believe that the loss is a "Total Loss." And leads the insured to take action based on the idea that his loss is a "Total Loss". Once the insured has obligations based on your assessment, "Total Loss" then the company is obligated and has to deal with the repercussions which would be mild if the loss is a "total loss" or extreme if the loss is not a "total loss." New Orleans has many buildings that have not been repaired from Hurricane Katrina because an adjuster said that the building is a "total loss", and created an expectation with the insured. Now the suits are being settled.

Another point is that we are all basically in this for the money, so the more money we make the better off we are. Following this line of thought, actions taken that generate work and thus more money are good. There are several successful professional adjusters that post on this board and I can tell you, because I know most of them, that they don't cut corners. I follow up behind adjusters that cut corners and I keep a list of no hires under any circumstance. Fortunately most of these people don't last from one storm to the other, but in my world fore warned is fore armed and don't want any of these "short cut" adjusters working around me.

My considered advice is to remove the words "total loss' from your vocabulary.

I just learned something new. The reason we do appraisals in California on ACV policies is that by case law, the Fair Market Value IS the ACV. This was a California Supreme court case (Jefferson 1970). The court ruled that you can't take replacement cost on a total loss and subtract depreciation to calculate ACV. The court said you need fair market value to determine ACV. (Obviously appraisers are qualified to determine ACV.)

The insurance companies then re wrote the policies to include the idea that partial losses would still be calculated RCV-depreciation = ACV so partial losses wouldn't require appraisals.

Anybody know what the rules are in other states? Are you allowed determine ACV on a total loss by subtracting depreciation from RCV?

Anyway, this is just another example of why we all need to be open minded to different ways of doing things because sometimes what we think is the "RIGHT" way in one situation is not the right away in another, due to a difference in the state law, the policy, etc etc.

Thanks for the clarifications, and I appreciate the fiduciary responsibility of an adjuster. I did not appreciate that the stick built estimation was the way to go for such large losses. Makes sense though- thanks for the clarification. That misunderstanding was the basis of most of the initial question. Being almost too detailed oriented for my own good, these comments are refreshing. I use Marshall Valuation Service (used to be called Marshall and Swift) regularly in my commercial appraisal business for RC estimates, so comments I was hearing about Katrina and using price per square foot were unchallenged by me until now. And "total loss" is gone from the vocab.

Leland- the court often will say things that do not make sense on further thought... The assumption that fair market value (FMV) from an appraisal is a better measure than RC as a starting point for ACV falls on its face in a couple of cases (at least). 1) If a real estate market is strong, land values go up and so does development profit on new construction. These increases result in increases in FMV. As a result FMV replacement cost new (RCN) would typcially exceed RCV. Contractor profit is not the same thing as developer profit. Development profit is a profit on top of contractor profit, and this is integrated into FMV RCN but not RCV. Upward markets were the lay of the land in CA for some time, so it seems like this was a strong pro-insured ruling.

In the case of a strong downward market though (Las Vegas today as an example), ACV would be an age/life physical-depreciation adjusted number from RC, but FMV could be much different - much lower. FMV would generally integrate an additional depreciation deduction for what appraisers call external / economic obsolescence. Let's say that RCV might be $225,000, less $25K for a physical depreciation deduction = ACV of $200K. But if the structure (ignoring land value component of value in all cases) sells for $150K, then FMV based on sales would understate ACV by $50K- this would be an external / economic depreciation deduction that is due to factors outside of the actual property - a soft real estate market, a noxious factory down the road, etc.

So the court's decision would make sense for the court-biased insured's well-being in a stable market or upward market, but I would hate to be an insured in the case of a soft real estate market when, if I'm understanding this correctly, the insured would be paid on FMV as a starting point to get to ACV. The point is that ACV depreciation and FMV depreciation are not at all the same thing. FMV depreciation includes deductions for 1) external depreciation and 2) functional obsolescence (which is like State Farm's use of "common construction") as well as 3) physical depreciation (like ACV depreciation). In a soft market the insured would have to buy a similarly depreciated house on a different lot but in the same general area to be left whole. At least that's my $.01 :)

Texas has had the liquidated demand for the policy limit on REAL property for a loss by FIRE (only) for years. I seem to remember Florida has a simular law for all perils .States with these laws may have some good investigation type losses. Good luck. I think Chuck has some good Florida experience on the Florida Law.

Mr. Jortberg- you're correct, an appraisal based ACV could be lower than a settlement based on RCV less depreciation. That's one of the reasons an insured might want to consider a RCV policy. Remember, it might not seem "fair" to some observers, but apparently paying the FMV on a ACV policy total loss is the law in California.

If you look at Louisiana's stated value policies it migh not seem "fair" that an insured could (theoretically) insure a property for more than it is worth or costs to rebuild, and in the case of a fire receive the policy limit.

I used to wonder why I didn't see more RCV policies on older victorian homes in the inner city. I noticed that the cost to rebuild all the custom features would be much more than the ACV/FMV. One day an agent explained to me that the underwriting dept generally doesn't allow older homes to be insured at RCV with code upgrade coverage. If you think about it it makes sense for another reason. If the carriers let you insure an old run down victorian for fiull replacement cost it would create a "moral hazard" by creating a financial incentive to avoid fire prevention, not put an accidental fire out quickly, or even commit arson.

Let's say a neighborhood is full of graffiti covered boxy stucco 3 story apartments with off street parking. In the middle of the block is a 120 year mansion that has been converted into 5 units. The building has neo-classical greek columns, hardwood floors, wood windows, beautiful old tile etc. The building has old knob & tube electrical wiring that is failing, and a ludowici tile roof that is leaking. The property would sell for $300,000, ($100,000 land, $200,000 building) but the neighboring properties sell for $450,000 because they have more units and more rental income, and less deferred maintenance. The value of the property is in the rental income, not the nice architectural details.(because of the location). The neighboring properties would cost $325,000 each to rebuild. If the insured property was rebuilt exactly like it is it would require $400,000 due to all the high end features and code upgrades. If the insured has a fire and recieves $400,000 settlement, spends $20,000 on demolition, and rebuilds with a boxy stucco job like the neighboring properties, spending $325,000, the insured would end up with a more valuable property than he had before the fire, more rental income, less maintance problems, and puts $55,000 in his pocket which he could use for a down payment on a second building. Can you see why the carrier is reluctant to offer RCV policies on older rental properties? In California the insured in the example above would probably have an ACV policy and get paid $200,000 FMV of the building + demo costs. So you can see there are two sides to the fairness issue and actually the policy is really not about "fairness" but about what contract says (of course the adjustment has to be done in good faith).

Also in your post you mention that if the insured is only paid FMV they could go find another residence and not bother to rebuild- that's true, the policy has made them whole (fairness?) buy giving them the money neccesary to buy a similar residence, and the insurance company has no duty to pay the extra cost that would be needed to make the special residence exactly like they used to have on exactly the same lot, if they only paid for an ACV policy (in California).

Just to clarify there is no additional depreciation appiled by the appraiser to the FMV to determine ACV . FMV in California is the ACV. The appraiser might consider RCV and some general lump sum depreciation to calculate one of the valuation models in his appraisal report but usually the appraiser simply does "comps" or finds comparable properties (minus land value, which may also be determined from comps). The insurance appraisals I have read are similar to appraisals that mortgage banks order in that they usually show more than one method of valuation but usually conclude with an estimated value based on "comps". Also the insurance appraisals have more focus on the separate values for the building and land.

By the way that reminds me of another issue on many RCV policies- the insured can purchase a brand new residence to get the recoverable depreciation that wasn't paid upfront. Buying the new home satisfies the requirement to replace- it is not neccesary to rebuild on the original lot. (the new home must be at least equal to the RCV of the old one- another job for the appraiser...) A public adjuster taught me that and I read the policy, checked one of my carriers- its true on a lot of HO policeis.

So can anyone answer my question- are other states different? the same?

Glad the board is back up and running.

Steve: Do you have an approximate % of these large claims which include the IA obtaining his or her own third party estimates from a GC? When an IA is dealing with a claim in the $3-5 million range, I would worry about a question of estimation competency since so few programs (Xmate, etc.) are good at these large losses. Personally, I would have to obtain 2-3 estimates to get a good comfort feeling as to the cost to cure. MVS would be the last program I would want to use in a case like this.

Leland: Not sure if you got any private responses about the ACV question as to other states. I understand your examples, and from that I would add that I would be very concerned if I lived in CA if I did not have a stated value or RCV policy. As one gets closer to the beaches and in other upward markets where the highest and best use is for new, high end structures, so much of the value of property is appreciating land values for the next uses.  As a result the appraisal provision would result in an ongoing and excessive diminution of the value allocated to the existing imps.  Bottom line, the depreciation to the improvements by the market could significantly exceed the depreciation due to ACV calculations.  I think there are probably problems w/ unintended consequences w/ this CA legislation.  

RJ