1. What is Xactimate?
Xactimate© is a software system used to estimate mitigation and repair costs for residential and commercial property losses. Insurance companies and restoration contractors use Xactimate’s products to handle more than half of all property claims in the United States and Canada.
2. What is Xactware?
Xactware© Solutions provides computer software for professionals involved in estimating all phases of building and repair.
Xactware opened for business in 1986 with Xactimate, its flagship estimating system. Xactimate helped contractors and insurance adjusters estimate repairs much faster and more accurately than ever before. Since Xactimate’s introduction, many other software solutions have been introduced to the industry. Today 22 of the top 25 property insurance companies in the U.S. and every one of the top 10 Canadian insurers use Xactware property insurance claims tools.
In 2006, Xactware was acquired by ISO (“Insurance Services Office”).
3. What is the ISO:
Insurance Services Office (ISO), a subsidiary of Verisk Analytics©, was created in 1971 through the consolidation of several state, regional, and national rating bureaus for various lines of property/casualty insurance. ISO helps insurers with product development, underwriting, and rating functions. In 2008, Verisk Analytics was established to serve as the holding company of ISO, and Xactware. In 2009, Verisk executed an IPO and 85.25 million shares were sold by its shareholders, which included American International Group Inc (AIG.N), Hartford Financial Services Group (HIG.N) and ACE Group Holdings.1
4. Pricing list
Xactimate gives users access to pricing databases for 460 distinct markets throughout the United States and Canada. Xactware publishes and maintains these price lists for both structural repair and cleaning, updating them at least once per quarter.
Each structural repair and cleaning database contains more than 19,500 unit-cost line items. For each line item, Xactimate provides:
● Labor costs
● Labor productivity rates (for new construction and restoration)
● Labor burden and overhead
● Material costs
● Equipment costs
● Contents replacement cost value
The Xactimate price lists seek to contemplate the costs to perform various activities within the confines of the restoration ecosystem. e.g., storage, contents packouts & restoration, mold remediation, water extraction, environmental testing, asbestos abatement, etc.
In most regions, a new pricelist is generated monthly. This updated pricelist incorporates ~10 new line items and significant modifications to an additional ~30 line items. Traditionally, user feedback is the catalyst for the adoption of new line items and material updates. Although the Xactware pricing department makes every effort to monitor and adjust pricing based on the data at their disposal, it is incumbent upon the user base to provide feedback informed by regional realities. Pricing feedback can be remitted via various avenues, however the primary vehicle is to remit thoughtful feedback via (firstname.lastname@example.org).
Insurance company adjusters use these price lists to estimate building damage repair and rebuilding costs so they can set their reserves. Restoration contractors use the price lists to estimate their costs to repair and rebuild, typically to include overhead and profit. The Xactimate program allows users the ability to create their own pricelist or adjust pricing of individual line items, and the Pricing Department encourages users to make reasonable adjustments to pricing as warranted. That said, broadly adopted best practices include augmenting any such changes to pricing with a supporting F9 note.
5. Sketch function
In addition to the pricelists, Xactimate incorporates a sketch utility through which the user produces a detailed representation of the property to be repaired or rebuilt. The specific measurements underlying this representation are crucial to the accuracy of the estimate to be generated. Differences of opinion between adjusters and contractors as to reasonable cost for the same scope of work can arise from discrepancies in dimensions of rooms, cabinets, etc. as represented in this sketch. As with any computer generated work product, “Garbage In, Garbage Out”.
6. Intentions and limitations of Xactimate
Nearly everything within the insurance ecosystem is open to some degree of interpretation. It is essential that adjusters interpret their policies, generate and review estimates in good faith with an eye towards fair claims settlement. In a similar vein, it is incumbent upon restoration contractors to leverage Xactimate in a responsible way that results in reasonable and warranted estimates/invoices. After all, Xactimate is a tool - a tool that can be used for good or evil. It can be manipulated nefariously to arrive at inflated reimbursement values or wielded thoughtfully in an effort to represent the additional cost associated with repairing a historic tudor-style mansion on Coronado Island. When leveraging this estimating tool, the overarching intent of all materially interested parties should always incorporate a bias towards fair and expeditious claims settlement that ultimately results in the policyholder being made whole.
7. Xactimate Certification
Xactimate certifies their users based on 4 levels of Xactimate Certification:
· Level 1 Certified (Fundamentals)
· Level 2 Certified (Proficiency)
· Level 3 Certified (Mastery)
· Xactimate Trainer
Many ordinary contractors/builders are unfamiliar with Xactimate. A contractor/builder who is inexperienced or uncertified in Xactimate may inadvertently be putting the policyholder at a significant disadvantage in arriving a fair and reasonable settlement amount, merely by participating in settlement discussions without understanding the basis of that adjuster’s calculations.
TOUGH TO KNOW
8. Limited Knowledge
Most in the know would agree that Carriers don’t seem particularly interested in ensuring that their Adjusters achieve more than basic level proficiency in the Xactimate program. Why? One underlying purpose of Staff Adjusters is to help manage claim severity. How does their limited knowledge of Xactimate support this purpose? In short, Adjusters proficient with Xactimate would be better equipped to generate more detailed estimates. Since the ~19,500 line items on the price lists represent components of repair/replacement activities, greater knowledge of this vast database results in the ability to create more detailed estimates, reflective of more reasonable and warranted (higher) reimbursement values.
Following this logic, Carriers are similarly disinterested in ensuring that contractors are proficient in Xactimate. While they mandate that their Program Contractors obtain and maintain various trade specific certifications (e.g., IICRC: FSRT, WRT, AMRT Certifications), they are unlikely to require Xactimate Certification at any level. One might speculate the Carrier’s have concluded that capable contractors armed with this specialized knowledge would be equipped to generate more detailed and accurate (higher) estimates/invoices.
9. Inefficiency By Design
The aforementioned ‘limited knowledge’ results in many administrative inefficiencies. This is the natural outcome when the powers that be are incentivised for the individuals on both sides of the claim to remain ill-informed. Policyholders are forced to suffer the consequences in the broadest sense.
These inefficiencies are expressed through:
● Extended cycle times
● Construction delays and cost overruns
● Increased emotional burden on Policyholders when settling disputes between contractors and adjusters
● Increased claim duties placed upon the Policyholder
● Increased frequency in which mechanics liens are levied against the Policyholder’s property
● Increased estimate disputes and supplement submission
● Increased administrative human capital requirements on both the Carrier and Contractor side
Many of these inefficiencies result in the following:
● Increased construction cost
● Reduced renewals and increased premiums
● Suboptimal experience for Policyholders
10. Cyclical Nature of the Insurance Ecosystem
A paradigm shift occurred in 1992 when Allstate and other major carriers hired McKinsey & Company to develop strategies for managing claim cost. McKinsey referred to the claims settlement process as a "zero-sum game" - essentially the carrier and the policyholder are competing for the same resources. The idea that an Adjuster’s primary objective was to fairly distribute claims benefits was an archaic notion, and the McKinsey report advised that claims be settled on a take-it-or-litigate-it basis. As a result, Allstate moved from "Good Hands" to "Boxing Gloves".
These ideas, albeit one-sided, appeared to have merit on the surface, at least as it relates to managing claim cost. However, in practice they had some significant unintended consequences. On balance, the delay, deny and defend approach expresses itself through increased cycle times and subsequently increased claim cost. Over the last two decades, Carriers have been forced to come to the realization that the longer a claim is open, the higher the cost will be to ultimately settle the claim.
So the pendulum has swung fantastically to the other side. Carriers are now myopically focused on settling claims as fast as possible. This bias expresses itself by Claim Representatives being encouraged to cut checks immediately on site. Although a seemingly noble gesture, these initial claim settlement checks are usually based upon the thinnest of supporting documentation (see Limited Knowledge, above) and often prove to be quite insufficient. Policyholders should be aware of this bias, and should engage capable resources that are there to serve and preserve their interest with an eye towards ensuring accurate and complete claims settlement values.
11. Noble Claims Settlement
Claims Adjusters are taught to conduct themselves in honest and honorable ways when handling claims. After all, the primary function of a Claim Adjuster should be to satisfy the insurance company's promise to the policyholder.
In support of this notion, here is an excerpt from the California Code of Regulations under the California Fair Claims Settlement Practices Regulations publication:
Section 2695.7. Standards for Prompt, Fair and Equitable Settlements
(g) No insurer shall attempt to settle a claim by making a settlement offer that is unreasonably low. The Commissioner shall consider any admissible evidence offered regarding the following factors in determining whether or not a settlement offer is unreasonably low.
Insurers operate within a highly regulated environment. History has shown us that when Claims Representatives depart from fair and equitable settlements, the consequences are ultimately bad for both the Carrier and the Policyholder. Carrier’s have broadly adopted Xactimate, both the program and it’s price list, in an effort to avoid these pitfalls and as a means to show their settlements are being made in accordance with an “industry standard”.
12. Pursuit of Perfection
Consequently, the Xactimate price lists are far and away the most broadly adopted in the industry and are widely regarded as the set standard pricing model. By its very nature, settling claims is a messy business - although not without its faults, the Xactimate product has done a fantastic job institutionalizing this process.
13. Data Mining
Xactware’s Pricing Data Service Team (AKA Pricing Department) reports cost information based upon actual prices and transactions (completed bids) that have occurred recently in the given market. This information is invaluable to users who need to reference current, local prices that are based neither on the highest nor the lowest price in their market. The pricing department also aggregates streams of real-time data provided by major retailers like Home Depot and speciality service providers. The Pricing Dept is tracking spikes in fuel, material and labor rates in near real-time.
Xactware’s holding company Verisk Analytics maintains the largest statistical database in the Industry, comprised of 19Bn records. The underwriting analytics that are published by the ISO are heavily informed by the pricing outlined in the Xactimate Price List. Interesting enough, removing legacy line items causes significant problems for the ISO folks that are using the Xactimate price list to inform their underwriting reports. This is why line items get added on nearly every update, but none of these line items are ever removed, resulting in the ever growing ~19,500 line item database that we’ve discussed.
14. We Don’t Pay For That
This industry is chock-full of ideas, customary and institutional, that while unreasonable are broadly regarded to reside beyond criticism.
Here are a few items that Adjuster’s often claim they don’t pay for:
● Contractor overhead and profit on structural drying, mold remediation, abatement, structural cleaning, contents cleaning, packout and storage activities
● Contractor overhead and profit on projects that have less than three trades involved
● Supervision and project management time
● Mold and bacterial clearance test
● Delivery charges (equipment, materials and staff)
● Relief for the additional cost associated with extending state mandated Workmanship Warranties
● Masking and preparation for drywall activities
● Final residential/commercial cleaning
● Warranted and necessary after hours charges
Despite the fact that Xactimate has incorporated acute concessions or specific line items to address these activites, Carriers often refuse to approve the charges. These are some of the most hotly contested aspects of a claim and these discrepancies can result in out-of-pocket expenses, conflicts and delays. Depending upon which side of the claim one is on, there are a myriad of positions that can be taken in regards to these issues. In order to have an informed discussion about these potentially warranted costs, it is crucial that experienced parties approach this in a reasonable way. Everything in this business is negotiable, and fair claims settlement requires good faith interpretation of the intent of both the insurance policy and the software program.
15. Qualitative vs. Quantitative
Xactimate® reports look impressive because they are well-organized, professional-looking, lengthy, and inherently quantitative. However, the mere fact that it looks tidy and institutional does not mean an Xactimate estimate is complete and/or accurate. The estimating platform is best understood when the user “swims in the brackish water” - amplifying their deep qualitative experience with the powerful quantitative metrics associated with the software program. When a user relies too heavily on one approach or the other, the claims settlement process becomes compromised and the materially interested parties will struggle to consistently arrive at a fair settlement value.
It is easy to imagine the shortcomings associated with the sub-optimal qualitative decisions made by users with a lack of experience. However, it is more challenging to understand the quantitative limitations of the Xactimate platform unless you're intimately familiar with the program.
The quantitative shortcomings of Xactimate become more obvious when estimating especially small or exceptionally large projects. For example, the painting and drywall line items tend to under compensate the Policyholder on repair projects <$10k; however, these same line items tend to over pay the Policyholder on claims >$1Mn (especially in a production commercial environment). The program is not inherently adept at adjusting for scale, but experienced users are aware of these factors and they can and should make adjustments accordingly.
16. Labor Minimums (Formerly Base Services Charges)
Xactimate has attempted to make concessions for the inefficiencies associated with performing specialized trade functions on a small scale. A scenario in which these inefficiencies remain evident is when a prime general contractor deploys a plumber out to a project and the only thing on their punch list is braising on a new angle stop behind the bathroom toilet. That plumber may only be on site for 30 minutes, but the general contractor can expect an invoice for just shy of $300. In reality, the plumber is not billing $600/hr, instead he is invoicing at ~$90/hr informed by a customary 3/hr minimum. Speciality tradesmen e.g., drywallers, electricians, plumbers and mechanical contractors typically maintain minimum/base service charges.
In acknowledgment of this reality, Xactimate introduced Base Service Charges which later evolved into Labor Minimums, and this algorithmic concession seeks to provide some relief for General Contractors that are performing specialized trades on a small scale. In practice, the aforementioned angle stop removal and replacement line item is roughly a ~$40 line item, and common sense tells us that ~$40 is not nearly enough to hire a licensed plumber to perform any on-site function (however trivial). In response to this, as soon as a line item is selected that resides within the PLM (Plumbing) category code, Xactimate generates a corresponding and dynamic labor minimum value. In this example, the initial labor minimum value is ~$275 and this number continues to decrease as additional PLM line items are added to the estimate. In the case of the angle stop, the materials total $7, so the remainder (the labor) is deducted from the plumbing labor minimum, ultimately returning a labor minimum in the amount of $242 labor minimum ($275 - $33 = $242). In the end, the $40 angle stop line item is added together with the $242 labor minimum. In order to arrive at the grand total replacement cost value of ~$342 the subtotal value is augmented by sales tax and overhead and profit.
That said, although the labor minimum utility was well intentioned, and technically functions near perfectly, the fact remains that it is easier to abuse the tool than use it correctly. Users are notorious for erroneously triggering labor minimums. This is why some Carriers have attempted to implement an ad-hoc policy that incorporates the notion that they don’t owe for labor minimums. This is nonsense, but when 50% of estimates hitting their desk erroneously include labor minimums, it easy to understand how they arrive at this hardline position. Users are encouraged to verify the labor minimums that are being triggered in an effort to ensure they are warranted. Policyholders should be aware of these potential discrepancies and encourage their contractor to get out ahead of this pitfall before needless turbulence arises.
17. Accuracy Sacrificed To Conciseness
Xactimate is excellent at assigning fair reimbursement for granite countertops - that is, provided the user incorporates the related line items to support the primary activity (granite countertop install).
Let’s explore estimating for the removal and replacement of 49 sqft of high-grade granite countertop.
First off, there are four different grades of countertop, ranging from “standard” to “premium” - how then do we determine the granite is high-grade? The answer: experience, interpretation and negotiation (in that order). Okay, so now that the materially interested parties agree that the granite countertop is high-grade, we are good to go right? WRONG! Determining the grade of the stone is just the beginning...
In this scenario, these are the other closely related line items required to generate an accurate estimate. (Note: This example does not seek to incorporate all the line items and general conditions this activity would trigger):
● Removal & replacement of 49 sqft of countertop subdeck - plywood that was removed and replaced
● Add 37 sqft of high-grade granite to accommodate the backsplash
● Add 1.5hrs (Finish Trim Cabinetry Labor) in an effort to cut in the 3 switch/outlets holes and the 1 Pot Filling Faucet within the backsplash field
● Detach & reset of 3 outlet/switches
● Detach & reset of the pot filling faucet
● Detach & reset of the sink faucet
● Detach & reset of the garbage disposal
● Detach & reset of the p-trap
● Detach & reset of the undermount sink
● Undermount sink cutout/polish
● The 18 sqft of additional high-grade granite waste (materials only) required to deliver the seamless arched island slab
● The 29 lnft of high grade edge treatment (fancy bullnosing)
● The 2 mitered corners
● The 37 lnft of Silicon caulk moisture protection
On balance, the additional line items outlined above total to more than the original primary high-grade granite countertop line item. It is easy for one to imagine how a user on both sides of the claim could either nefariously or erroneously leave out warranted line items required to generate an accurate estimate of this nature. It is merely prudent for Policyholders to remain aware that the accuracy resides within the details, and to be wary of any representative that boasts about how fast they can estimate a loss. Generating an accurate Xactimate estimate is a time consuming and arduous process, one that some individuals take great pride in.
If property owners are unsure about the completeness and/or accuracy of the estimate(s) at hand, it is prudent to obtain a second opinion and have their estimate(s) reviewed by a seasoned restoration professional that has a depth of knowledge using Xactimate. This is critical to verify that the scope of work and necessary line items are included to establish adequate allowances to perform the work. The biggest challenge homeowners/disaster survivors face with being given an Xactimate estimate is the lack of understanding of what is or is not included in each line item entry and what to do if something appears to be overlooked or undervalued. There is an enormous amount of speculation and assumptions made when a property owner is being asked to sign off on an estimate as a settlement and rarely will an adjuster admit that there may be line items that were overlooked, or priced too low. Xactimate and the values it produces represent the difference of being able to rebuild a property to pre-loss condition or being forced to start over somewhere else.
WHERE DOES THIS LEAD?
18. Medical vs Property
For policyholders it is often helpful to make the comparison between medical codes and Xactimate line items. If an MD calls for an MRI there is a code for that. Similarly, if a restoration contractor calls for an environmental asbestos survey there is a line item for that. However, it is at this point where the comparisons tend to break down. That is because the medical field is a more mature industry that recognized the value in developing set standards around billing practices. Not just the billing codes themselves, but the interplay between them and the appropriate application of modifiers. Let’s explore this scenario: Two different hospitals in the same town performed identical surgeries on similar patients and they billed the same insurance carrier - the invoices would look identical, right? That would be a reasonable assumption to make, and today, most medical billing professionals would agree that the invoices would look similar - but that was not always the case.
Medical billing professionals that have been around for a while would be happy to reminisce about a time computers were thrust onto the medical billing scene back and a myriad of new billing codes were introduced. These codes and the associated modifiers were often inaccurately assigned and these discrepancies caused an administrative nightmare for both the carriers and the hospitals. Fortunately, several visionaries formed nonprofit organizations in an effort to resolve these needless errors and misalignments. These foundations reached across the aisle and got insurance carriers and medical professionals to agree on what the set standard should look like. The medical industry has worked hard to agree on billing standards and the results have been compelling.
So why hasn’t this evolution taken place in the restoration industry? Well, the first answer is that Xactware was not keen to clarify how their program is to be used beyond a certain point, as to avoid alienating their client base. Remember, their client base is spread rather equally between carriers and contractors. Thus, any move to clarify the interplay between the 19.5k line items that currently comprise their price list will be met by extreme scrutinized by at least 50% of their client base. Now that is a quandary, so what did they do? Nothing, they willingly remain on the periphery and perhaps that is most appropriate.
Fortunately for the restoration industry there is at least one foundation working diligently to establish standards for billing practices; Actionable Insights. Actionable Insights is a foundation that exists to preserve the health of the restoration ecosystem by clarifying globally recognized billing standards. They recently published both the Umpire’s Mitigation Manual and the Umpire’s Repair Manual. These texts were integrated into a searchable database that provides guidance for adjusters and estimators when generating estimates. Each chapter incorporates feedback from insurance adjusters, restoration estimators and industry experts. We are hopeful and curious to see how these texts are adopted by industry professionals and the associated impact this will have on policyholder’s claim settlement experience.
19. Auto Repair vs Property Repair
For restoration professionals it might be helpful to make the comparison between autobody billing codes and Xactimate line items. Frankly, what Actionable Insights is doing has been done before in the Auto Repair ecosystem. I-CAR paved the way as an international not-for-profit organization dedicated to providing information required to perform and invoice for quality repairs. In an effort to establish guidelines around these activities, I-CAR facilitates conversations between those representing both sides of the claim. Similar to Actionable Insights, funding for the organization is primarily derived from student tuition. This assures that I-CAR remains unbiased in developing programs and services on an industry-wide basis.
For more information, please read the following United Policyholders’ publications, all free and available online at www.uphelp.org. They’re located in the Claim Tips section, which can be found on the left side navigation bar on their home page.
This publication was donated to the UP library by Mark Whatley/Actionable Insights. Actionable Insights generates estimating guidelines that help Xactimate users generate accurate estimates.