We have carried homeowner’s insurance on our primary residence for over 40 years now. Naturally, premiums have risen with increases of replacement value. At this point (with no mortgage or other liens on the property), we would rather assume some of the risk ourselves and simply top out the amount insurance would pay for replacement costs. E.g. if replacement is deemed $1.5M, we would like a policy that pays out $1M in the case of total loss, while we cover the extra half million $ ourselves. The agents with whom we have spoken have said they are unaware of any insurance companies which will enter into such an arrangement. In fact, the agents suggest this is impossible by law. I am looking for further elucidation on the issue. I have much freedom to decide how much insurance to take out on my own life. Why not my house? Are insurance requirements on other material goods (e.g. a necklace or a work of art) similarly pegged to replacement value only? Should we be looking for insurance under a name other than Homeowner’s? I understand that laws could be in place to protect consumers from entering into an insurance agreement which is unlikely to meet expectations, but I would think a policy could be written in such a way that consumer and company both understand fully that insurance payout is not intended to cover full replacement value. I would be interested to hear a more expert opinion.
Ron Whitney asked 1 month ago 1 Answers
Dear Ron,
Short answer to your question:
I don’t think the coverage you are seeking is illegal to sell – but I don’t think you’ll find it in the admitted market. You may be able to find that coverage structure in the surplus lines market.
Long winded explanation:
Insurers that write business in the standard residential market offer homeowner policies that provide a very similar set of coverages, offer a limited set of deductibles, and pretty much follow the very similar sets of considerations (age of home, roof type, fire department rating, territory, wildfire risk score and a few others) in determining both eligibility for coverage and for structuring the rating plans used in pricing coverage.
There is very minimal tailoring of coverage and options – essentially a “cookie cutter” approach – that provides the consistency of loss data that leads to having rates that are statistically credible and thus loss results that are relatively predictable over a multi year period. It also leads to easier management of the underwriting process and better consistency in the claims handling process. The insurance version of an assembly line to use another label.
These insurers require that you insure to value because that is what their rating structure is based upon. So, if it would cost $1,000,000 to rebuild the home, that is the amount that the rate is applied to determine the premium for the policy.
To your particular point, suggesting the insured wanted to insure only to, say $500,000, and not the full $1,000,000 is a whole different risk and pricing paradigm. The reality is that the insurer would be carrying much more than 50% of the risk of loss – that’s because the great majority of losses are not total losses. Conceptually, insuring for 50% of the cost to rebuild would still cost 90% of what it might cost to insure to the full replacement cost of the home. Figuring out the appropriate rates/premiums for homes not insured to value would require collecting a wholly more detailed data set. Most insurers choose not to create these options and stick with their more standardized structures.
You may also be wondering whether an insurer would be willing to sell you a policy with a very high deductible, like something in the range of $500,000. But I am doubtful that any insurer would offer that option for a home under maybe $3+ million in replacement cost. One reason, that’s just not how insurers are set to operate. There has not been demand from lower limit properties for such high deductibles in the past. Another reason is that if a home suffered $100,000 in damage, for example, the insurer would want to be aware of what caused that loss and whether the cause of loss was remedied appropriately. But these desires on the part of the insurer would likely be frustrated by an extremely high deductible.
However, there is no law requiring that coverage cannot be written in the way you want. In fact, “surplus lines” insurers often tailor coverages, limits and exclusions to fit the specific home being covered and take into account many more details about the risk. But that tailoring and calculating of appropriate surcharges and discounts is a more expensive process – usually applicable to only the most unique or high end homes.
Summary: In today’s very challenging homeowners market, more homes are ending up in the surplus lines market in large part because surplus lines carriers’ rates are not regulated so they are free to charge much higher rates. Still, most of the policies now being issued are similar to standard policies. You could find an agent who will help you seek your more usual coverage structure in the surplus lines market – and it might be a somewhat better deal, though likely less savings than you might have expected and of course you would be carrying a lot of the risk.
Best to you,
Broer Otis and Joel Laucher
United Policyholders
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