Here is Why Insurance Companies Own the Biggest Buildings in Every City!

Everybody knows that insurance companies are the “King Midas” of today’s world.  One of the reasons is that insurers often play by two sets of rules: one set when they are asking for rate increases, and another when they are paying out claims!

There are replacement cost assumptions made during underwriting that differ from the replacement cost assumptions made at the time a claim is presented. The difference in these assumptions creates a “statistically probable” windfall for the insurer.

The replacement cost of a building is by definition an aggregate of individual construction trade costs (such as drywall, electrical, roofing, etc.) that make up the whole. These construction trade costs include all costs incurred by the particular tradesman actually doing that work, including their sub-contractor overhead and profit margins (SCO&P). In addition to that aggregate replacement cost is the markup added to the process by a general contractor, who is paid for his time, expertise in management, and assumption of risk. In the insurance restoration world that markup is generally 10% for overhead expenses and 10% for profit, and in an insurance claim this markup is commonly referred to as the “10 & 10,” or “General Contractor Overhead & Profit” (GCO&P).

The windfall starts with the RCV calculations made during underwriting. These costs are generally calculated using software that assumes a number of things about a building. The software holding almost 50%of the market share is a program called 360Value, owned by Verisk Insurance Solutions. Until 2009 Verisk was wholly owned by several of the world’s largest insurers, including AIG, The Hartford, and Travelers. Verisk went public in 2009 in that years largest IPO, raising 1.9 billion for those owners. Today, over 90% of Verisk stock is held by only 374 institutional shareholders. The company’s board of directors contains a number of former insurance executives from some of the world’s largest insurers.

360Value software was developed by Xactware, a company that is also wholly owned by Verisk. Xactware is also the company that produces the Xactimate software.

Here is some info from the 360Value information brochure:
“From underwriting to policy renewal, you can count on the 360Value® replacement cost estimation system to generate reliable estimates for every property in your book of business. That’s because 360Value replacement cost estimates account for all costs needed to reconstruct a property to its original condition — down to the screws and nails. This true component-based approach for residential, commercial, and agricultural properties is what sets 360Value apart from other cost-estimating tools. The key to the accuracy and reliability of 360Value estimates is Xactware data and technology. Using Xactware’s comprehensive, current, and localized reconstruction cost information on labor and materials to calculate replacement cost estimates, 360Value helps you better manage risk and align underwriting coverage limits with expected claims losses. In fact, 360Value is the only replacement cost estimating system that uses the same building cost data as Xactimate®, Xactware’s industry-leading claims estimation solution.”
“Match the front end to the back end -”
Consistency across your underwriting and claims means no surprises for underwriters or policyholders in the event of a total loss. 360Value uses the same reconstruction cost data as the industry-leading Xactimate, which is used by:
• nine of the top ten U.S. property insurers
• 80 percent of insurance repair contractors
• seven of the top ten U.S. independent adjusting firms”

You can view the entire 360Value brochure by following this link:

During the underwriting phase of a policy 360Value or other software is used to establish an RCV for a structure. In that process an RCV is calculated for each component of the structure, and that value contains GCO&P.

See this link for a sample 360Value appraisal:

The aggregate RCV that is calculated for the structure is then used to establish the premium payment for the associated policy. In short, insurers collect premium dollars in anticipation of the cost to repair or replace covered property, and those costs anticipated include GCO&P.

At some point in the future a claim against this policy may be presented. It is at this point, however, that the cost assumptions for the loss often change, and GCO&P cost is no longer assumed to be a part of the loss.

Over 80% of all property insurance claims in the U.S. and Canada are settled on a software platform called Xactimate. As mentioned earlier, Xactimate is also wholly owned by Verisk.

Most claims presented are relatively small, and only require 1,2, or 3 of the various construction trades to restore the property to a pre-loss condition. It is at this point, and in these claims, that most insurers diverge from the GCO&P assumptions that were made while calculating premium. Instead, most insurers refuse to calculate GCO&P on these losses, claiming that they lack the complexity to require the services of a general contractor. In fact, many insurers cite a “three trade rule,” saying that they will not pay GCO&P on any loss that does not require more than three trades. Others simply deny paying GCO&P on losses that they arbitrarily feel are not complex enough to require the services of a general contractor.

So, looking at the example of the roof of the building in the 360Value sample report, we see that the roof is valued at $70,578.00 inclusive of GCO&P. Since GCO&P is generally considered to be 20%, we can infer that the cost of the roof used in that calculation from the roofing contractor is approximately $58,815.00. Consequently, when the owner secures an estimate to replace the damaged roof on his building in the amount of $58,815.00, that is all the insurer will pay even though the insurer has collected a premium on that risk based on an anticipated potential payment of $70,578.00.

The conversation is muddied by the concept of indemnification. If, in our example above, the owner secures an estimate for $58,815.00 and is paid that estimate plus GCO&P, then it is the owner that reaps an improper windfall.

The conversation is further muddied by the two avenues that loss values in an insurance claim arrive through:

  1. Estimates for repairs requiring 1, 2, or 3 trades are obtained by the property owner and agreed with by the insurer, and the claim is settled on that amount. Those estimates by definition contain the SCO&P (subcontractor overhead & profit) required by the tradesmen, but obviously contain no GCO&P. Adding GCO&P to that estimate would yield a windfall to the insured. The insurer is already reaping a windfall because they had calculated premium as if that loss was repaired by a General Contractor requiring GCO&P.
  2. An estimate for repairs is created “out of thin air” using Xactimate software, and no actual bid from any contractor is secured. The cost assumptions utilized by Xactimate software do not contain O&P for either the tradesman or a general contractor. This from an Xactimate whitepaper explaining cost assumptions inside Xactimate:

    “When Xactware performs market research on unit prices, those surveyed are specifically asked to not include expenses that would be included in the General Overhead and Profit markup percentages (item #1 below).

    General Overhead are expenses incurred by a General Contractor, that cannot be attributed to individual projects, and include any and all expenses necessary for the General Contractor to operate their business. Examples (including but not limited to):General and Administrative (G&A) expenses, office rent, utilities, office supplies, salaries for office personnel, depreciation on office equipment, licenses, and advertising. Including General Overhead expenses in an Xactimate estimate–General Overhead expenses are not included in Xactware’s unit pricing, but are typically added to the estimate as a percentage of the total bid along with the appropriate profit margin. These two costs together constitute what is normally referred to in the insurance restoration industry as General Contractor’s O&P, or just O&P. General Overhead and Profit percentages can be added in the Estimate Parameters window within an Xactimate estimate.” (emphasis added)

In the instance of #2 above, not applying O&P creates a double windfall for the insurer; both the non-payment of the SCO&P owed to the tradesman for his work, and the GCO&P premium portion collected for the GCO&P cost assumption during underwriting.

There is another area of windfall that is produced by this method of RCV calculation at underwriting, and that is Building Law & Ordinance coverage.

Current RCV calculations in 360Value or a similar software necessarily assume today’s costs, which include replacing the structure to meet current building codes. However, many structures today have various systems that do not meet current building codes, and those systems would have to be upgraded during the repair process should they become damaged, or the structure damaged enough to trigger an all-over “bring it up to code” mandate from the building official. For example, if damage to a building required re-wiring, and the existing wiring did not meet current building codes, then the new wiring would have to be upgraded to meet those current codes. In the absence of a Law & Ordinance endorsement however, it is likely that those increased costs would not be funded by the policy, even though premium had been collected in anticipation of those current and upgraded costs. That means that the property owner is paying premium for cost assumptions that will not occur in the absence of an endorsement, and then has to “double-pay” for the coverage in the form of an endorsement to actually secure the Law & Ordinance coverage.

In summary, insurers calculate premium based on more expensive risk assumptions than they are usually actually willing to pay at claim time.

Restore vs. Repair

We have a client who calls on us whenever she needs work done at her house.
Repeat clients like that are priceless! Besides, she’s a single mom and we work
hard to make sure that the work we do on her home gives her the best value.
Recently she called with a problem. She had an exterminator under the home
who told her that she had a leak under her hall bathtub, and it had caused
significant damage to the floor under her bath. She called her insurance
company, and then she called us.
I sent John, one of my best carpenters, under the house and confirmed what
the exterminator had said. It was actually the commode flange that leaked under
the tile floor, (a very common leak) and had completely damaged the floor of the
5′ x 8′ bath. Everything was going to have to come out, including a 5′ single
piece fiberglass tub & shower combination. Now, a tub & shower
combination is a BIG bath fixture. In fact, it is physically bigger than the
space it is in, because it has a flange all the way around it that the drywall
covers. There is NO WAY that tub is coming out of that bath without either
cutting it into pieces or taking it through the wall into the next room. Since
the tub itself was undamaged, we opted for the latter, something we have done
many, many times and is actually pretty easy to do.
Meanwhile, the adjuster had sent his “pet” contractor out to see her, trying
to get him the job to fix the bath. Problem for him is, we have worked for her
and her father several times, she trusts us, and she wants us to fix the house
for her, period. That contractor still wrote an estimate, sent it to the
adjuster, and guess what? It never mentioned moving the tub! Beware of “pet”
contractors that many insurance companies have! Often times they are called
“Preferred” contractors. Why are they preferred? Because many of them will cut
corners to save the insurance company money, even if it means reducing the
quality of the work you need! Don’t misunderstand me. Damage to a home is not
like a soft tissue injury in a car wreck that can’t be seen in an x-ray. Damage
to a home is obvious to those who know how to look, and each item can be seen,
touched, and verified.
Now this is where the subject of restore vs. repair comes in. I wrote an
estimate to RESTORE the bath, which included taking the tub through the wall
into the bedroom next to it. That meant detaching and resetting an electric wire
and outlet, taking down 3 studs, rolling up the carpet in the bedroom, taking
down about 3′ x 6′ of drywall, and painting a small 10′ x 12′ bedroom. The
adjuster had a fit! He wanted to know why we were working in the bedroom at all,
since it was undamaged from the leak. I told him that the tub had to go
somewhere so we could replace the sub-floor under it. He said he had been told
the floor under the tub was undamaged. Now I’m wondering if my guy was wrong! So
out I go to the house, camera in hand, and crawl under the house myself. Sure
enough, the floor was just as John had said. I took photos and emailed them to
the adjuster. He still didn’t believe it, and sent his “pet” contractor back out
to confirm what I had told him. Unbelievably, the “pet” told him that though the
floor was damaged, it was “not enough to worry about, since it was under the tub
and couldn’t be seen.” Uh, unless you go under the house! The adjuster then told
me that “generally, we don’t worry about the floor underneath tubs.” I thought
“well then, generally you rip off your insureds.” I was wise enough not to say
that out loud! The client insisted on the proper work, and the adjuster paid for
it like he should have from the beginning.
Now, think this through with me. What if my client didn’t have a contractor
she could trust, and instead trusted the “pet” contractor supplied by her
insurance company? They would have REPAIRED her bath, and from the top it might
have looked great. Then, sometime in the future, she would have put her house up
for sale and some home inspector would have found that damage under the tub. At
that point she would have to either properly fix the floor with her own money or
take that amount off the price of the house. It would have cost her THOUSANDS.
Not exactly what a single mom needs when she is trying to sell her home!
Instead, she had a contractor who was working for HER, had her best interests at
heart, and RESTORED her bath properly.
The big idea to take with you here is that VALUE is what you are insuring
when you insure anything, be it a home, a car, or a life, and while you can
REPAIR something and it may look fine, that doesn’t necessarily RESTORE the
value that it previously had.

The Mark of a Pro!

I spent a couple of hours one Tuesday at the March meeting of the Middle Georgia Home Builders Association.  We had a Board of Directors meeting at 11:00, followed by lunch and a general membership meeting at 12:00.  Georgia Power hosted the meeting at their auditorium on Key Street, and a Georgia Power engineer spoke about current legislative issues affecting the construction industry, particularly as they relate to energy.  Those that attended received an hour of continuing education credit.
            As we talked and listened for those two hours, exchanging information and ideas,   I thought about the many contractors who are members of the Home Builders Association.  What, if anything, sets these contractors apart from the many contractors who are not members? Does it make a difference?  Then it occurred to me; of course it does!  In almost every profession, whether it is medicine, business management, insurance, or contracting, professionalism is marked by membership in professional organizations, by professional certifications, and by continuing education.
            Think about it.  How would you feel if you discovered that your doctor never learned anything after medical school?  Or that the CEO of the company you work for didn’t proactively seek out new information and new ideas to keep your company competitive?  I don’t know about you, but I would feel a bit uneasy, and would question that individual’s professionalism!
            If you are considering building a home, adding on or remodeling, doesn’t it make sense to seek out and hire a builder who is a real pro?  Of course it does.  You want a builder who is exposed to new ideas, products, and fresh ways of doing things, someone who is up to date on the latest codes and requirements, someone who is constantly improving themselves and their businesses. 
            It doesn’t matter if you are building new, adding on, remodeling, or repairing some kind of damage to your home.  As you interview prospective contractors to hire, ask them what professional organizations they belong to, what professional certifications they hold, and what continuing education they have completed in the last year.  It will quickly become apparent who the real pros are! 

“Green” Is Good…With The Right Design!

We are all overwhelmed with the concept of “Going Green”…..”green” cleaning products, “green” clothing lines, “green” this, “green” that… any of it worth the hype?

Usually, when I hear the term “green”, I reach for my wallet, because it often means someone is trying to get some of my green money out of it! Sometimes, though, “green” is worth the trouble, and it doesn’t have to cost much more than doing it the old way! I recently sat through a class on “Green Building for Building Professionals” as part of my Graduate Master Remodeler designation. To tell the truth, I wasn’t that familiar with green building techniques other than the hype I have read in magazines or seen on the news, and I was a bit cynical going in. I soon realized, though, that many of the green building techniques out there can be incorporated into a new or existing building with little trouble or expense. Let’s look at two ways to “go green.”

You can go through one of the recognized green building certification processes, such as LEED (Leadership in Energy and Environmental Design through the US Green Building Council) or NGBP (National Green Building Program through the National Association of Home Builders). This is the way to go if you want an independently certified and rated building. If you want the tax breaks and utility company incentives that are out there for green buildings, then you need to go all the way and build to attain a certified level of green building. Both LEED and NGBP use a point system and color codes to certify and indicate various levels of efficiency and utility. These systems look at things like energy efficiency, site layout and design, and sustainability.

You can also “go green” by simply choosing some green building techniques that you can incorporate into your design without too much fuss. If you are building new, look at using advanced framing techniques. For example, you can build walls with the studs (the vertical members that are the walls) on 24” centers instead of 16” centers. What did you say? Heresy! Only a “cheap” building would do that! I can just hear the wailing and gnashing of teeth! The truth is you can build a building using advanced framing techniques that is just as strong, just as sturdy, and just as long lived as one built using traditional techniques. And guess what? For every stud you leave out, that’s one less stud that is connected to the outside of your building, busily transmitting freezing cold or roasting hot temperatures to the interior that you work so hard to heat and cool! And, less lumber brought to the job site means less waste in the landfill. The EPA estimates that builders throw away one billion (with a “B”) board feet of lumber every year. The lumber we throw away every year building our buildings would make a 1” x 12” that is almost 190,000 miles long! Talk about getting the plank out of your own eye! And that’s just the tip of this green iceberg!

If you are thinking about or in the process of building or remodeling, ask your builder about incorporating some green in the design. You can save some “green” in your pocket, and keep the world “green” a little while longer for all of us!

Do I really Need Three Estimates? (Or four, five, or why not, say….fifty?)

Your insurance company or adjuster may say something like “You need to get me three estimates for these repairs” (this is very common in the auto collision repair world). On the surface, this sounds very reasonable. We all research prices before we make a major purchase, so why should this be any different?

The difference is that in all those other buying decisions we are the ones coming up with the money. Let’s say that you have decided to add a bedroom onto your home. You would be wise to talk to several contractors, and get proposals from all of them. But then let’s say that in doing your homework on them you found something out about the low bidder, that he doesn’t drug test his employees. The contractors that are asking more in their proposals do drug test their employees. Are the proposals equal, other than cost? Of course not, especially if having certified drug free people in and around your home and family is important to you. Since you are writing the checks for the work, you are free to throw the low bidder’s proposal in the trash and select one of the other, more costly proposals. We do this all the time. There is a grocery store in your town that you shop at all the time, because it works for you. The food quality is good, it’s clean, it’s close to you, it works for a lot of reasons. But there is also another grocery store in your town that you don’t shop at, even though the prices are lower. Sometimes a lot lower! We have all been in this grocery store, but we don’t shop there, because it is not as clean, it smells funny sometimes, it’s across town or in a bad area, for a variety of reasons we choose to shop somewhere else and pay more for our food. And that’s fine. It’s our money, and it’s our right to choose. But somehow in an insurance claim adjusters act like all contractors are equal, that any of them will do just as good a job as any other, so we have to focus on who is the cheapest.

There is an important insurance concept to grasp here; your insurance contract (policy) says that the insurance company will pay “the cost to repair or replace” your property. Nowhere in the policy does it say anything about them paying “the least cost,” or “the cheapest cost.” It says they will pay “the cost.” Anybody who has ever bought anything knows that prices vary from place to place, and most of our buying decisions do not hinge entirely on cost. It is also true that for almost anything available to purchase there is someone, somewhere, somehow, willing to sell it for less. Now, your insurance company is a business, and they are in business to make money. The less they pay for claims, the more money they make. So, with all that said, how do we establish what “the cost” is going to be? Ideally, “the cost” is what the contractor of your choice will accept for the work that you and he agreed would properly restore your home. If your adjuster asks you for more than one estimate, simply ask him where in the insurance policy it says that you will provide even one estimate, much less three! Now, since it is your responsibility to present your claim, presenting an estimate for the repairs is a good idea. Presenting more than one estimate, however, is not! Think about it: If you give your insurance adjuster three estimates, he literally has no choice but to pay the lowest one! So, unless the three estimates and contractors are exactly equal and you would be entirely satsified with any of them, only give your insurer the estimate from the contractor you prefer. I tell my clients “If you give your adjuster three estimates, be sure you like the low guy, because that’s who he’s paying!”

Your adjuster may say something like “It’s company policy for us to require three estimates.” Well, they should have written that company policy into your insurance policy! Just look at the adjuster and say “Well, it’s my policy to only get one estimate for restoration work.” And if you take the “three estimate” mentality even further, why stop at three? Why not get five, or ten, or fifty different estimates? No matter how many estimates you get, there will always be somebody, somewhere, somehow, who will do it cheaper. And that takes us right back to the insurance policy language, where the words “cheapest” or “least cost” never appear.