The Problem of Insufficient Property Limits

Commercial Property and Homeowners/Dwelling Coverage are two of the most frequent sources of E&O claims – and these claims often involve disputes over insufficient property limits. Every agency likely has clients with property limits insufficient to cover replacing the property, which means your agency is potentially exposed to a claim issue in the event of a loss.

Navigating a discussion of property values with your clients can be challenging. Clients will often look to you to tell them their limit is adequate. It is vital to be clear that you are not qualified to determine the replacement value of their property. Clients should choose their own property limits.

Following these practices can help you protect your agency if a client suffers a loss that is not adequately covered and pursues an E&O claim against you:

• Document, document, document. Document any discussions involving limits in writing in your file. This is particularly important when you have verbal discussions with a client as these can turn into “he said, she said” scenarios if there is an E&O claim. Memorialize verbal communications in writing to the client. Whenever possible, have the clients confirm they believe their limit is adequate.

• Note coinsurance clauses to clients. This is a commonly overlooked and misunderstood aspect of property coverage by clients. See this flyer about the importance of property values that can be provided to your clients.

• Communicate to clients that they should contact you if changes are made to the property or if they believe the limits may no longer be adequate.

• Obtain an annual signed statement of values for commercial property accounts that includes a disclaimer. Here is sample disclaimer language:
  • The signature above acknowledges that: (1) the values listed were provided by the signatory, based upon the knowledge of the signatory or an independent appraisal obtained by the signatory; (2) the agency has not provided the values listed above and has made no representations regarding the values listed above; (3) the failure to provide accurate values may reduce or eliminate insurance coverage; (4) higher limits may be available upon request.

• Keep in mind that insurance-to-value tools may be outdated and are sensitive to the data entered into them. Ideally, your clients will advise you of the limits they need. However, you may need to utilize these tools. Clients must understand that replacement cost estimates generated by these tools may not be adequate in event of a claim.
  • The following is an example of disclaimer language that can be used if providing a replacement cost estimate to your clients:
    • The information outlined in the Replacement Cost Worksheet is an estimate of a dwellings value based on information provided by the policyholder. This replacement cost figure was evaluated using industry standard software which calculates replacement cost values. The actual cost to rebuild or replace a dwelling may exceed the limits outlined in the Replacement Cost Worksheet. This estimate is used for information purposes only and the agency does not guarantee that the policy limits provided will be adequate to rebuild the structure. The policyholder has the option of retaining a professional appraisal if there is a question as to whether the replacement cost number is adequate.