Homeowners in coastal regions of the United States face unique risks associated with the growing prevalence of hurricane and severe storm activity. Getting the right coverage plays a crucial role in protecting homeowners from the financial devastation caused by natural disasters and catastrophic events. Traditional homeowners insurance often includes coverage for damage caused by wind, but most standard carriers do not offer wind coverage in hurricane-prone regions.
Property catastrophe insurance is a specialized type of insurance that provides coverage for property damage or loss in the event of a natural disaster or other weather-related catastrophic occurrence. In this article, we’ll explore property valuation and, specifically, Insurance to Value, which is a key component when evaluating this type of coverage with your clients.
Importance of accurate valuation
Valuation plays a vital role in determining the right amount of property catastrophe insurance coverage homeowners should carry. Insurance that does not cover the full, accurate value of the property can lead to a significant financial burden if damage occurs. ITV considers the property value along with other factors (i.e., inflation, materials and service costs) to replace the property should a loss occur. As this table shows, undervaluation of a property can have a significant impact on whether a homeowner can recover adequately following a wind event.
| Example | Submitted ITV | Accurate ITV |
| Dwelling amount | 500,000 | 750,000 |
| Premium | 5,000 | 7,500 |
| Deductible cost at 3% | 15,000 | 22,500 |
| Loss to dwelling | 600,000 | 600,000 |
| Uninsured loss | 100,000 | — |
| Out-of-pocket cost: Premium + Deductible + Uninsured loss | 120,000 | 30,000 |
Factors affecting ITV calculations
Replacement value. An estimate of the cost to replace or rebuild a property following a loss. This value includes material, labor, debris removal, architectural services, permit requirements and other expenses. Note: Estimations should consider inflation and other market trends. The following three factors should be considered when determining replacement value:
- Demand surge: In the aftermath of a natural disaster, there is a greater need for materials and services, causing constraints that can increase costs.
- Direct expenses: materials and labor needed to restore and repair the property. Material and labor prices fluctuate, so inflation and supply chain trends should be considered.
- Indirect expenses: engineering services, consulting fees, and other expenses.
Property age. Additional construction costs from upgrading outdated building materials and equipment.
Building codes. Properties may require specific modifications or upgrades to comply with modern building codes. Ordinance or law coverage helps with this cost and can be added as an additional coverage onto a policy and becomes a sublimit of the total scheduled value.
Property accessibility. Bracing or other safety measures during demolition and rebuilding operations to ensure accessibility. This coverage becomes a sublimit of the total scheduled value.
An accurate ITV calculation should account for each of the above factors to ensure a homeowner is sufficiently covered.
Accurate property valuations
There are several ways homeowners can ensure an accurate property valuation, including the following:
No. 1: Utilize property valuation tools.
No. 2: Revisit limits at renewal time. The amount of insurance your client buys should be revisited with each renewal term—more often if the property: is located in a natural disaster-exposed area; has experienced a change in assessed value; has undergone recent renovations or modifications; or has added new features to mitigate risk, such as a security system or a new roof.
No. 3: Ensure proper maintenance. A proper valuation assumes houses are well maintained, regularly updated, and taken care of year-round. Poor maintenance can cause inflated loss costs and potentially expose undervaluation problems.
Accurately valuing properties is crucial to assessing the amount of coverage your clients require, and ITVs should be reviewed regularly to avoid underinsurance in the event of a loss.
Getting the right coverage for your clients
As storm seasons persistently affect homeowners in coastal regions, having property catastrophe insurance becomes an essential element of every coastal homeowner’s hurricane preparedness checklist. While ITVs are central to assessing risk, there are other considerations when buying this type of insurance.
By working closely with your homeowner clients—keeping them informed about ITVs and the range of coverage options available—you can help them make informed decisions to safeguard their properties and financial wellbeing.
Robby Horner
Robby Horner is the senior vice president of ICAT Online. He has over 15 years of commercial property insurance experience and currently oversees all elements of ICAT’s online policy administration platform, ICAT Online. ICAT has created a guide, the Coastal Homeowners Survival Kit. This comprehensive resource is designed to answer common questions homeowners have about coastal homeowners insurance.
