Construction slowdown seemed to have little impact on property insurance premiums

Nov 5, 2010

The following article was published in the Sun Sentinel on November 5, 2010:

Construction Slowdown seems to have little impact on property insurance premiums

By Julie Patel

The cost of rebuilding homes in Florida dropped about 5 percent from 2009 to the first half of 2010, but you’d never know it from your property insurance bill.

State law says premiums must be fair and reasonable, but it doesn’t require them to be adjusted when rebuilding costs decline. And regulators don’t control how insurers se trebuilding costs.

Insurance companies say other costs, such as claims payments, continued to rise as the economy tanked. Agents say homeowners haven’t asked whether their homes’ replacement costs should be adjusted downward. And agents have little incentive to raise the issue

“One would think insurance rates would decline,” said Bill Newton, executive director of Florida Consumer Action Network. “Instead, we’ve had increases either directly or through losing… discounts.”


When the economy crashed in 2008, so did Florida’s construction industry.
Building costs in Florida dropped 4.78 percent from 2009 to mid-2010, according to Xactware Solutions, a research firm that produces a quarterly index used by insurance companies to calculate rebuilding costs.

Another index widely used by insurers, produced by Marshall & Swift/Boeckh, shows a smaller decrease. Both indices are starting to rise again, as materials costs climb.

Roger Zahn Jr., president of Zahn Luxury Builders in Lighthouse Point, said his company used to provide prospective customers with an average quote of $200 or $225 per square foot to build a typical home from the ground up. Now it’s $175 to $190.

“It’s gone down considerably” because builders are being forced to cut costs and workforce expenses to compete for the few jobs available, he said. “It’s supply and demand really. There’s no work out there.”

A letter from Zahn helped Gail Bierworth, a retiree who lives in Lighthouse Point part of the year, convince Citizens Property Insurance to lower her windstorm insurance premium, with a replacement cost that dropped to $347,000 this year from $698,000 last year.

With the lower replacement cost, Bierworth’s windstorm premium fell to $1,315 from $2,346.

  “If I needed the $600,000 in coverage I would have had to pay the high premiums,” she said recently. As building costs go up, she said she’s worried the industry will “grab onto that” and increase the rebuilding cost. But she’s prepared to pay more if construction costs rise considerably.

Most homeowners’ premiums go directly to cover the cost of rebuilding or repairing. Some pay for marketing, employees’ salaries and other administrative costs.

In general, insurance companies say they’ve had to raise rates in Florida in recent years because premiums are not keeping up with expenses, including more claims for non-catastrophic issues such as sinkholes. They also say they’ve been too generous with discounts for strengthening homes against hurricanes.
Insurers point to other factors that may raise the cost of replacing South Florida homes: high-end finishes, such as granite countertops and expensive appliances, as well as years-old home improvements that may be overlooked by the homeowner, such as room additions and remodeling.

Insurers also have to take into account that it can cost more to rebuild an older home than to build a new one, said a representative of Marshall & Swift/Boeckh. It can be costly to duplicate old designs and materials.

Consumer advocate Newton questions insurers motives. He points out that reinsurance – insurance that insurers buy to cover their risks — has dropped in price. He notes that insurance company investments earned less in recent years.

Paul Mack, president of Mack, Mack & Waltz Insurance Group in Deerfield Beach, said insurance companies usually don’t accept applications for lower replacement costs.

“Insurance companies are pushing to increase the value because the cost of materials have gone up,” this year, Mack said. “Clients are putting pressure on us to lower them because of the economy, labor and everything else has gone down.”

There’s no strong incentive for insurers or their agents to lower estimated replacement costs, and in turn lower premiums and commissions they collect.

“I’m going to get paid less to find you savings,” said Sean Virtue, an insurance agent for condominium buildings at Smith Watson Parker Insurance in Hollywood.

Virtue says his reward for helping policyholders save money comes in the form of referrals from satisfied customers.

Regulators said state law doesn’t allow them to require companies to lower rebuilding cost estimates, and they don’t have to provide the data.

When insurance companies file for rate changes, the calculations are based on expenses, payouts and hurricane projections, regulators say.

Office of Insurance Regulation Spokeswoman Brittany Benner said state law doesn’t dictate how insurers calculate replacement costs, but if a company’s rate request reflects changes in the costs, regulators consider them.


Robbye DeFrancesco, a book keeper in Pompano Beach aid her insurer, Fort Lauderdale-based Universal Property & Casualty Insurance, increased her replacement cost of her coverage to $45,500 from $35,000 last year. That pushed her total premium to $863 this year, from $600 last year.

DeFrancesco tried to lower the replacement cost. Her lender only requires coverage of $15,000, and she said a 2008 building appraisal put the cost of her unit near $30,000.

She said Universal wouldn’t budge.

“How can they can dictate to me how much coverage I buy?” DeFranceso asked. The insurer also requires her to pay for coverage to replace her air conditioning unit and drywall, as well as for debris removal, all which is covered by her condo’s master policy. “That’s double-dipping.”

Universal could not be reached despite phone calls and emails. But, in a letter to DeFranceso in June, Universal said it increased the replacement cost coverage because the old amount was “much less than the estimated cost of making repairs to your unit following a large loss.”

She complained to state regulators, who confirmed that Universal is allowed to calculate the replacement cost based on the Marshall & Swift/Beck index.


Most Florida insurers only offer replacement cost coverage in order to rebuild a property if it’s destroyed. That is why they’re allowed by state law to set the replacement cost at what they deem necessary.

Consumers in states such as Texas and Illinois can buy coverage for the “actual value” of a home. The problem with actual value policies arises when a homeowner files a claim. The insurer may argue the value of the property depreciated signficantly, yielding a very small claims payout.

Lynne McChristian, spokeswoman for the Insurance Information Institute, a national industry association, said Florida insurers typically don’t offer “actual cash value” coverage for the consumer’s own good.

“Insuring to full rebuilding cost is an important consumer protection. It means that people can rebuild in the event of a total loss – and considering that Florida is [a] catastrophe-prone state, this protection is extremely important,” she said.

Full replacement cost coverage protects consumers even if the cost of construction materials rise dramatically after a hurricane, she said.

Some insurers might be willing to insure homes for 80 percent of the rebuilding cost, but McChristian urged caution.

“Policyholders may be able to offer good evidence that the replacement cost estimate is too high for their specific locale,” she wrote in an email. “But I always suggest that people look carefully before they leap. They might not be saving that much by foregoing full coverage, and they are more apt to be underinsured.”

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