Valuation and the Policy Wording That Matters When You Leave the Standard Market

As insureds move beyond standard admitted markets into excess and surplus (E&S) markets, manuscript forms, layered placements and specialized property programs, the policy wording governing valuation becomes increasingly important.

A building valued at $20 million may not be insured for $20 million when a loss occurs. The ultimate claim payment can depend upon definitions, endorsements, coinsurance provisions, margin clauses, valuation conditions, ordinance and law limitations, and numerous other policy provisions.

For owners, lenders, investors and risk managers, understanding these provisions is critical to avoiding unexpected coverage gaps.

Insurers encourage proper valuation so actuarially developed rates are applied to an adequate exposure base, which in turn generates an adequate pool of premium for the industry. Rate alone does not fund losses; adequate premium does.

From an insured's perspective, this should be equally important. Overinflated values equate to unnecessarily high premiums, while undervaluation potentially limits coverage, and in certain cases this could be a significant amount — impacting the bottom line much more than an inflated premium on an overstated asset.

Let's explore some of the important terms and coverages that are key to watch out for in both the standard market and the E&S sector. The market conditions at any given time can affect what's available and what should be expected.

Key terms and coverages in the standard market and the E&S sector

Coinsurance

Coinsurance is very common in standard market policies, especially when the limit provided equals the TIV reported. Simply stated, it incentivizes the insured to report adequate values outlined by the Coinsurance Clause (80%, 90%, or 100%). If the insured satisfies the applicable threshold, no penalty applies. If not, a calculated penalty may reduce the loss payment.

Layered and shared accounts

When insureds move into a layered and shared structure, coinsurance goes away. Instead, a series of potentially confusing provisions may take its place in various forms throughout a manuscript policy form, a carrier form or endorsements applied by individual carriers throughout a program.

Occurrence Limit of Liability Endorsement (OLLE)

This very common endorsement takes several different shapes and forms, depending on the insurance company, but they all seek to do a few things:

1. Define what an Occurrence is — the event that will trigger a loss

2. Outline how much limit will be applied to the loss relative to the reported values

This endorsement can often differ or even contradict similar language within a manuscript policy, so a careful review of this needs to happen on every layered and shared placement. Occurrence definitions can range from 72 hours to 96 hours to 168 hours, and these can even vary by peril. All carriers need to be using the same definitions, or a claim will be difficult to adjust and potentially either limit a payout or cost the insured multiple deductibles.

Key components of the OLLE

The first key component is how property will be valued and adjusted relative to what was reported on the statement of values (SOV). Here, it states that the claim will be no more than the actual cost to replace the item, no more than the policy limit and no more than 100% of what was reported on the statement of values.

This last clause can be tricky. It needs to be stated and understood whether we're referencing the values per line item on the SOV, the values per address, location or just the values in total on the schedule. This also begs the question of how a "location" is defined in the policy. All these factors are dependent on one another to have an accurate picture of coverage.

Adjustments to focus on

Depending on market conditions, we can adjust the specific wording that ties coverage back to the SOV. Referring back to the 100% statement, we can introduce what's known as a margin clause (MC). An MC of 115%, for example, allows for 15% inflation tolerance in the event a claim costs more than what was reported on the statement of values.

The broadest amendment we can make to this part of the OLLE is to delete the clause that references any mention of values being tied back to the SOV. By doing this, we're effectively making the policy a blanket policy. This is not done with a magic wand, though. An underwriter must go through valuation underwriting to determine if they feel reported values are in line with what would be expected, depending on the asset class and geography.

So, how do we get this right?

Truthfully, it's nearly impossible to get it exactly right. The factors that can influence the true cost of repair or replacement are numerous.

The cost to repair a hotel in Florida in February after a fire will be far less per square foot than to repair that same hotel in September after a major hurricane. The latter scenario is called demand surge. Material costs more, labor costs more and claims adjusters cost more.

Sublimits and additional coverages can also significantly increase the cost of a claim, which may not have been contemplated during a valuation determination. "Land Improvements," "Debris Removal," or "Ordinance or Law" coverages can inflate a claim. Valuation services are only as good as the information given to them, and it's rare that the actual bound coverages are contemplated by either valuation software or the predictive modeling companies.

We've seen many claims where the replacement cost exceeds the total reported value of a property. In some cases, by an uncomfortable amount.

Let's go back to the hotel in Florida and make some assumptions, starting with the fact that it has been reported as a $20,000,000 hotel, but would cost $26,000,000 on an RCV basis:

Ultimately, valuation should not be treated as a static number on a statement of values, but as a critical underwriting and coverage issue that directly affects claim recovery. The goal is not necessarily to achieve a perfect valuation, but to understand how reported values, policy limits, margin clauses, blanket wording, sublimits and occurrence definitions will interact when a loss occurs.

The more complex the placement, especially in layered/shared or E&S programs, the more important it becomes to review the policy wording carefully, align carrier forms wherever possible and make sure the insured understands how coverage will respond before a claim happens.

In summary

Think of valuation as more than a number. It's an opportunity to help clients understand how coverage might respond when a loss occurs. By blending disciplined valuation practices with careful policy wording review, brokers can support more informed renewal conversations, pinpoint potential coverage gaps and help clients reduce the risk of unexpected claim outcomes.

Partner with your RPS property specialist to review client property programs, evaluate key valuation provisions and strengthen renewal strategies before a loss occurs.

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