insurance community university insight on property valuation part #2 1

Insurance Community University www.InsuranceCommunityUniversity.com

Insight on Property Valuation Part #2

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Components of a Structure Necessary to Estimate

Replacement Cost

Including a discussion on how the various components contribute to Fire Hazard

Identification

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One of the Best Lessons in Construction

Laguna Fires October 1993http://www.finehomebuilding.com/how-to/

articles/fire-resistant-details.aspx

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Insurance Community University www.InsuranceCommunityUniversity.com4


Laguna Fires

• That was the scene in October 1993 after a fire storm destroyed nearly 400 homes in Laguna Beach, California. The fires started several miles inland and swept to the sea at a brisk 2 mph to 4 mph, consuming increasingly thick vegetation along the way.

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Laguna Fires

• Frequently, the flames boiled 50 ft. or 60 ft. into the air, and they reached temperatures of 2,000°F or greater

• The most obvious question homeowners, builders, architects and code officials asked as they combed the rubble for clues was how did a precious few structures survive such an inferno while houses on all sides vanished in the fire? What they learned was a number of lessons that likely will work their way into local building codes and should help to reduce the damage of future fires.

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Laguna Fires

• The home of To Bui and Doris Bender was called a "miracle house" by the Los Angeles Times because of its dramatic survival in a neighborhood almost totally devastated by the fire. Why did this trilevel structure and a few others like it survive while neighbors' homes on all sides, sometimes no more than 10 ft. or 15 ft. away, burned to the ground?

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Laguna Fires

• "It's in the details," Bui insists. He knows about such details. Originally from Vietnam, he lived and worked as a structural engineer in Germany for more than 10 years. There, the predominant building materials are concrete, stone, brick and steel. "In Germany, structures are designed to last hundreds of years," he said. "I built my house to last."

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• To prevent heat buildup, this house was constructed without eave overhangs, which also eliminates soffit vents. Cornices are built up with 2x12s and 2x8s and covered with 1-in. stucco. The class-A fire-retardant roof tiles are plugged with metal bird stop.

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Dormer Type Roof Vent Minimal Gable End Vent


Wooden deck surfaces are troweled over with several layers of fire-resistant coating. Undersides of all decking are stuccoed over with a 1-in. layer of cement. The glassed-in deck rails are further protection against fire.

The owner of this Laguna Beach house stuccoed the undersides of all wooden deck surfaces to a maximum thickness of about 1 in., virtually eliminating any exposed wood.


Types of Basic Building Construction

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Tilt-Up

• Tilt up or tilt-slab is a type of building, and a construction technique using concrete. The process resembles barn raising specifically and wood platform framing generally. It is cost-effective for low buildings.

• Wikepedia.com

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Cinderblock• It is block• Could be used in the foundation of the

home• It is fire resistive

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Wood Frame• Exterior wall of wood or other combustible

construction, including wood-iron clad, stucco on wood or plaster on combustible supports. Also aluminum or plaster siding over frame.– Most popular– Covered with stucco so more fire resistive

than siding– A lot of insurance companies do not want to

write this– Fire zones define type of building construction

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Brick and Masonry• Masonry

– Exterior wall of wood or other combustible construction, including wood-iron clad, stucco on wood or plaster on combustible supports

– Masonry Veneer—Exterior walls of combustible construction veneered with brick or stone

• More common in commercial structures however common in East

• EQ standards make it very expensive

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Metal/Frame• More in commercial construction and

additions to existing structures like garages, barns

• Depending on what zones will determine if it is allowable because it can melt and burn especially in a wildland fire.

• Metal products when exposed to heat can burn and melt

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Superior Construction• Non-Combustible—Exterior walls and floors

and roof constructed of and supported by metal or other non-combustible materials

• Masonry Non-Combustible— Exterior walls constructed of masonry materials and floors and roof of metal or other non-combustible materials

• Fire Resistive— Exterior walls and floors and roof constructed of masonry or other fire resistive materials

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Types of Foundations• Determining the types of foundations is

very important for purposes of loss settlement and determination of value

• If a foundation is cracked due to excessive heat, for example in a fire, then the loss is considered a constructive total loss and the foundation must be replaced

• Often times the foundation may not be up to code such as in the example of the Oakland Fires

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Types of Foundations

• Type of Foundation– Depending on when and where a house was

built, the foundation may be made of stone, brick, preservative-treated lumber, concrete block, or poured concrete. By far the most common material for foundations is concrete

– There are three types of conventional concrete foundations: poured concrete, concrete block, and post-and-pier. Size and acceptable types are regulated by building codes

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Foundations and the HomeownersTo determine the amount of insurance required to equal 80%

of the full replacement cost of the building immediately before the loss, do not include the value of:

(1) Excavations, footings, foundations, piers, or any other structures or devices that support all or part of the building, which are below the undersurface of the lowest basement floor;

(2) Those supports described in (1) above which are below the surface of the ground inside the foundation walls, if there is no basement; and

(3) Underground flues, pipes, wiring and drains.

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Roofing Materials

• Roofing Materials are very important in terms of fire hazard

• Many older types of roofs are no longer acceptable, such as wood shack, due to their susceptibility to fire.

• Example is the Laguna Fires where the roofs caught on fire and created explosions that was a major cause in spreading the loss to other homes.

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Roofing Materials

• Roofing materials can be a significant cost factor in replacement of homes

– Shingles—Asphalt, Shingles Architectural– Wood Shake, Wood Victorian Scallop– Tile—Clay Concrete– Tar & Gravel– Slate– Tin– Cooper– Foam

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That’s a roof?

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That’s a roof?

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More than a roof—sunbathing!

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Siding Materials

• Stucco• Stone Veneer• Cement Fiber• Wood Clapboard• Brick Veneer• Cedar Shingle Siding• Engineered Wood Siding

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Slope• The Slope on which a home is built enters

into the per square footage replacement cost.

• As relates slope, various schemes for rating fire hazard have been developed

• Five elements chosen by many agencies are: vegetation, canopy cover, slope, aspect, and elevation

• Slope and Other Fire Hazard Considerations http://grayback.com/applegate-valley/fireplan/how-freq.htm

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Slope and Other Fire Hazard Considerations• Vegetation directly influences rate of spread,

flame length, fire line intensity, heat per unit area, and other elements of concern in the suppression of wildland fire

• Canopy cover and ladder fuels are closely related when it comes to hazard rating. A greater percentage of ladder fuels means a greater likelihood of a surface fire moving into the crown canopy, increasing the difficulty of suppressing the fire. An area with a thick shrub cover has a higher hazard rating than a grassy area, which has neither canopy cover nor ladder fuels

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Slope and Other Fire Hazard Considerations• Gravity dictates that many if not most

things travel downhill faster than uphill. Not so with fire, which defies gravity in obedience to other laws of physics (warmer air rises). Thus, slope is a factor in the rate of fire spread. As the slope becomes steeper, fire increases in speed. On flat terrain, the spread of fire relies more on wind.

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Slope

• Slope is graded in the following broad categories– Flat to Slight– Moderate– Steep

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The Unexpected

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Geographic Location of the Property• Factors previously discussed are key

issues here as well.– vegetation, – canopy cover, – slope, – aspect, and – elevation

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Oakland Fires 1991

The destructive Oakland fires were an eye-opener when it came to rebuilding costs in the Bay Area. With the steep slopes in the Oakland hills, the bill came in at $400 per square foot rather than the $100 national average. www.paloaltoonline.com

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• There are checklists that are useful to help identify hazards and mitigate them such as: www.befiresmart.com/protect

Materials used as relates values and fire hazard

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Age of the structure or the year it was built• The age of the structure is important for

valuation from a couple of aspects– Building could be substantially out of

code– Building may be able to be built as it

was prior to the loss– The building my be “historical” or have

unique building items that must be included in Replacement Cost

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Size and Type of Attached Garage• Garages vary in type, size, usage and

construction (specialty finishes)• Often times the garage is overlooked in

the overall valuation and must be considered as a separate line item

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Additional costs associated with single or custom home• Estimators only provide basic information

and “estimates” of value• Broker/Agents should always inspect a

home, take pictures and do an on site evaluation for any costs associated with customization

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San Diego Fires 2007 Oakland Fires

Laguna Beach Fires

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Effects of Catastrophes on Replacement Cost• Under Normal Situations Repair and Replace• Following a CAT loss the costs of construction

can sky rocket– Cost of permits– Change in building codes– Supply and demand– Fuel Charges– Inability to replace at the same site—

especially a consider in flood prone areas

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Effects of Catastrophes on Replacement Cost• Construction labor shortages

– Example is the San Jose Fires when 2300 homes were damaged. Prior to the loss the estimated costs/sq footage replacement cost for typical homes in the area were $100/sq.ft. Following the loss it was $300.00/sq. ft. because of supply and demand

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• Building supply shortages– Example was Hurricane Andrew where massive

amounts of lumber were sent to rebuild in the area which created a shortage and increased cost of lumber on a national basis

– “cement supplies will continue to be a problem for hurricane-wracked southern states and fast-growing areas in the southwest,” unless the Commerce Department alleviates cement shortages by suspending the duty on Mexican cement. (http://rermag.com/Constrcution_Costs_112105/

Effects of Catastrophes on Replacement Cost

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• Transportation delays can result in increased construction time and cost. Example is the Oklahoma Bridge collapse that forced trucks to find alternative routes that took longer, cost more fuel and accordingly increased costs to the end useer

• Permit restrictions can result in increased costs, sometimes referred to as demand surge and delays in rebuilding

Effects of Catastrophes on Replacement Cost

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Review of Significant Endorsements• Guaranteed Replacement Cost• Extended Replacement Cost• Inflation Guard• Building Ordinance

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Guaranteed Replacement Cost

• The limit of insurance is suspended on the described property.

• In the event of a total loss, the recovery is the actual amount of the loss.

• In the event of a partial loss, the policy pays replacement cost or ACV if the property is not replaced.

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Guaranteed Replacement Cost

• Many homeowner policies prior to 1991 provided this enhanced coverage.

• In the aftermath of a catastrophic fire in the Berkeley Hills above Oakland, most homeowner policies revised this provision.

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CIC Code as relates Guaranteed Replacement Cost 10102• Significant misuse of the “Guaranteed

Replacement Cost Endorsement” and Extended Replacement Costs have resulted in law suits following losses.

• Specifically the term Guaranteed was misused leading the insured to believe that the full cost of replacement was “guaranteed” without restriction. According the code makes specific reference to this.

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Guaranteed Replacement Cost Section 10102 of CIC• e) No policy of residential property insurance may be

initially issued on and after January 1, 1993, as guaranteed replacement cost coverage if it contains any maximum limitation of coverage based on any set dollar limits, percentage amounts, construction cost limits, indexing, or any other preset maximum limitation for covered damage to the insured dwelling. The limitations referred to in this section are solely applicable to dwelling structure coverages. Endorsements covering additional risks to the insurer's dwelling structure coverage may have internal limits as long as those endorsements are not called guaranteed replacement cost coverage.

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Extended and Guaranteed

• Misuse of Extended Replacement Cost AND Guaranteed Replacement Cost does NOT remove the obligation to insure to value and it is inappropriate and harmful to an insured to underinsure their property and rely on either of these endorsements as remedies.

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Extended Replacement Cost

• Most homeowner policies today provide coverage for the dwelling at an increased percentage of the specified amount on the policy.

• This provision has in the past been mis-used in setting value

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Extended Replacement Cost• Commonly at 125% of the specified amount.• Requires the home to be insured to 100% of

the insurance company’s replacement value.• Must report any remodeling or additions that

increase the reconstruction cost above $5,000 or 5%, whichever is less.

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Catastrophe Coverages and Types of Replacement Cost• Following a Catastrophe loss there will be

increased costs of construction due to such issues as: construction labor, building supplies, fuel, transportation issues and permit restriction.

• All of these can contribute to demand surge and the cost of rebuilding

• Replacement Cost estimators do not take into account these increased costs

• This is the purpose of the Extended Replacement Cost Endorsement

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Inflation Guard• An Inflation Guard is usually a built in feature

on a Homeowners and Commercial Property Form.

• The Inflation Guard may appear as a percentage on the Declarations Page

• The intent of the Inflation Guard is to provide coverage during the policy period to increase by a percentage for inflation of building costs.

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Inflation Guard

• Example: If the insured has a $100,000 limit for the dwelling and a 5% Inflation Guard they will get 1/360th of a 5% increase on a daily basis in the event of a total loss.

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Inflation Guard HO 04 46

• For an additional premium, the limits of liability for Coverages A, B, C and D will be increased annually by %*, applied pro rata during the policy period.

• *Entries may be left blank if shown elsewhere in this policy for this coverage.

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Building Ordinance


Building Code Upgrades• Building Code upgrades deal with the size and

construction of the entire structures and separately for the square footage of the living space. Valuation must be done to determine the amount necessary under the Building Ordinance Endorsements

• This is not only important for older homes but is part of insurance company’s eligibility.

• If a home is over a certain age then it must have required upgrades which would include such items as electrical, plumbing, and roofing. The company is specifically asking these questions to mitigate the fire exposure and exposure to other types of losses.

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Building Code Upgradeswww.bsc.ca.gov/ Building codes regulate how a building has to be

reconstructed following a loss. Types of construction and costs attached thereto can vary based on many factors:

• Size of the building and at what point it must be sprinklered. Number of stories and nonstandard interior wall heights is a factor. There is a point with damage, when the building must be ripped down and replaced in its entirety rather than simply repairing damage. There are always additional costs associated with building a custom home.

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Building Code Upgradeswww.bsc.ca.gov/ • Geographic location in terms of set backs,

brush hazard and proximity to other hazards

• If materials used in construction are up to code in affect at the time of loss such as heating, air conditioning, flooring, ceilings, fireplaces, etc

• Cost of demolition and debris removal are often written for a separate limit from the increased cost of construction.

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Geographic Location of the Property• Construction costs differ tremendously based on where the

home is being built. This differs state by state and city by city.

• The homeowners rating process begins with determining the fire protection or dwelling class in which the risk is located. Protection and dwelling classes are graded 1-10 (with Class 1 being the best and 10 the poorest) based on the quality of the fire protection available in the specific community, county, or fire protection area. This information is accessed when doing the companies homeowner’s estimates and rating typically web based.

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Homeowners Policy• Section I – Exclusions• We do not insure for loss caused directly or

indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.

• Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair, or demolition of a building or other structure, unless specifically provided under this policy.

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Building Ordinance Issues

• Tearing down undamaged dwelling• Removing Debris• Building the home as to updated building

codes

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Ordinance or Law• You may use up to 10% of the limit of

liability that applies to Coverage A for the increased costs you incur due to the enforcement of any ordinance or law which requires or regulates – This is new to the 2000 series.– This can be increased with the HO 04

77 Ordinance or Law Increased Amount of Coverage.

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Building Code and CIC Section #10102

Language included in Building Code Upgrade Coverage defined in section 10102 of the CIC

(g) Coverage provided for building code upgrades by a policy of residential property insurance shall be applicable to building codes, ordinances, standards, or laws only to the extent that those codes, ordinances, standards, or laws do not impose stricter standards on the property on the basis of the level of insurance coverage applicable to the property.

• http://www.leginfo.ca.gov/cgi-bin/displaycode?section=ins&group=10001-11000&file=10101-10107

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CIC Section #10103

• (5) Whether the policy provides coverage for the increased costs of repairing or replacing damage to the insured dwelling caused by a covered loss because of building ordinances or laws regulating the repair. In the event that no coverage is provided for repairs that result from new building ordinances or laws, the insurer shall include in no less than 10-point typeface the following statement: "THIS POLICY DOES NOT INCLUDE BUILDING CODE UPGRADE COVERAGE."

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CIC Section #10103

• In the event that the policy does include code upgrade coverage, it shall either: (1) State this on the declaration page, and denote any applicable limits. (2) State this on a separate disclosure form attached to the declarations page, if the separate disclosure form meets the following standards:

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Methodology of Determining Values

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Proprietary Valuation Tools

• Valuation tools provide a mere indicator of minimum values. Agent/Brokers should pay particular attention to individual home components and values• Insurance Company Evaluations On Line• Marshall Swift• www.marshallswift.com • Data Quick• www.dataquick.com

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Why Values Are So Important

• Accurate values avoid– Over insuring– Under insuring– Ultimately used to establish a fair premium

for the property at risk

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Responsibility• Whose responsibility is it to establish

property values for the personal lines client.– The responsibility is the property owner’s not

the insurance agent or insurance company– IF the insurance client asks to be “fully”

insured then a heightened responsibility exists.

– The insurance agent has guidelines such as estimators but these are only minimum limits that should be carried

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How Are Values Established??• Purchase Price of the home

– Insureds often want to insure for what they purchased the property for

• Bank’s requirements– Banks often want the insurance to equal

the amount of the loan

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Methodology of Determining Value

• Prior Policies– New buyers may assume the coverage of

the prior homeowner• Property Owner

– Property owners typically only know what they paid for the property or the comps

– The property owner typically does not understand how the policy will pay in the event of a loss.

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Methodology of Determining Value• Real Estate Appraisals

– Real estate appraisals are sometimes done by insurance agents utilizing independent companies. These appraisals, while they cost money, are a very good indicator of value

• Insurance Company’s Valuation Software– Almost all insurance carriers provide

estimators through their portal

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Methodology of Determining Value• Contractor’s and Expert’s estimates or

opinions– The same comment applies here as

with independent appraisals• Cost per square footage Estimates

– This is a beginning mark for determining value

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Methodology of Determining Value• Insured’s opinion

– If the insured is qualified to provide this opinion, this is helpful. Often time the insured is referring to “market value” rather than replacement cost

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Documentation of Person Making Estimate• There are specific requirements in the DOI

Regulations relating to the requirements of an individual who is making an estimate on Residential Properties.

• All of this documentation must be in a retrievable format

• The website should be consulted• The regulations provide as follows

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Documentation of Person Making Estimate• a) In the event an estimate of replacement cost

is provided or communicated by a licensee to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, the licensee shall document and maintain in the applicant's or insured's file the following information:

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Documentation of Person Making Estimate

(3) The source from which or method by which the estimate of replacement cost was prepared, to include any replacement cost calculator, contractor's estimate, architectural report, real estate appraisal, or other source or method; and (4) A copy of any reports, inspection reports, contractor's estimates, or other documents used to prepare the estimate of replacement value.

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(b) In the event the estimate of replacement cost is provided by a licensee to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, the licensee shall maintain in the insured's file the records specified in subdivision

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(a) of this Section 2695.182 for the entire term of the insurance policy or the duration of coverage, whichever terminates later in time, and for five years thereafter. In the event the estimate of replacement cost is provided by a licensee to an applicant to whom an insurance policy is never issued, subdivision (a) of this Section 2695.182 shall not apply.

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(c) Notwithstanding any other provision of this Section 2695.182, this section shall impose no duty upon a broker-agent to obtain from the insurer and maintain any information or document that in the absence of this section would not come into the possession of the broker-agent in the ordinary course of business.

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Section 2695.182 Standards to be used when a licensee estimates Replacement Cost• This section of the regulations is also found at:

http://www20.insurance.ca.gov/epubacc/REG/151771.htm

• The regulations deal with the requirements and standards of communication of what must be included in the estimation submitted to the insured

• Follows is the regulation language

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Section 2695.182 Standards to be used when a licensee estimates Replacement Cost

• No licensee shall communicate an estimate of replacement cost to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, unless the requirements and standards set forth in subdivisions (a) through (e) below are met:(a) The estimate of replacement cost shall include the expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety, including at least the following:

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• (1) Cost of labor, building materials and supplies; (2) Overhead and profit; (3) Cost of demolition and debris removal;(4) Cost of permits and architect's plans; and(5) Consideration of components and features of the insured structure, including at least the following:

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(b) The estimate of replacement cost shall be based on an estimate of the cost to rebuild or replace the structure taking into account the cost to reconstruct the single property being evaluated, as compared to the cost to build multiple, or tract, dwellings. (c) The estimate of replacement cost shall not be based upon the resale value of the land, or upon the amount or outstanding balance of any loan.(d) The estimate of replacement cost shall not include a deduction for physical depreciation.

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• (e) The licensee shall no less frequently than annually take reasonable steps to verify that the sources and methods used to generate the estimate of replacement cost are kept current to reflect changes in the costs of reconstruction and rebuilding, including changes in labor, building materials, and supplies, based upon the geographic location of the insured structure. The estimate of replacement cost shall be created using such reasonably current sources and methods.

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Fire Mitigation and How it Affects Insurance Costs

The California Wildland Urban Interface Fire Problem

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Fire Mitigation• The Wildland-Urban Interface (WUI) is defined as a

location where structures meet or intermingle with undeveloped wildland. Since 2000 in California alone an average of over one thousand structures per year have been lost to WUI fires.

• Housing growth in the West Coast (CA, OR, WA)region was 12 percent overall, with over 1 million new WUI housing units, an 18-percent increase in the number of WUI homes. WUI area also expanded from 5.8 to 6.5 percent of the 3-State area. Of the 16.1 million housing units in this region, over a quarter (4.5 million) are located in the interface WUI.

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Fire Mitigation

• The October 2007 California Witch Fire progressed at a peak spread of five miles per hour and had a maximum perimeter of approximately 100 miles. The Witch fire was responsible for taking two lives and forty fire fighter burn injuries. The fire destroyed nearly 200,000 acres and over 1,600 structures

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Some factors that affect the risk/hazard

– WUI areas typically lie within vegetation zones that require regular fire intervals for regeneration of natural vegetation

– Steep canyons and topography make fire fighting difficult and fire spread increase

– Years of fire suppression create high fuel loads– Road ingress issues can cause slow fire fighter

response times (e.g., narrow, dirt, steep roads)– Proximity to overhead power lines– inadequate defensible space

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Mitigation• Creation of defensible space through vegetation

management usually means reducing the amount of fuel around the building or structure, providing separation between fuels, and or reshaping retained fuels by trimming. Defensible space can be created removing dead vegetation, separating fuels, and pruning lower limbs.

• It does not mean cutting down all trees and shrubs, or creating a bare ring of earth across the property.


Mitigationhttp://www.fire.ca.gov/cdfbofdb/PDFS/4291finalguidelines2_23_06.pdf

http://www.fire.ca.gov/cdfbofdb/PDFS/4291finalguidelines2_23_06.pdf


Mitigation



Laws & Policy• As of 2008 California Building Code includes provisions for ignition

resistant construction standards for new construction in the wildland urban interface. The updated fire hazard severity zones will be used by building officials to determine appropriate construction materials for new buildings in the wildland urban interface.

1. Exterior Wall Siding and Sheathing (SFM Standard 12-7A-1) 2. Exterior Windows (SFM Standard 12-7A-2) 3. Under Eave (SFM Standard 12-7A-3) 4. Decking (SFM Standard 12-7A-4) 5. Ignition Resistant Material (ASTM E84 for 30 Min. with

Accelerated Weathering Test)


Laws & Policy

• Public Resources Code (PRC) 4291 contains defensible space clearance requirement maintained around buildings and structures to a distance of 100 feet.

• These guidelines apply to any person who owns, leases, controls, operates, or maintains a building or structure in, upon, or adjoining any mountainous area, forest-covered lands, brush-covered lands, grass-covered lands, or any land that is covered with flammable material, and located within WUI.


Toolbox Section for the Wildland Fire

This is a project whose effort is to support the shift in national fire policy toward hazardous fuel reduction and the WFU’s increasing roles as a fuel management technique. The tools are offered to fire management professionals to help them in the project.The toolbox is organized into three sectionsA) Prioritizing Planning. In this stage the fire managers

1. Update a 5 year urn plan2. Prioritize burns based upon the landscape treatment analysis3. Review agreements with operators4. Outline education and communication plans5. Consider method of managing smoke.


Thank you for attending

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Upcoming Dates for the Valuation Class: 4/5 and 4/65/24 & 5/25

University Cyber Liability Class is on 4/7/11Community Class on 3/29/11 on

Cal/OSHA & AB2774

insurance community university insight on property valuation part #2 1

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