Canadian Underwriter

How guaranteed replacement fits within a world of rising home costs

April 26, 2022   by Philip Porado

Luxury new house in suburbs.

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While federal budget proposals aimed at dampening home-price escalation may modestly help insurers control reconstruction costs for insureds, there’s another side to the conversation.

What if it doesn’t work?

Beyond price appreciation, lots of factors — like updates to building codes after a home is built, rising materials costs, and maturing of landscaping and increased neighbourhood density that make it hard to bring in heavy equipment — can raise rebuild costs beyond what policies cover.

In recent years, said Douglas Morrow, CEO and managing director at Excel Insurance Group, better homeowners’ policies have added a ‘guaranteed replacement cost’ endorsement that complements the existing replacement cost endorsement.

In it, an insurance provider guarantees a client’s home can be rebuilt, even if costs exceed policy coverage limits.

The Insurance Bureau of Canada notes “guaranteed replacement cost coverage (building) pays for replacement without reduction for depreciation” and permits a homeowner “to rebuild or replace [their] property, even if the damage exceeds [the] policy’s limits.”

“The insurance companies now have an online tool to help customers, through the broker, to come up with the replacement cost,” Morrow said. “Details of the house are entered, and then the tool does the math.”

If a client agrees to insure for the value assessed, he said, the insurance company will add the guaranteed replacement cost endorsement, which effectively removes the co-insurance clause. (Essentially, a co-insurance clause encourages policyholders to carry a limit of insurance equal to the full value, or a percentage of the value, of the insured property.)

One concern, though, is that various insurance companies use different source data when they program the online tool.

“So, it is possible to run the same house through different insurance company tools and get different values,” Morrow said. “We know that some brokers select the lowest replacement value from the process, which in turn reduces the premium.”

He said he’s seen some cases where smaller insurance companies and direct writers not affiliated with major insurance brands have used the tools in ways that result in lower valuations.

“I don’t think it is intentional, rather a sophistication issue most likely,” he said. “I do think the industry would benefit from a consistent approach to online valuations.”


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