The impact of Hurricane Katrina has
had a lingering effect on many
facets of the American economy.
Certainly, insurance carriers have felt
the pinch. As demand for reconstruction
projects rose following last year’s devastating hurricane, so did payouts — often
in multiples of what the carriers had
expected to pay.
Now, says Deborah Freeland, area senior
vice president for Arthur J. Gallagher &
Co., underwriting requirements are much
more stringent. “The days of just picking
up the phone and getting true blanket coverage, where a group of buildings is covered with a single limit, regardless of the
value stated for the individual buildings,
are long gone,” she says.
Smart Business spoke with Freeland
about demand surge, how a company
should go about getting an appraisal and
the importance of obtaining valuations
from certified appraisal professionals.
Why has there recently been an increased
demand for appraisals from insurance carriers?
The tremendous property losses resulting from Hurricane Katrina highlighted the
fact that many of the insured properties
were scheduled as having values well
below what would normally be considered
a true replacement cost under normal circumstances. Add the increase in costs
associated with the demand surge following the hurricane and resultant flooding,
and the carriers were paying out multiples
of what they expected to pay to replace
these undervalued buildings. Many carriers
now require independent verification of
building values as a condition to binding
coverage.
What is demand surge, and how does this
impact values?
Demand surge is essentially post-event
inflation. After a disaster affecting a large
number of buildings, as insurance dollars
roll in for reconstruction, there is much
demand for limited construction materials
and labor. This drives up building reconstruction costs. The greater the number of buildings affected, the larger the total economic impact and the greater the demand
for goods and services that increased the
demand surge. Generally, over time, as
more of the buildings in an area are rebuilt
or repaired, the demand for contractors,
laborers and materials begins to drop off,
and costs stabilize.
How should a company go about getting an
appraisal?
Contract with one of the many appraisal
firms or an independent, certified appraiser. A referral from someone you trust, who
has used a firm’s services in the past, is the
best way to find a resource.
If you don’t have a referral, the Web site
of the American Society of Appraisers
(www.appraisers.org) is an excellent reference. It lists certified appraisers by discipline, location and specialties. Costs may
be much less than you would think. Right
now, however, there is so much demand
for appraisal services, it does pay to call
several to compare prices.
Also, it is important to note that there
are many types of appraisals. Insurance
contracts generally cover replacement
of the building with one of ‘like kind
and quality,’ so we would usually ask
for a replacement cost appraisal and specify that it is for insurance purposes,
or request a reconstruction cost
appraisal, which includes additional
loading costs that might be incurred following a loss.
How do valuations from a certified appraiser
differ from those of insurance carriers?
Most insurance carriers do not provide
full, certified appraisals. Instead, they use
computerized programs that take general
building data and develop an estimate of
the cost to construct a building. These are
a good tool for checking to see whether the
values they are given for a building appear
to be in the ballpark and flagging out buildings that appear to be undervalued.
However, these programs require the user
to make certain subjective assessments,
and the programs also incorporate generic
assumptions that may not apply to a particular building. Often, a more detailed
analysis done by a certified appraiser may
show that the estimates obtained using
these programs are not even close to being
correct.
Do appraisals provide an absolute valuation,
or are they subject to change?
An appraisal is a snapshot at a particular time, giving the cost to rebuild a particular building and factoring in costs of
materials and labor. So, if the cost of
materials goes up days or weeks after the
appraisal was completed, the appraisal
needs to be updated to reflect these
changing costs.
Trending figures for updating appraisals
are published by different valuation firms.
In general, applying these to an appraisal
that was conducted within the last five
years will give a pretty accurate figure.
Most appraisal firms will not trend up an
appraisal that is over 5 years old.
DEBORAH FREELAND is area senior vice president for Arthur
J. Gallagher & Co. Reach her at (818) 539-1290 or
[email protected].
