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 Deborah_Freeland@ajg.com.