Two recent developments in the Florida insurance world will have a great impact on residential property and insurance appraisers throughout the State of Florida.
Citizens Now Limits Residential Policies to $1 Million
Citizens newest move will leave some high-end single-family homes struggling to find insurance coverage. Agent Bulletin ATB #002-12 was released Friday, Jan. 13, 2012. What a fitting date to release bad news!
The Office of Insurance Regulation (OIR) has approved Citizens request to decrease the maximum coverage limit from $2 million to $1 million for personal residential policies in wind-eligible areas. This applies to both, wind-only and multi-peril policies that include wind coverage.
As of February 1, 2012 the following policies will no longer be available:
- Dwellings with a replacement value of more than $1 million (Coverage A)
- Singe condo units with a combined dwelling and contents replacement value (Coverage A and C) of more than $1 million
Many homes over $1 Million are newer homes and therefore will find coverage with private carriers. Homes within 1,000 feet of the Gulf often have their fire coverage with a private carrier and the wind policy with Citizens. In either case, the house must have opening protection if the value is over $750,000.
For some properties however, the new Citizens limit of $1 Million will present problems, especially when the homes are older and not built to current code. These homes might have problems to find appropriate coverage.
Clearly, Citizens is trying to limit its exposure throughout the state with this new regulation.
Replacement Cost overstated for Residential Properties?
But this is not the only move, which put Citizens in the spotlight over the last weeks. The Tampa Bay Times’ journalist Susan Martin published an interesting article last weekend, which reports about Citizens requirement to use the 360-Value software for residential replacement valuation.
One homeowner in New Port Richey was forced by Citizens to insure her home for $124,000 although an appraiser estimated the house at $89,158. This is not an isolated case and the question if this software is in tune with reality lingers. “Critics accuse the insurer of using exaggerated replacement costs to do an end run around rate caps” is one of the headlines of the Tampa Bay Times article. Citizens meanwhile does not accept appraisals from independent appraisers (in the residential market), but solely relies on the 360-Value software.
In July 2010, Citizens issued an agent bulletin for commercial and commercial residential properties (e.g. condominium buildings), which limits the appraiser’s ability to adjust the cost for Overhead & Profit (O&P) and Architect’s fees. These are set at 20% and 7%, respectively.
Compared to the real world, these numbers are exaggerated, because in this economy there is no contractor working with 20% O&P, rather 15-17%, and architects are happy to receive a 5-6% fee.
Comparing the results of the commercial software Marshall & Swift/Boeck to local construction shows not the same high differences than the residential 360-Value software; however, also the commercial software results are most often higher than local cost.
The only way to overcome that gap would be the inclusion of construction cost comparables in the appraisal report. But, due to the halt in commercial construction, there are rarely any cost comparables to find.
The only products, which are being built right now (at least in our market), are single-family homes and apartment buildings. One could say, great, lets use apartment buildings as cost comparables for condo buildings. But the difference in construction quality on the exterior as well as the interior is too large to consider this comparison.
With the overbuilding of condos and thousands of condo conversions (apartment buildings which were converted into condos), the Florida condo market will not see condo construction for a long time and therefore the only valuation tool for commercial and residential commercial property will remain the MSB software and the appraiser’s good judgment.
However, the rebounding residential construction market (especially in the Lakewood Ranch and Sarasota area) currently provide an abundance of construction cost comparables and Citizens should encourage appraisals with cost comparables which will show the true cost of construction in the current market.
I hope you’ve enjoyed this in-depth analysis of why Citizens is in the news spotlight. Let me know what your thoughts are on this topic!
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