The Valuation Gap: Obstacle or Opportunity?



...and decreases in premium having nothing to do with the insured’s loss experience.

Then, as so often happens in our imperfect world, this streak of good fortune comes to an end. The insured has a major property loss. It might be caused by a natural disaster like a flood, earthquake, hurricane or tornado. Or a hostile fire. Or the interruption of key services or supplies from a critical vendor or utility. Whatever the cause, the resulting damage— physical property loss, business interruption loss, or combination of the two—portends a significant financial loss. The insured studies their predicament and assumes comfortably that they have enough insurance coverage to avert a financial nightmare. They are safe.

Or are they?

During the course of filing their claim they discover these sobering realities:

Sound far-fetched? It’s not. It happens every day, all over the world. And it happens just when everything seems to be going so well.

Can such an unfortunate situation be avoided? Yes! But to determine how, let’s go back to the beginning and review the circumstances that led up to it. In this case, the insured, like so many, casually reviewed their property values from time to time, usually based on their broker’s requests for updates. Frequently working against a deadline to produce the figures, the broker provided estimates—which amounted to “guesstimates”— based on prior years’ values and his own knowledge of the account. (This laissez-faire approach to the insured’s property exposures is probably typical of the way many commercial insurance programs are handled. It’s not my intent here to accept or reject the practice or to be critical of it, but simply to recognize it as fact. Since the typical insured seldom has any measurable frequency of property claims, little concern for them is exhibited until a loss occurs.)

Where did the insured go wrong? What could they have done differently? Who is to blame, and does it really matter? Should this predicament have been foreseen by the broker? The insurance carriers? Outside counsel? The accountants? Should any advisor to the insured who deals in financial matters be held responsible? Would it be right for the insured to merely shrug their shoulders and look to another party (and that party’s professional liability coverage) as the answer? In this case the answer is categorically no ! The responsibility lies first and foremost with the insured.

Let’s consider what they could have done differently at the outset, and where they could have obtained help.

The most common defect in a property insurance program— usually discovered after the loss—is the insured’s failure to report and maintain values that correspond to the costs they are likely to incur in replacing lost property. At the root of this problem is the fact that most insureds have no real understanding of even the most basic policy definitions. Some of the most frequently misunderstood terms—including their correct definitions and applications—are documented in the chart on page 3.

“The most common defect in a property insurance program—usually discovered after the loss—is the insured’s failure to report and maintain values that correspond to the costs they are likely to incur in replacing lost property.”