Professors' Points

You Get What You Pay For

Kevin Lynch
Insurance Experts' Forum, March 4, 2011

A few nights ago, as I listened to 60-plus-mile-per-hour winds rattle my windows, I thought once again how happy I was to no longer be a property/casualty insurance agency owner.

For 10 years, I was a P&C insurance professional, and I remember every single major weather event that blew through North Texas, where I built two agencies from scratch. I remember the difficulty I experienced in the homeowners insurance market when the mold scam was perpetrated on the industry. I remember trying to explain to long-time clients why their auto coverage was increased, despite never having an accident or moving violation, rather, because the credit industry was allowed to take advantage of consumers. I remember most of all, trying to explain to clients the reason their homes needed to be insured for the amount needed to rebuild them in the event of a total loss, and not for the amount they thought their house was worth. This was perhaps one of the most difficult sales I had to make.

I admit, it’s difficult for many customers to understand why their insurance company is requiring them to insure their home for higher than the amount for which the property can currently be sold, or for an amount far exceeding the taxable value of the property.

And why, exactly, is this the case? Why do all the major P&C carriers in the United States require replacement cost valuation on their policies? The answer isn’t really that difficult to understand if you step back and think about it with less emotion.

The first thing agents have to do for their customers is get them to decouple the idea that the replacement cost to rebuild their home is in any way related to the amount for which it can currently be sold. That truly is comparing “apples and oranges.” The price they can get for their home is related to market conditions and basic supply-and-demand factors, together with the cost of interest for mortgage financing. That area is in turmoil to be sure, and has been since late 2007-early 2008. The replacement cost of their home, the amount that a builder/contractor would change to rebuild it, after a total loss, is related to the cost of building materials and labor. It is easy to see that the two are not related.

As far as the taxable value of their home, that is the least reliable of the three values. The taxable value of the property is subject to political whim, and can be artificially manipulated by the county appraisers. It is then up to the customer to protest their appraisals…in their arena.

The bottom line is this: When you walk your clients through the replacement cost calculations and explain that they need X amount of coverage on their property, you’re doing it for their benefit, not yours. The difference in commissions that you will earn based on their home being insured for X dollars vs. X + $ whatever is minimal. Help them to understand that you value their business too much to cause them to spend more than absolutely necessary.

Do I miss the thousands of clients I helped with their car, home and life insurance over the decade I was in the business? I sure do. Do I miss the aftermath of the weather events in North Texas, and the stress and strain my clients went through after those events? I certainly do not.

Do I miss those clients who left me to find cheaper homeowner’s coverage somewhere else because I insisted on recommending the proper coverage for their homes? Actually, I do, because I wish I could’ve made them understand the truth about all things of value…including proper insurance coverage…you get what you pay for.

Kevin Lynch, CLU®, ChFC®, RHU®, REBC®, CASL®, CAP®, LUTCF, CFP®, is an assistant professor of insurance at The American College in Bryn Mawr, Pa. He also is the host of "Wealth Today," a featured presentation on

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