Determining the amount of insurance: Value of insured belongings and cost of rebuilding
When insureds purchase or renew their contract, they often wonder how to appraise the value of the belongings they wish to insure. Although damage insurance agents and brokers are not responsible for determining the amount of insurance, it is nevertheless their duty to make sure their clients understand the importance of an appraisal and proper coverage.
It contains information on determining the value of assets to be insured, be they buildings (for example, a single-family dwelling, a condo, a commercial building), the contents of this property, including valuable items (for example, racing bicycles, wine cellars, works of art) or items intended specifically for business use. Here are the main points to keep in mind when talking with your clients:
- A reminder regarding your advisory role;
- The limits of your advisory role and the insured’s responsibilities;
- How to help your client calculate the value of his/her insurable property;
- The usefulness of a personal property inventory;
- The reasons to opt for a professional appraisal;
- The condominium owner’s obligation to have an appraisal done;
- The principles of the co-insurance clause.
A reminder regarding your advisory role
As a damage insurance agent or broker, you must act as a conscientious advisor by informing your clients of their rights and obligations. You must also give them all the necessary and useful informations1 they require to understand the coverages in their insurance contract and make informed decisions. You must also inquire into your client’s situation, including the value of the property to be insured, in order to identify his needs and offer him a product that meets these needs2.
It is therefore important to provide information and explanations regarding the amount of insurance and how it affects coverage. Here are a few examples of best practices you should use to help clearly identify the client’s needs:
- Ask your client targeted questions about her situation to accurately assess the value of the items to be insured (do not simply follow the call script). For example, your client might be a musician who owns several expensive instruments or an audiovisual technician who owns specialized equipment.
- Ask your client whether he has had his building appraised or whether he already has a professional appraisal. If not, you should recommend that he contact a professional appraiser; put this recommendation in writing.
- Highlight specific points in the insurance contract that impact the appraisal, for example: including in the overall cost of rebuilding such things as demolition and debris removal costs, and the cost of bringing the building up to code.
- Arrange for a site visit (particularly for commercial-lines insurance) or use online tools to visualize the property and identify specific characteristics that could have an impact on the client’s needs (for example, review the building’s fact sheet and photos on a real estate site, or use apps like Google Street View).
- Ensure that all the information is reliable. For example, photos on a website may have been taken months earlier and might not accurately reflect the property’s current state.
- If you suspect insufficient coverage, mention it to the insured, and give her the information she requires to recalculate the value of the property to be insured. Do so in writing if need be.
- Explain the co-insurance clause, if necessary.
- Create a system to regularly review insurance needs (annually, in certain cases).
- Note in writing the explanations and recommendations your give, and the client’s decisions.
The limits of your advisory role and the insured’s responsibilities
There are limits to your advisory role: evaluating insured property is not one of your professional responsibilities. You should not decide on the amounts of coverage required. To avoid any ambiguity, you must explain to insureds that:
- Damage insurance agents and brokers are not appraisers. You must therefore never give the impression that you can appraise a building, company equipment, furnishings, or a work of art.
- Insurers provide agents and brokers with one or several tools to estimate a building’s reconstruction cost. Remember: this is only a guide. You must be able to recognize the limits of such tools and explain them to the insured.
- The best building appraisals are those done by professional appraisers. Ask your clients if they have an appraisal. If they do not, recommend that they have one done. Remind clients that they are responsible for determining the value of the property to be insured and that the appraisal must take into consideration their specific circumstances, which may change over time. Please refer to the section on “How to calculate the value of insurable property.”
- If you have doubts about the information the client gave you, remind him that he has an obligation to the insurer to declare all the information required to assess the risk. However, you must not stop at this obligation alone. Your advisory role requires you to be prudent, diligent and proactive. If the insured refuses to follow your recommendations regarding a change in coverage, an increase in the amount of insurance or a professional appraisal, you cannot force his hand. However, it is important to explain to him the potential consequences of insufficient coverage. Take notes and, if need be, confirm the insured’ instructions in writing, in particular if he delays or refuses the recommended revision of the amount of insurance. This could prove useful in the event of a dispute.
Thus, the insured will be able to make an informed decision on how to proceed with having his property and belongings appraised. It will also avoid him potentially blaming you in the future for being under-insured.
To learn more, re-read Ne laissez pas de fausses impressions. [Don’t leave any false impressions. In French only]
How to calculate the value of insurable property
Context: an insured estimates his house’s market value at $225,000. He requests that it be covered for 100% of its value in the event of a loss. What advice should you give him to help him calculate the required amount of insurance?
- Explain to your client that the cost of rebuilding is different from the building’s market value or its municipal assessment. Some older homes may have a market value much lower than the cost of rebuilding. Conversely, a building that is not particularly expensive to rebuild or renovate might sell for more in a rising real estate market.
- The value of the land is not included in the appraisal required for insurance purposes.
- Make him aware that he must take into consideration all the information the insurer needs to evaluate the amount of insurance. Here are a few examples of questions to ask him and factors to keep in mind:
- The age of the building, keeping in mind the materials used when it was built versus those used in modern construction.
- The building’s structure, customization and the quality of the materials used.
- Was the property built to be energy efficient?
- Major renovations, improvements, or landscaping done over the years.
- Demolition and debris removal costs in the event of a loss, and the way the building is built.
- Are there any particular issues with accessibility?
- Explain that the calculation guides provided to you by the insurer have their limitations. Furthermore, you must notify your client that the insured value may vary if, for example, the house has any special features.
- Depending on the insurer’s policy, inform your client that it might be necessary to regularly re-evaluate the cost of rebuilding. Also ensure that the insurer’s automatic indexation rate reflects economic realities and is sufficient to meet the insured’s needs.
- Caution your client that he must inform you of any work that could lead to an increase in the cost of rebuilding (for instance: finishing the basement, adding a bathroom, converting an addition into a habitable room). Certain contracts even stipulate that the insurer must be informed within 30 days of starting the work if it exceeds a certain cost. Note that this obligation applies during the term of the contract or at any subsequent renewal and not simply when the initial quote is made!
After your client has done the calculations, take some time to review the suggested amount with him. If you did not suggest it at the outset, you should also advise your client to have a professional appraisal done.
With respect to property other than the building itself:
- Make the insured aware of the importance of updating his personal property inventory and the value of his belongings, especially when doing a needs analysis at renewal time. You must be proactive and ask your client questions to find out about any changes, such as the purchase of electronic equipment or valuable items, or whether he made any changes to his business activities that could affect the amount of coverage required.
- Mention to him any coverage limits that apply to certain items. For example, in the event of a theft, home insurance contracts generally set a limit of $1,000 – $2,000 on items such as jewelry, furs, electronic devices, bicycles and collections.
- In commercial-lines insurance, the amounts of insurance must be reviewed annually. In particular, confirm with the client his inventory levels, equipment, the number of employees, company sales, etc.—all of which might point to a change in the client’s insurance needs.
To learn more, re-read the case study Un cas de coût de reconstruction partiellement garanti. [A case of partially covered rebuilding costs, in French only]
Refer insureds to this article: How do I decide on the correct amount of insurance?
The usefulness of a personal property inventory
Creating a personal property inventory allows the insured to be more in control at two key moments:
- When renewing his insurance contract, since he will have a clear idea of what he owns and its value.
- In the event of a loss, since it will be easier to draw up the list of damaged or destroyed items as well as their value.
Advise him to:
- Create a list and update it regularly. In order to clearly identify any changes that have occurred during the course of the year, your client can use the ”Questions to ask yourself when renewing your contract” tools.
- Keep the personal property inventory, as well as photos or videos, where applicable, in a safe, accessible place such as on the cloud.
The Insurance Bureau of Canada provides insureds with an e-form to guide them through the process. Suggest to your clients that they download it in either French or English. This article contains valuable advice for your clients.
Using a professional
Ideally, insureds should take advantage of the advice provided by a professional appraiser. Here is some information you can give them:
- Neither the insurer’s calculation method nor any tools or software for estimating a building’s reconstruction cost can replace a professional appraisal.
- In commercial-lines insurance this appraisal is all the more important in determining the actual value of the building, and its contents and equipment since every business is unique, and every type of coverage has its own specific co-insurance clause. Suggest that your business-owner clients read Renewal of a Business-Lines Insurance Policy.
- If your client asks you for a referral to an appraiser, advise your client to visit the website of the Ordre des évaluateurs agréés du Québec.
- If you discussed, requested or received an appraiser’s report, scrupulously review this report when it arrives (for example: read it, send it to the client and the insurer, give your client advice based on the report’s conclusions, and follow up on any instructions by adjusting the amount of insurance, if applicable.
Aside from the building appraisal, it could be worthwhile advising your client to ask a specialist to appraise valuable items such as antiques, works of art, or expensive jewelry.
The importance of acting immediately
If the professional appraisal shows that there is insufficient insurance, notify the client immediately, discuss the situation and take corrective action to ensure proper coverage. If you have trouble reaching the insured, consider the advisability of contacting the insurer immediately to raise the limit, even if it means a readjustment once you have discussed the issue with your client. If it were your file, wouldn’t you prefer being insured for a higher amount rather than not being sufficiently insured, especially in the event of a loss?
The obligation to assess a divided co-ownership
Article 1073 of the Civil Code of Québec now stipulates that every five years, syndicates of co-ownership must mandate an appraiser who is a member of the Ordre des évaluateurs agréés du Québec to carry out an appraisal to determine the cost of rebuilding. To learn more about how to properly explain this obligation and provide syndicates with the tools they need, read the Co-ownership page.
Please note that even though this is an obligation for co-owners, it is also a best practice that applies to all property owners.
The co-insurance clause
N.B. Most personal-lines home insurance forms in Quebec (in particular, those available from the Insurance Bureau of Canada) no longer include a co-insurance clause. In the absence of this clause, the insurer could apply article 2493 of the Civil Code of Québec, which requires a co-insurance clause of 100%.
Commercial-lines insurance contracts may still include a co-insurance clause (e.g.: 80% or 90%).
Your clients need to understand that this clause could result in limiting the amount of compensation paid in the event of a partial loss. Here are two essential points they need to keep in mind:
1. If the amount of insurance stipulated in the contract is less than the value of the contents or the building (client is under-insured), the compensation paid for the loss could be limited and not cover the entire cost of damages.
2. When a total loss occurs, compensation is limited to the insured amount. It is therefore advisable to choose an amount of insurance equal to the value of the insured property or its replacement cost if the insured has a replacement cost clause.
To obtain compensation that covers the full cost of damages when a partial loss occurs, your clients must insure their belongings for the minimum amount corresponding to the value of the item or, where applicable, the percentage stipulated in the insurer’s co-insurance clause (generally 80% or 90%). If they choose a lower amount, they may have to assume a portion of the cost of damages.
Feel free to share the fact sheet (currently under revision) on this topic with your clients.
 Section 37 (6) of the Code of ethics of damage insurance representatives
 Section 27 of the Act respecting the distribution of financial products and services
 Section 26 of the Code of ethics of damage insurance representatives