Tag Archives: appraisal

How to Understand Valuation Reports

Most owners of small businesses, many executives/owners of medium businesses and even quite a few executives/shareholders of large businesses think the most important aspect of a business appraisal is the final number. The business is worth X dollars.

Obviously, the dollar amount is important. Getting the right dollar amount is even more important (I make this distinction because, in my experience, some business owners/executives and even quite a few bankers do not understand or sometimes even care about the difference between A Number and the Right Number). However, the number is arguably, especially if contested, only half of the requirement.

Depending on the reason for the business being appraised, the actual valuation report MUST meet specific parameters. If the report does not meet these parameters, the value arrived upon by the appraiser may be found meaningless or an opportunity to litigate by tax authorities or plaintiff attorneys. Just arriving at a reasonable number is completely inadequate if the report parameters are missing. It is kind of like buying the wrong insurance policy. The coverage amount might be right, but coverage may not exist because the policy is wrong.

Matching the correct report with the need is vital. Not knowing or understanding the difference makes business owners vulnerable to con jobs. And many business owners are conned each and every year.

How to Avoid Being Conned
First, I advise hiring an accredited business appraiser. All accredited business appraisers must sign a code of ethics, and most believe in their code. Some, though, do not quite believe in ethics as much as others. Some run the same con, but with accreditation. To be fair, I think some complete their reports mistakenly because they do not know any better. They are like insurance people with credentials who can barely spell insurance, much less business income coverage.

The better path is to understand the three basic types of Fair Market Value reports and to also understand the huge difference between Fair Market Value (FMV) and Fair Value (FV). FMV and FV are not synonymous. I have seen agency owners, and even accountants and attorneys treat these critical terms as if their meaning was the same. However, many courts treat the values calculated using these two terms quite differently.

See also: 3 Myths That Inhibit Innovation (Part 3)  

Relative to the three types of valuation reports (there are other types that are generally less applicable to most agency owners that I won’t address here), generally there is (exact terms vary depending on the professional association standards to which the appraiser is credentialed or belongs and sometimes depending upon the court, if being litigated):

  1. Summary reports, which are often referred to as letter reports (the entire valuation is in the form of a letter) or short-form reports. These reports contain little detail.
  1. Informal or Calculation Reports. The report writing standard, the analysis, the degree of confidence that applies to these reports are all relatively low. The margin of error is relatively high. The cost of these reports should therefore be relatively low. These reports rarely discuss the applicability of different valuation methods.
  1. Detailed, Written Reports. As the name implies, these are highly detailed reports usually combined with considerable analysis and a thorough discussion of the applicable valuation standards. These should cost the most, all else being equal.

Do not confuse a low price with high quality. Some appraisers charge a stiff penny for lower-quality reports because the customer does not understand the relatively low quality. Customers tend to think the appraiser just charges less. They think they are getting a Cadillac for the price of a Chevy. They are really just getting a Chevy that might not even be new.

The con occurs when appraisers fail to offer clients options, especially the most rigorous option, and clients do not know they are comparing apples with oranges when one proposal is for a lightweight appraisal and the other proposal is for a high-quality, heavy weight appraisal. One cannot always tell by the price, either, because the con is to charge as if the lightweight appraisal will be of high quality but just enough less money to get the job.

Courts have recognized this problem to some extent. For specific purposes, especially estate taxes, the courts can actually penalize the appraiser. For most purposes, though, once the valuation contract is signed, the damages will fall on the client and not the appraiser.

I am not suggesting all reports need to meet the highest standard, because they do not. When someone truly needs a decent, back-of-the-envelope valuation that has a large margin of error that is acceptable to all parties, a low-standard report should suffice. If litigation, a sale, taxes or compensation are directly tied to the value, then usually the best option is to spend the money and obtain a high-quality valuation right from the get go. Having a low-quality report in the hopes that everyone will agree can only complicate the situation if a high-quality report is eventually required. Then one may find it necessary to explain all the factors the low-quality appraisal inadequately addressed.

My key point, though, is that it pays to understand some basic valuation differences. It pays to understand that a low-quality report has severely limited acceptable uses, including that one cannot easily dispute the resulting value because the margin of error is so acceptably high. If the calculated value is $1,000,000 plus or minus 50%, then any value between $500,000 and $1,500,000 is okay.

See also: 5 Ways Data Allows for Value-Based Care  

These are not easy differences for the uninitiated to understand, either. My short summary is a summary of thousands of pages of textbook differentiation. Sometimes, especially when the attorneys and accountants involved do not understand the differences, I think clients should consider hiring someone to just explain their valuation report options. The complexity goes far beyond getting a home appraised, and choosing the wrong standards rarely is beneficial to any party other than the attorneys involved.

You can find the article originally published here.

What Millennials Demand as Customers

Those of us born in prior generations are used to certain innate complexities about insurance. We are almost immune to the thick stack of documents that accompany a policy. We’re not particularly upset about having to jump in a car to visit our insurance agent’s office to ask a question or pay a bill. We somehow are even understanding about delays associated with getting a claim adjustment or an appraisal completed.

But, in June, Millennial demographics crossed the chasm. Millennials exceeded a quarter of the population, passing the number of baby boomers. The question for business is, Are we ready? Do we truly know our new consumer; do we understand what they want, what they need, and what they like?

It seems obvious that generations get older and that things change, but did we miss the Millennial switch? Are we still stuck thinking about the customer of yesterday and today, or did we start to shift to meet the demands of the customer of tomorrow?

The Millennial consumer does not have our patience and understanding. This consumer has seen great companies like Google, Amazon, Apple and others consistently deliver on their promise by providing excellent service. Millennials demand the same in insurance – the speed and quality, simplicity and transparency, fairness and flexibility.

Millennial consumers do not understand why insurance has to be so complicated that it almost requires a degree in insurance to truly grasp it or why the policy cannot be acquired, managed and paid for easily online or over mobile. This consumer doesn’t understand when 24/7 service is not available and definitely does not understand when certain insurance activities take weeks to finalize. A Millennial knows that he can acquire money from any of his friends worldwide in a matter of minutes and does not understand when payments from a worldwide enterprise take weeks. Likewise, a Millennial doesn’t understand when claim information captured immediately during the incident cannot be delivered and reviewed in real-time and why almost every claim no matter how small must go through a process that could come out of a CSI episode.

As an industry, we are already too late. The industry finds itself experiencing a true generational gap between the insurance organization and the Millennial consumer.

What the new insurance customer demands requires more than just fine tuning of existing methods, technologies and business processes. There is a need to re-invent insurance as a whole, and innovative technology and products are the key.

Are You Telling a Good Story?

Think back to the last time you listened to a great story. There was a fantastic cast of characters, breathtaking scenery and, of course, a plot line that hooked you. For a brief moment, you were there, right in the middle of it, living the story.

Each time a successful salesman sit downs with a potential customer or client, he weaves together a story in which the product or service has already become an integral part of the listener’s life. The customers, through the picture painted by the salesman’s words, soon realize how beneficial this particular product or service could be and start to wonder how they existed without it for so long.

Does this sound like some sort of trick?    

Does it seem like some sort of mind game played on unsuspecting victims? 

No. By painting a picture with words, by telling a story rich in substance, the insurance professional accomplishes a number of things. First, he helps to develop the conversation with the potential client. By offering details, and making sure that everyone is seeing the same picture, he can see where miscommunication may occur. Also, the potential customer is more likely to think of more detailed questions to ask to help fill out the remaining part of the picture.

Remember that people make the connection with an item or a service not through rational thought but through emotion. Sure, a potential client needs to know the good points, the bad points and the mechanics of how something is going to work, but the final decision is greatly influenced by how he feels about something.

Does your product or service instill confidence? 

Does it feel familiar? 

Does it cause excitement? 

All these feelings and emotions can help make the sales process a success.

So, how do you craft an emotionally engaging story?

First, it is important that you, as the storyteller, believe and are emotionally connected to your story. Remember, a client will hear the sincerity in your voice, or the lack thereof. This is where the knowledge and personal use of your service or product can be so important. By using your own experience, or that of other customers, you can easily convey a believable story that extols the virtues of your product or service.

Second, a great story has structure. We have all heard stories that seemed to go on forever, with no point in sight. We have also all heard stories that jump around so much we tune out because we are lost. There are different ways to structure a story. One is called a “hero’s journey” model. The hero’s journey follows a departure, an initiation and a return.

Steve Jobs was a master storyteller. Watch one of his keynote speeches and observe how he weaves a story throughout his entire presentation. Case in point: his Stanford commencement speech in 2005. (Text is here. Video is here.) His first story connects the dots of his childhood to his success. The second story tells about his loves and losses. The final story is about death. He really gets personal, connecting with his audience on an emotional level. You hear jeers, cheers, laughter, and when the camera pans the audience in the video you see tears. His message is to trust the process, love what you do and don’t settle. Don’t live anyone else’s life. When you listen to this speech, as well as his others… you pay attention, you listen and you feel. You are emotionally connected.

As you formulate your presentation, remember how we, as humans, communicate. Surprisingly, when a person is talking, research shows that most people only give a fraction of their attention (7%) to the words that are being spoken. Over half (55%) is given to the various pictures and images that are created during the conversation. The remaining amount of attention is allotted to the mechanics of speaking itself, such as our mannerisms and body language.

To be an effective sales person, you must engage your potential client and make the entire story memorable. Like an artist, you need to create an emotional picture with your words and bring what you are trying to communicate to life. Don’t be a stick in the mud while talking; use your hands naturally. If you feel enthusiastic about your product or service, don’t be afraid to let those around you know. Chances are the excitement that is coming from you will encourage them to take a second look at what you have.

The art of selling isn’t really about selling at all. It is about sharing a story and bringing your potential client into the creation of the next chapter. By guiding them to a vision where their success and their satisfaction is an integral part of this story, you’ll have a great chance of convincing them of what they truly need.

Are you connecting emotionally to your audience? 

When was the last time you told a good story?

Claims In A Catastrophe, Part 2

This is Part 2 of a two-part series on claims management in the wake of a disaster. Part 1 of this series can be found here.

Protect All Property From Further Damage
Every policy requires that the insured protect the property from further loss. Therefore, you should turn off any water flow to broken appliances or pipes, arrange to have openings in roofs or walls covered to protect from rain damage, and seek help from the adjuster to further protect your property from losses of all types.

Take any necessary emergency measures to protect the building and personal property from any further damage. Do not throw anything away until permission of the insurance company is obtained in writing and you have documented its condition unless the damaged property presents a hazard to the health or safety of your family or others.

If the insurer delays or refuses to authorize measures to prevent further loss, confirm the insurer’s delay in a fax, email, and a letter, and take whatever reasonable measures you can afford to protect the property. If your loss is covered, the insurance company should also cover the cost of any reasonable emergency measures you took to protect your property. It is not unusual for an insurer to deny coverage for damage resulting after the initial claim on the grounds that an insured failed to comply with the policy condition to protect the property from further damage.

Document The Loss
If you were prudent and prepared, before the catastrophe, an inventory of your contents or took pictures of your contents, provide the adjuster with the inventory and photographs or videotape. Photograph, videotape, and inventory all damaged property after the loss. Make sure you record the date of the photos and videotape. It is important to document the source and the extent of damage whether by fire or water intrusion.

In most states, a material misrepresentation, concealment, or omission made in connection with the claim will give the insurer a valid reason to reject the entire claim. For example, claiming that an item was destroyed that really wasn’t or substantially overstating the value of a damaged item is fraud. In most states insurance fraud is a felony that can place you in state prison if convicted.

No catastrophe is so bad as to cause you to attempt to defraud your insurer to make up for uninsured losses. You should never exaggerate, speculate, or guess about the loss or value of any particular piece of property. Make it clear to your insurer when recollection may not be accurate, when you are estimating value, and the basis for your estimate. For the value of items you are not sure about on a claim presentation, use the phrase “To Be Determined.” If you do not have receipts to show the price of an item, information can be found in catalogs, statements from retail clerks, bank statements, credit card statements, or statements from family members or friends.

If all else fails, a formal appraisal can be obtained from a professional personal property appraiser. Save this as a last resort, since the insurer will usually refuse to reimburse you for the costs of hiring an appraiser, but may hire one at no cost to you if asked courteously.

You Must Cooperate With The Insurance Company’s Investigation And Handling Of The Claim
You have a contractual obligation to cooperate with the insurer in its investigation and handling of the claim. However, you never have an obligation to allow yourself to be abused. In most states the insured and the insurance company have a mutual obligation to act in good faith and deal fairly with each other to investigate and process the claim. This means that both should avoid taking any unreasonable position or doing or saying anything that would in any way frustrate each other’s rights under the policy.

The insurer may require one or more recorded statements from you. Always request a copy of the recording and a transcript of the statement to review. You have a right to review and correct the transcript of any recorded statement.

You may also be required to appear for an “Examination Under Oath” (EUO). The insurer may, but is not required to, hire an attorney to take the Examination Under Oath to represent the insured. Since a lawyer is not required, however, the insurer will not pay for the attorney that is representing you. The Examination Under Oath is a contractual obligation and there is usually no clause in the insurance policy promising to pay a lawyer to help the insured make a claim against an insurer. You should not appear for an Examination Under Oath until you understand all rights, the insurance coverage, and the full extent of the claim, or until counsel is retained. Do not refuse to appear at an Examination Under Oath or the insurer may reject the claim because such refusal is a breach of a material condition of the policy. You may reasonably request a delay in appearance at an Examination Under Oath to obtain the services of counsel or a public insurance adjuster.

The insurer may ask you to make available various documents related to the claim, including banking statements, investment reports, receipts, and other personal financial documents. You are required to produce any documentation reasonably related to the insurer’s investigation of the claim that can include tax returns. In some states, tax returns are considered privileged and the insured cannot be compelled to produce them, while in other states the failure to produce tax returns is sufficient cause to deny the claim. [See Barry Zalma, Insurance Claims: A Comprehensive Guide, (Specialty Technical Publishers, 2002): Chapter II-5.]

The insurer can require you to produce these kinds of documents as long as they are reasonably related to its investigation. You should not provide these documents to the insurer until you understand the rights, duties, and obligations imposed by the insurance coverage and the full extent of the claim. You should never refuse to produce documents unreasonably since the requirement for document production is a condition precedent to the insurer’s obligation to provide a defense and/or indemnity to you.

Proof Of Loss Requirement
Most first party property policies require that you submit a sworn proof of loss form to the insurer within a certain amount of time, either after the loss or after being provided the proof of loss form. During a catastrophe, especially when total losses are involved, insurers will often waive this requirement.

Flood insurance policies require the proof of loss within sixty days of the loss and are applied in a draconian fashion. If you cannot produce a proof of flood loss within 60 days of the loss, obtain an extension of time, in writing from the adjuster, or you will lose all rights under the policy to indemnity.

In most states you are contractually obligated to submit the sworn proof of loss within the time limit (usually 60 days from the date of request), or at least to substantially comply with the requirement, unless the insurer agrees to dispense with the sworn proof of loss or extend the time. You should not submit the sworn proof of loss to the insurer until you understand all of the rights and obligations imposed by the policy, the insurance coverages, and the full extent of the claim. It is not unusual for an insurer to consider mistakes in the sworn proof of loss (since they are sworn to under oath) as intentional misrepresentations sufficient to allow it to reject coverage for a claim. A statement made under oath cannot, by definition, contain an innocent misrepresentation. Never sign a sworn proof of loss, even if your lawyer or professional public insurance adjuster prepares it, until you have carefully read every word and are certain that the statements made are true.

Some insurers believe that, at some point, you will refuse to comply with their requests. If you refuse to comply with reasonable requests for a recorded statement, an Examination Under Oath, a sworn proof of loss, or documents reasonably related to the insurer’s investigation, you may give the insurer a valid excuse to deny the claim based on your breach of the duty to cooperate.

If you believe that any requests made by the insurer are unreasonable, ask the insurer to explain the reason(s) for the requests in writing. Err on the side of caution and provide all documents that have some reasonable connection to the policy or loss. Before giving an insurer a reason to deny a claim because of your failure to cooperate, consult with a policyholder attorney, a public adjuster, or the state Department of Insurance before refusing a request that may, in retrospect, turn out to have been reasonable.

Get A Second Opinion
Many insureds believe that insurers make a practice of making inadequate (sometimes called “lowball”) offers of settlement. They are wary of what they think are estimates from insurance-company-friendly contractors. Whether true or not, it is a good practice to get a second, or even a third, written estimate to repair and replace damaged property from reputable, independent professionals that you would hire to do the repairs if there was no insurance.

You are entitled to have the damaged property replaced with “like kind and quality.” This means that you should insist that the amount determined to be the amount of loss is sufficient to replace the property with property of like kind and quality to the damaged property. When you cannot match the remaining undamaged tile, wallpaper, carpeting, or other portions of undamaged property, you are usually entitled to have the entire “line of sight” replaced to match. For example, if a broken water pipe destroys the hardwood floor in a kitchen and does no damage to the contiguous hardwood floor in the adjoining family room, the insurer is required to replace both the damaged and undamaged floors so that they match as long as they are in a continuous line of sight.

Some losses are paid on an actual cash value (ACTUAL CASH VALUE) basis, which in some states means either the fair market value of the property at the time of loss unless the policy defines ACTUAL CASH VALUE differently. Many policies will define ACTUAL CASH VALUE as replacement cost less physical depreciation for age and wear and tear.

Some losses are paid out on a replacement cost value (REPLACEMENT COST VALUE), where the insured is paid the difference between actual cash value and replacement cost value after the insured has actual sums necessary to complete the replacement.

You may collect the ACTUAL CASH VALUE loss immediately and advise the insurer you intend to make claim for the difference between ACTUAL CASH VALUE and REPLACEMENT COST VALUE when the structure is rebuilt. If your policy has a time-limit for rebuilding be sure to get a written extension of time since, after a catastrophe, the rebuilding process is often severely delayed.

When fire and water-damage reconstruction contractors write estimates for insurance companies they always add at the end of their estimate a sum equal to 10% of the basic contract price for “overhead,” and an additional 10% of the basic contract price for “profit.”

This technique is a fiction believed only by contractors and adjusters. Knowledgeable construction people know that no contractor could survive on 10% profit and that contractors build overhead and profit into their basic unit costs (paint, plaster, roofing, etc) and add the “profit and overhead” numbers as a fee for the extra service they provide to insurers.

In recent years, some insurers have attempted to withhold 20%, an amount equal to the contractor’s “profit and overhead” numbers to arrive at an ACTUAL CASH VALUE amount. There is no basis in the policy that allows withholding profit and overhead as a means of calculating ACTUAL CASH VALUE. In fact, ACTUAL CASH VALUE is defined either as the difference in the fair market value of the property before the loss and the fair market value of the property after the loss or the full cost of replacement using like kind and quality, less physical depreciation.

You should insist that any amounts withheld from payment pending completion of the work, be documented in writing and justified by the adjuster objectively. Policyholder attorneys and some insurance regulators have successfully prevented insurers from withholding these amounts.

Investigate Contractors
Thoroughly investigate the qualifications, license, and references of your insurance company’s approved contractor before agreeing to hire them to perform the repairs. The State Contractors Licensing Board will usually provide the consumer, by telephone or over the Internet, with the contractor’s license status and history of discipline. At a minimum, the licensing entity and a reference should be checked before a contract is signed. You do not have to use consultants or contractors recommended or approved by the insurer to perform repairs. Approved contractors are typically contractors who have agreed to discount their labor and costs and follow insurer guidelines in exchange for a volume of business from the insurance company. If your insurer promises to guarantee the approved contractor’s work, the guarantee is generally limited to replacing any defective materials or correcting faulty workmanship. The insurer is not insuring against any contractor delays, negligence, or liability. Accordingly, do not use the approved contractor unless it is a contractor that you would independently hire to do the work after a thorough screening. Check that each contractor’s license is valid and for any complaints against the license. Ensure that the contractor is bonded and insured.

Seek Proper Legal Advice
Never sign a release, waiver, indemnity, or “hold harmless” agreement without proper legal advice. If the insurer, adjuster, consultant, or contractor asks you to sign a release, waiver, indemnity, or hold harmless agreement, ask them to explain why in writing. These kinds of agreements can be used to deprive an insured of rights and benefits and may obligate you to pay thousands of extra dollars for issues that arise. Consult a policyholder attorney to determine your rights before signing any such agreement.

Seek professional help, if needed. If you reach an impasse with the insurer, document the dispute fully in writing. Explain your position and why the insurance company’s position is unreasonable. If the dispute does not require legal advice, you may be able to resolve it by calling your state’s Department of Insurance or by hiring a lawyer or public adjuster. If the dispute does require legal advice, contact a lawyer who is experienced and specializes in representing policyholders. There are many consultants who claim to be “insurance claims experts” who do not have adequate training, skill, or experience. Before you retain one, investigate the person diligently by contacting licensing bodies and references.

Be Aware Of Deadlines
Make sure you know all the deadlines that may cut off the right to file a lawsuit. California has a four-year statute of limitations for breaches of written contracts but most insurance policies require suit within one or two years of the loss or the denial of a claim. If your claim is denied, seek legal advice promptly.

In most states the insurance company is required to tell you, in writing, that the claim is denied, and that the limitations clock is running. That is, if you disagree with the insurer’s conclusion to deny your claim you have a limited time to file suit. Make sure you understand all possible deadlines. Consult with a policyholder attorney as soon as possible. The time limitation can be as short as one year from the date the loss occurred and can be put on hold by actions of the insurer. If you wish to sue, it is best to contact counsel as soon as possible before the expiration of the time limit.

Report all Unfair Claims Handling to the Department of Insurance or an Insurance Regulator
The state Insurance Department tracks policyholder complaints about their insurers and compiles the results. Most states have proactive consumer advocates in their insurance departments who will jump in to help you if they believe the insurer is not treating you fairly.

Conclusion
Many insurers involved in catastrophes provide their adjusters with policy limits authority and instruct the adjuster to be generous. If your house was one of those totally destroyed and coverage is available, there is a good probability that you will receive the full policy limits immediately.

If you did not carry sufficient insurance to totally rebuild your house and replace your contents consider the acquisition of a factory built home which can be trucked to your site and completed, with all appliances included, for much less than a conventionally constructed home.
Almost all claims will be handled promptly and fairly. A person knowledgeable about insurance claims can better deal with an insurance company. Don’t take advantage of your insurer and don’t let an insurer take advantage of you. You are entitled to indemnity. You and your insurer should work together to make you whole.

This article is adapted from Barry Zalma’s book, “Insurance Claims: A Comprehensive Guide” and his book “Mold: A Comprehensive Claims Guide” published by Specialty Technical Publishers, Vancouver, BC, Canada; 800-251-0381; http://www.stpub.com.