Tag Archives: homeowners policies

The Need for ‘Price-Driven Costing’

In 1973, I began my insurance career as a claims’ adjuster. We handled some of the first claims in the new NFIP Flood Program. There was chaos.

A year later, I was hired by Cumis Insurance to staff a new sales office in Baton Rouge,LA. The market hardened dramatically, capacity was limited and our office closed before we sold a policy. I learned about market cycles.

My next job was as an insurance producer. My job and the agency business were good. We were paid 25% commission on homeowners policies, there was no transparency (comparative rating didn’t exist in our part of the world) and the most exciting change was when Safeco allowed field men (yes, they were all men) to wear blue or buff-colored shirts in lieu of the traditional white.

During my first week at work, a colleague dropped an article titled “Marketing Myopia” on my desk and said, “read it.” The author was Theodore Levitt. The piece was then and still is a classic — and framed my thinking about an issue that has only grown in importance and must become  the future of insurance.

Levitt opened with an observation on the railroad industry, which declined because it defined itself incorrectly – “railroad-oriented instead of transportation oriented… product-oriented instead of customer-oriented.”

Levitt also mentioned a fundamental misunderstanding about the success of Henry Ford. “We habitually celebrate him for the wrong reasons: for his production genius. His real genius was marketing. We think he was able to cut his selling price and therefore sell millions of $500 cars because his invention of the assembly line had reduced the costs. Actually, he invented the assembly line because he had concluded that at $500 he could sell millions of cars. Mass production was the result, not the cause, of his low prices.”

From 1978 to 1981, I represented Fireman’s Fund/FAMEX in its GM dealers program. At that time, the No. 1 concern of General Motors and its dealers was that GM would gain 65% market share and that the government would then break GM into Cadillac, Buick, Oldsmobile, Pontiac, Chevrolet and GMC corporations. We all know how this played out.

In 1993, I opened my consulting practice focusing on CHANGE – its management and architecture. (“The best way to predict the future is to create it,” as Peter Drucker said.) I spoke to the leadership of a community bank and said that, although GM, IBM and Sears were the giants in their respective industries, “one of these three will ultimately go bankrupt.” The bankers rolled their eyes and laughed. We all know how this played out. (In my children’s lifetime, I may prove right on the other two.)

Later that same year, Drucker offered an op-ed in the Wall Street Journal, titled “The Five Deadly Business Sins.” It said, “The third deadly sin is cost-driven pricing. The only thing that works is price-driven costing. Most American and practically all European companies arrive at their prices by adding up costs and then putting a profit margin on top… their argument, ‘we have to recover our costs and make a profit.’

“This is true but irrelevant; customers do not see it as their job to ensure manufacturers profit. The only sound way to price is to start out with what the market is willing to pay.”

Levitt’s voice echoes his agreement from the “Marketing Myopia” article, when he says, “Our policy is to reduce the price, extend the operation and improve the article. You will notice the reduction of price comes first.” Drucker’s wisdom closed the circle that began with my reading of “Marketing Myopia.”

In 1994, I became the executive director of the Louisiana Managed Healthcare Association (LMHA) – the health maintenance organization (HMO) association. I quoted Drucker dozens of times as I attempted to explain the difference between the then-existing fee-for-service system and the new world of “capitation” and “managed care.” I was shouted down more than I was applauded.

That same year, a couple named Harry and Louise (in a TV ad campaign) defeated Bill and Hillary’s attempt to reform healthcare. Fast forward another 20 years and Obamacare is the law of the land. At its essence is managed care – a price-driven costing model. The market won’t go back to cost-driven pricing.

Two more observations from Drucker as your prepare for tomorrow — or choose to ignore it:

— “Because the purpose of business is to create a customer, the business enterprise has two and only two basic functions: marketing and innovation.”

Innovation is so necessary because customers are constantly changing. We must be defined and driven by clients.

–“There are now only three possible roads the financial services industry can take. The easiest, and usually most heavily traveled, is to keep doing what worked in the past. Going down this road means, however, steady decline….The second road – to be replaced, and probably fairly rapidly, by outside innovators – remains a possibility for today’s firms. But there is also a third and final road – to become innovators themselves and their own ‘creative destroyers.’”

Your future depends on more production but only at a price the market will pay. Your sustainability depends on innovating your processes to ensure profitable delivery whether your commission is hidden in the premium or disclosed or whether premiums are quoted net of commission.

Today, when I drive by a dealer, the genius of Drucker is reinforced. Look at a pickup truck on the lot. The window sticker shows the “cost-driven price.” The sign on the windshield celebrating a $12,000 discount is the price-driven cost.

If you want to sell a truck in today’s world, discounts are not optional!

The same is true for insurance.

Surviving the Loss of Your Home

I lost my home in the 1991 firestorm in Oakland, CA. With wildfires now destroying others’ homes in California, my heart goes out to the homeowners whose homes are damaged or destroyed by fire or other disasters, to the firefighters and to others who have risked and are risking their lives. I also feel for the communities that will experience the devastating aftermath.

While I am an attorney who specializes in handling insurance claims for policyholders, the loss of my home showed me the stresses and challenges of handling my claim with my insurer, as well as those facing many other Oakland firestorm survivors whom I assisted with their claims.

Those whose homes are damaged or destroyed will face many challenges in the coming days and months — temporary shelter, replacement of necessary items, disruption of their lives caused by having to relocate, and the repair and rebuilding of their lives and homes.  I would like to offer some professional as well as personal advice in the hope I can be of some assistance.

Likely, none of you have read your homeowners insurance policies previously.  I am embarrassed to say that I had not read mine prior to the Oakland firestorm, and I am, as they say, in the business.  Do not be surprised when you attempt to read your policies if you have difficulty understanding them, despite their claims of being written in “plain English” or “easy to read” format.  Even professionals do not agree on every policy interpretation, and no one is born with an innate understanding of insurance or how to pursue their personal insurance claim.

Your homeowners policies provide a few basic coverages for your home, other structures, additional living expenses, and personal property.  Initially, you will want to focus on obtaining an advance from your insurer to cover immediate necessities, including food and lodging.  Most insurers involved in a catastrophic loss will readily issue advances from your contents and additional living expense coverages, usually in the $5,000-$15,000 range.  In fact, many insurers will set up local catastrophic loss command centers to handle requests in your community.  The easiest way to communicate or locate your insurer is to contact your insurance agent or broker.

Additional living expense coverage covers your expenses when you are dislocated from your residence as a result of its being destroyed or rendered uninhabitable.  This coverage is usually limited by a dollar limit or a maximum time. Such coverage typically covers either your actual out-of-pocket expenses, such as increased meal costs, increased cost of commuting from a different location, cost of temporary residence, etc., or the reasonable rental value of your former residence.  Most insureds opt for the latter method of determining their additional expense coverage as it is simpler, less time consuming to document and usually yields a greater dollar recovery.

You will need to immediately replace certain essential items, such as toiletries and clothes.  Most insurers will give you an advance on your contents claim with no specific proof of loss other than proof that your home was damaged or destroyed.  As time progresses, you will be required to document your loss on an itemized basis.  Most of you will have replacement cost coverage, which means you will, upon proof of replacement, be entitled to the cost of replacing lost items up to the limits shown in your policy.  For items that you do not immediately replace, the insurer usually will pay you “actual cash” value for those items.

This means that the insurer will determine the replacement cost of the item and then depreciate it for use, age or obsolescence.  If you subsequently replace the item, you can then send the insurer a copy of the receipt and receive the difference between what you were paid by the insurer shortly after the loss and what you spent to replace it.

A frequently asked question is:  What is the replacement cost of an item that is no longer made?  You are entitled to replace such items, subject to your contents limits, with items of like kind and quality.

Eventually, you will be dealing with the cost of repairing or replacing your home.  The first item you will likely have to deal with is removal of debris.  Almost all policies provide coverage for debris removal as either a percentage of the limits for the house or in addition to the limits for replacement of your house.

Next, the insurer and you will be working on determining the cost of rebuilding your former home.  Many of you will have a form of replacement cost coverage that will give you the replacement cost of your home up to some percentage in excess of your stated policy limits.  Such an increase in coverage is typically 125% of stated limits.  Additionally, most of you will have coverage for other structures, such as detached garages, decks and fences, with an additional coverage limit, usually referred to as “other structures” coverage.  Many of you will also have coverage for code upgrades, although such coverages will also have limits.  You will likely have coverage for landscaping.  Even if you had native or natural landscaping, you are entitled to have it replaced subject to the terms of your policy.

An issue that many of us dealt with in the Oakland firestorm is that policies that provide replacement cost coverage usually require you to replace the structure before you are fully compensated, although you are provided some monies on an actual cash value basis in the interim. This posed a significant challenge for those who were less affluent, because they were financially incapable of fronting the monies necessary to complete their homes.  After some negotiations and with considerable help from the then Insurance Commissioner, now U.S. Congressman, John Garamendi, the insurers agreed to either finance reconstruction costs as building progressed or advanced funds.  Most insurers will reach similar agreements in response to the current situation.

Some of you may not wish to rebuild, but may wish to relocate.  There are many considerations that go into such a decision, and it can only be made by you in the best interests of you and your family.  At the time of the Oakland firestorm, most insurance policies required that you rebuild your homes at their current sites.  However, most insurers waived this requirement, and now most policies no longer have these requirements.  If you wish to relocate, let your insurer know as soon as possible.  Even if the policy requires building on your lot, most insurers will waive that requirement as you will be in temporary quarters for a shorter time, which decreases the amount they have to pay in additional living expenses.  Most insurers are ecstatic if the insured wishes to relocate, as it decreases the amount they ultimately have to pay.  If you choose such an option, the insurer still pays you the cost of rebuilding/replacing your former home.  You will also retain title to your lot and can sell it later.

I was asked by many homeowners in the Oakland firestorm and in subsequent disasters whether they need to hire an attorney.  This is my response:  1) most homeowners insurance claims are resolved over a period of time through negotiation and with assistance from claims adjusters and contractors; and 2) most insurers are helpful and sympathetic to their insureds and will make every effort to guide insureds through the process.  However, for most homeowners, their home and its contents are their largest and most important investments.  Consequently, it is advisable to consult with an attorney who specializes in handling insurance matters to make sure that you avail yourself of all benefits you are entitled to under your policy.  Additionally, if you feel at any time you are not being fairly treated by your insurer you should either consult with an insurance coverage attorney or seek assistance from your state's Department of Insurance.

When the Oakland firestorm destroyed my home, I had two daughters: Katy, then 6, and Noelle, who was just shy of her 3rd birthday.  My now-former husband and I were lawyers, and, heck, we were insurance coverage lawyers.  We knew we could handle our claim and the situation.  We relocated our family within a week into temporary housing and shortly thereafter went into contract to purchase a new home.  We had no idea what lay ahead.

Replacing even the bare necessities was a huge project.  We were shopping both days of every weekend and almost every evening.  I wanted to keep my oldest in her school and my youngest in her preschool, so I drove a long commute from our temporary housing every morning and evening.  When I wasn’t driving, I was working on the claim or shopping to replace basic necessities.  My youngest cried every night and begged to go home.  Even though we knew how to handle an insurance claim, it was physically and emotionally exhausting.

About a month after the fire, my older daughter came home with a flyer inviting all firestorm survivors to a special day at Marine World hosted by the Oakland, Berkeley and Piedmont fire departments.  I indicated that we probably wouldn’t be able to go because we needed to go shopping for “stuff” for our soon-to-be new home.  Within an hour, Katy had organized Noelle into a joint protest.  They let their father and me have it.  They told us we had become the “no fun” family.  They were tired of not doing anything.  They missed their friends, who now lived away from them, and they missed us.

They were right!  From that day forward, we made sure that we had family day every weekend.  We went to the event at Marine World and reconnected with other relocated friends.  Katy and Noelle got to play with their friends.  We learned to be nicer to each other.  We also learned that not everything had to get done on a certain schedule, and sometimes it was better if it didn’t get done at all.  We learned that we had gotten the most important things out of the fire: ourselves.  We also learned that only those things that had memories attached were truly important, for anything else could be replaced.  None of us has ever placed the same importance on possessions.  For a long time, I resisted replacing many items, as I simply did not want as many things, and frankly still don’t.  Most importantly, we learned the importance of family and community and that we could survive a major loss in our lives and be the better for it.