Home insurance companies have their own ways to estimate the damage, this article will describe how they do it.
A Philadelphia town house was damaged by an explosion in the gas line of the house next door, including damage to the wall shared by the two homes. The insurance adjuster properly recognized the limits of his expertise and brought in an engineer to assess the damage to the wall. The engineer concluded that the top foot and a half of the wall needed to be replaced, but it was otherwise structurally sound.
Public Insurance Adjuster
The homeowner’s public adjuster brought in a better qualified engineer who found that the entire wall had to be replaced and, after a four-hour meeting at the site, persuaded the insurance company’s engineer that that was the correct position. That change, and other corrections to the insurance company’s scope of the damage and estimate of the needed repairs were the difference between the company’s original offer of $250,000 and its final payment of nearly $600,000.
How Insurance Companies Calculate the Damage
Once the extent of the damage is scoped, the adjuster has to estimate the cost of repairs. Today many companies automate the process with software estimating programs that appear to remove discretion and to substitute for the adjuster’s lack of experience. Although there are many such programs, the industry leader is Xactimate, sold by Xactware Solutions, a division of ISO, the industry’s central source for policy forms, information on policyholders, and other products.
The adjuster described by the Property Loss Adjusting textbook who has “a vast knowledge of property values, costs, and methods of repair and at least a working knowledge of accounting and construction methods and materials” has been supplanted by, as the phrase goes about Hurricane Katrina adjusters, “a guy with a ladder and a laptop?” The adjuster takes the scope of the work, such as the replacement of a twelve-foot-by-eight-foot wall made of drywall and containing one window of specified dimensions and two electrical outlets, types it into Xactimate, and the program produces a cost estimate for the job, including material and labor costs.
The costs are drawn from one of 467 regional pricing databases covering the United States and Canada; they are updated monthly. As Kerr notes, “Xactimate takes the guesswork out, and not surprisingly, the days of handwritten claims are essentially over?’
The days of handwritten claims may be over, but all the guesswork or, more important, error is not out of the process. Xactimate is a tool and, like any other tool, it is neither perfect nor impervious to misuse. It first depends on an accurate scope of the work and, as with any program, garbage in, garbage out applies. Any errors in scope will produce an inaccurate estimate. Although its categories of items are vast, they are not infinite. As United Policyholders points out, Xactimate is “generic software” that is better suited to address “cookie-cutter” homes.
The Philadelphia town house damaged by the explosion next door contained custom woodwork that needed to be replaced by an especially experienced carpenter, and the adjuster is hard-pressed to use Xactiinate to allow for that additional expense. The costs built into the database are, like the results of any survey, somewhat generic and may not account for particular market conditions or the higher quality work done by some contractors. Studies by DataLath Inspection Services have demonstrated that for high-end homes, estimating software produces error rates of 20 percent or more half the time; the estimate for rebuilding a $800,000 home therefore would be off by $160,000.12 and the figures built into the software can be unknown and hard to challenge.
Xactimate works off choices made by the adjuster, and because it needs to cover many different situations, the program is designed to give him a wide range of choices. Each of these choices affects the repair estimate. When drywall is replaced, the new drywall needs to be painted; the adjuster must choose the appropriate application—seal/prime, seal then paint, paint one coat, or paint two coats—each of which will produce a different cost estimate.