Insurance offer too low: why it happens and what you can do

A low offer has a cause you can find on paper. Work was left off, the prices are lower, money was held back for depreciation, the policy pays less than full replacement, or the deductible came out. Some of these can be challenged with documents. Others are how the policy works.

Why is the offer lower than the repair cost?

The NAIC, the association of state insurance regulators, says differences in construction estimates are common. There are five places to look:

Missed scope. The scope of loss is the detailed list of everything needed to repair the damage: materials, quantities and labor. If a room, a trade or hidden damage is not on the insurer’s list, it is not in the offer.

Pricing. Both sides list the same work, but the insurer uses a lower price or a cheaper grade of material. United Policyholders, a nonprofit, suggests checking for items priced too low or specified at a lower quality than what you had.

Depreciation. This is the loss in value from age and wear. The NAIC says insurers usually work it out from the item’s condition, the cost of a new one, and how long it normally lasts.

Actual cash value versus replacement cost. Replacement cost coverage pays to repair or replace without subtracting depreciation. Actual cash value coverage pays the depreciated amount. In the NAIC’s example, two neighbors each have $15,000 of roof damage and a $1,000 deductible. The one with replacement cost coverage is paid $14,000. The one with actual cash value coverage, after $10,000 of depreciation, is paid $4,000. The NAIC also warns that a replacement cost policy can still pay actual cash value on the roof. Your declarations page, the summary at the front of the policy, shows which you have.

Deductible. This is the part of the loss you pay. It can be a flat amount or a percentage of the insured value. In the NAIC’s example, a 2% deductible on a home insured for $250,000 is $5,000. Some policies have a separate deductible for wind or hail. The Texas Department of Insurance notes that if the repair costs less than the deductible, the claim can close with no payment.

How do you compare the insurer’s estimate with a contractor’s?

1. Ask the insurer for its complete estimate, with every line. In Florida, the insurer must send you a copy of any detailed estimate within 7 days after its adjuster creates it.
2. Ask your contractor for a written bid that lists materials, prices and labor line by line. The Texas Department of Insurance suggests showing contractors the insurer’s estimate.
3. Go through both, room by room. Check the measurements and quantities, the quality of materials, and whether any room or trade is missing.
4. Mark each difference as a missing item, a price difference, or something the policy does not cover.
5. Send the list to the adjuster in writing, with the contractor’s bid and photos.

Two things can make a contractor’s bid higher for reasons the policy will not pay. The NAIC says replacement cost coverage pays for materials of like kind and quality, not upgrades. It also says a standard policy does not pay the extra cost of meeting current building codes unless you have ordinance and law coverage.

How does recoverable depreciation work?

With a replacement cost policy, the insurer may first pay only the actual cash value. When you show that the property has been repaired or replaced, it pays the difference, up to the replacement cost. The NAIC calls that difference recoverable depreciation.

• There is a clock. The NAIC says there is usually a time limit, ranging from 6 months to one year depending on state law and your policy. Ask the adjuster for the date in writing. If repairs will run past it, ask for more time early.
• You need proof. United Policyholders says you generally have to replace the items and send in the receipts.
• The amount can be questioned. United Policyholders notes there is no agreed national schedule for depreciation, and that condition matters as well as age. One flat percentage applied to everything is worth a written question.

With an actual cash value policy, the depreciation is not paid back.

What is a supplemental claim?

It is a request for more money on the same claim, for damage or costs that were not in the first estimate. For example, a contractor opens a wall and finds damage nobody could see.

The NAIC says to contact your insurer any time you find damage that has not been reported or inspected. It also cautions that a company may not pay for repairs it did not authorize, so one option is to tell the insurer before the extra work is done.

States can set deadlines. In Florida, notice of a supplemental claim is due within 18 months after the date of loss, and notice of a new or reopened claim within one year. Rules differ by state, so check your state’s page.

What are the options if the gap stays?

• Ask for a second look. The California Department of Insurance suggests taking your documents to the claims manager.
• Appraisal. If your policy has an appraisal clause, each side hires an appraiser and an umpire settles what they cannot. It decides the amount only. In Texas, you pay your appraiser and half the umpire’s cost, and the umpire’s decision is binding on both sides.
• Mediation. Where a state runs a program, a neutral person helps both sides talk. In Florida, the insurer pays and the result is not binding.
• A public adjuster. You pay a fee, so run the numbers first with the fee calculator. The NAIC says the contract should state whether the fee applies to the whole payout or only to the amount the adjuster adds. The contract check covers what else to look for.
• A complaint. Filing with your state insurance department is free, but the Texas department says it cannot settle disputes over facts.
• An attorney. United Policyholders says a dispute limited to the value of the damage, with an insurer that is still cooperating, may not need one.

Public adjuster vs attorney vs appraisal compares these in more detail.

Before treating any payment as final, ask in writing whether it is a partial or a full payment. United Policyholders says you should not have to sign a release to be paid an amount nobody disputes.