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Commissioned article to explain how insurance companies in Florida are taking advantage of property owners after the 2004 and 2005 hurricane seasons. To be used on the realtor's Web page to attract interest in his proposals to fight the abuse.1650 words

A Level Playing Field for Insurance Premiums

How it started

Although no major hurricanes hit Florida last season, the number and ferocity of the hurricanes in the prior two years caused a major change in how property insurance is written here. The damage claims and sinkhole claims from 2004 and 2005 were so great that they led to doubts whether property insurance would be available to all Florida residents. Even before the two disastrous seasons, many Florida companies were already buying "re-insurance," that is, additional coverage from off-shore companies so that risk could be shared. Florida insurance companies wanted to parcel off still more of the risk. However, re-insurance companies did not want to accept a larger share of the risk here. This made it difficult or impossible to obtain some kinds of property insurance in some areas.

In 2004 the State Legislature mandated that no policyholder be underinsured as part of a plan  to make insurance available to all residents. If private insurance companies were unwilling or unable to insure property in all parts of the state, Citizens Insurance Corporation would become the insurer of "last resort." So that this quasi-governmental company would not to compete with private insurance companies, Citizens was required to charge the highest premiums for the insurance it sold. In order to implement this directive, a replacement cost estimator appraisal called the "Marshall and Swift" would become the standard.

This idea worked-as far as it went. Much of the property Citizens insures is in high-risk areas where insurance from private companies is not available.

What went wrong is that private insurance companies now have the option of insuring only the most profitable sectors and can to ignore property owners in riskier areas, sending them to Citizens. Those clients are in a double bind: Citizens must, by law, charge the highest rates; and there often is no private company competing with Citizens that might offer my reasonable rates. In order to justify the highest premiums, Citizens property appraisals are generally higher than they should be for replacement-value appraisals.

Where we are today

Not all appraisals are the same. If you want a new mortgage or a second mortgage on your property, or you want to sell, you need it appraised at market value. This is what someone else would pay to own your property. Both you and your bank want to see a high market appraisal value. In fact, this kind of appraisal is typically done by banks, real estate agents, loan officers, and other professionals who purchase, sell, or loan against properties.

However, the right kind of appraisal for insurance purposes is a replacement cost appraisal-how many dollars you'd have to spend to rebuild your property if it were destroyed by fire or storm. This kind of appraisal is used for insurance premiums, and requires a different kind of expert: someone who knows how to estimate construction materials and costs. You want the estimate to be realistic: if it is too low, you won't be able to recover from a catastrophe; if it is too high, you're throwing dollars out the window. For example, if you are insuring a home for a market value of $200,000, you are paying a premium that would reimburse you up to $200,000. If the home can be rebuilt for $100,000, that is all the money you will get from your policy if you home is destroyed.

The dollar value difference between the market value (what your home might sell for) and replacement cost (what it would cost to rebuild your home if it were destroyed) can vary by tens or even hundreds of thousands of dollars. If you are using a market-value appraisal to establish your insurance premiums, you are probably paying hundreds or even thousands of dollars a year more in premiums than you will ever need in order to rebuild. Unfortunately, the result is the same with an improperly-done Marshall and Swift appraisal. Only a properly completed "replacement-cost" appraisal will give you accurate values for insurance policies.

Who really pays for insurance

The way Citizens is using this approach does not reflect real-world replacement costs (that is, insurance costs). As currently applied, their "appraisal" overvalues property by a substantial amount, leading to insurance premiums that are often double the premiums of only two years ago. This has a two-fold effect on insurance rates. First, property owners are paying top dollar in areas where only Citizens offers policies-as required by law. Second, in areas where other companies compete with Citizens, private insurance companies can use Citizens high rates as a ceiling for their own premiums. In both cases the situation is made worse because the starting point-replacement cost value-is grossly inflated. Everybody who buys property insurance is charged more than it would cost to replace insured property, whether the building is private, commercial, or income-producing.

The costs extend even to non-residents. Businesses can only pay for insurance increases by passing the costs along to their customers. Hotels, restaurants, even gas stations have to increase their prices, and these services are often used by out-of-staters.

Another less-obvious cost is also associated with higher premiums. Over-insured properties have higher deductibles, which is usually a percentage of the total value of the policy. Even though the percentage of the deductible remains the same, claims have higher dollar deductibles. Thus every insurance claim costs the policyholder more than it did before the premium increases.

Some homeowners have had to take out loans to cover their increased premiums; some businesses have failed due to these increased costs. Everybody loses-except the big insurance companies.

Short- and long-term solutions to the problem

State Senator Mike Fasano wants to address this problem from a regulatory standpoint. He is calling for an investigation into appraisals that grossly overvalue replacement costs. There is a good chance that a legislative correction will be implemented at some point in the future.

In the meantime, property owners should take immediate steps to reduce their insurance costs. The fastest way to reduce your premiums is to have your property correctly and accurately appraised for its replacement value, regardless of how much your insurance company may have increased your premium.

Citizens and other companies may encourage their clients to get an outside appraisal if clients wish to debate the replacement cost value. Unfortunately, not all insurance agents understand what is needed to complete an appropriate Marshall and Swift appraisal. Clients may be asked for appraisal items that are irrelevant to an accurate replacement cost estimate, driving up the cost of the appraisal itself as well as the value assigned to the property.

The best solution is an appraisal from a licensed, certified state appraiser who can perform a true square-foot replacement cost analysis. This qualifies as a Marshall and Swift cost approach appraisal, but it is not used for lending purposes. It does not include items required for a loan appraisal or for the resale of the property. A true Marshall and Swift appraisal usually costs $200-$250, rather than the typical bank or real estate appraisal, which costs $325-$450.

For the home or business owner who has just received a substantial premium increase, spending another $200 to contest the increase may seem like throwing good money after bad. But the cost of this appraisal is usually made back in less than twelve months through reduced insurance premiums. Then it keeps saving money, year after year.

Getting the right appraiser

Citron Mortgage can refer you to licensed, certified state appraisers anywhere in Florida for a true Marshall and Swift square-foot replacement-cost appraisal. We know the best appraisers because we're in the real estate business.

In order to make this service available to all Florida property owners, Citron Mortgage has formed a strategic alliance with Kanaris and Associates. Kanaris and Associates has appeared in the news several times concerning this issue. The company has more than thirty years of experience in the appraisal business, and has multiple appraisers available to serve the majority of the state of Florida. Citron is not the only company that recommends Kanaris and Associates. State Senator Michael Fasano and his office has recommended to many individuals to get a square-foot appraisal by Kanaris and Associates.

Because of its size, reputation and quality, Kanaris and Associates has been a key player in the fight for insurance reform. We have worked with Kanaris for many years and can attest to the company's honesty and integrity. Citron does not get a single dollar for referrals to any licensed, certified state appraisers. We offer this service as a goodwill gesture to all property owners in the state of Florida.

If you to live in an area not served by Kanaris, Citron can refer you to a qualified licensed, certified state appraiser in your area.

The next step

You do not need to put up with unfair, unjust premium hikes. You can get them rolled back legally, quickly, and inexpensively with a true Marshall and Swift replacement-value appraisal. Citron Mortgage can refer you to licensed, certified state appraisers who can perform this service anywhere in Florida.

Our strategic partner to help Floridians fight these unfair property insurance premium hikes is Kanaris and Associates. This appraisal company is also supported by Senator Mike Fasano, who is leading the legislative fight for insurance reform. If you live in an area not served by Kanaris and Associates, we can refer to you other equally qualified licensed, certified state appraisers.

Citron Mortgage does not get any remuneration for these referrals. We offer this service as a goodwill gesture to all property owners in the state of Florida.

Additional steps

Getting the right appraisal is the most important action you can take to reduce your property insurance premiums, but it is not the only step. You can also take a look at our
Tips to Reduce Insurance Costs for other ideas that will help you hold down the price of your coverage.
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