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In The Public Eye: Valuations - More Important Than Ever

By Alliant Specialty

Carleen Patterson and Justin Swarbrick, Alliant Public Entity, welcome David Werch, Managing Director, and Tim Kolgen, Business Development Manager, from CBIZ Valuation Group’s Tangible Asset Practice to discuss what underwriters are looking for when reviewing a schedule of values. July 1 renewals may be in the rearview mirror, but keeping an eye on the road ahead will prepare you for the future.

Intro (00:00):
Welcome to the Alliant In the Public Eye podcast, a show dedicated to exploring risk management topics and challenges faced by today's public sector leaders. Here are your host, Carleen Patterson and Justin Swarbrick.

Carleen Patterson (00:19):
Welcome back everyone, to another episode of In the Public Eye. We are past the big July one renewal for most public entities anyway, and for many, it was a painful process. And for some folks, they had some shocks and for others, they didn't, and it seems a little crazy, but we are already looking at ways in which we can improve our client's submissions for next year. Even though we're barely past July one, we're always looking for ways to improve our client's submissions and improve the message that we tell the insurance markets. And one of the things that has been a topic of conversation for public entity clients for a few years, and it seems like it was really under the microscope this year and that was the accuracy of our client's evaluations and their schedule of values. Every year, a risk manager or someone with authority is signing off on a schedule of values and we use that in the insurance market and they are testifying to the fact that it's an accurate schedule of values. Today, we have invited Tim Kolgen and David Werch to join us to talk about valuation accuracy. Tim, before we get started, why don't you start off by just giving a little bit of a background about yourself? So, our audience knows who you and David are.

Tim Kolgen (01:36):
Sure. Thanks. Carleen. I've been in the appraisal industry for about 19-20 years. I actually started as an intern in two, around 2001, 2002 as a summer intern, and got to travel and do a lot of fun stuff. So, I learned the appraisal industry that way. I was an appraiser for over 15 years and I'll still go out and kick the tires once in a while when it's needed. And then I have been in business development for a little over seven years, working mainly with schools, states, counties, municipalities facilities, risk pools, and hospitality. And I'm out of San Diego, California.

Carleen Patterson (02:10):
Thanks, Tim. How about you, David?

David Werch (02:13):
So I celebrated my 28th year in the valuation and advisory business. I've been with CBIZ for 15 years and the Managing Director of our tangible asset practice for the past seven. I'm actually a senior designated appraiser with the American Society of Appraisers. So, I have a specialty in machinery and equipment served a lot of industries like Tim has, but then a specialty in healthcare, metalworking, plastics, printing utilities and oil and gas. And I am based in Dallas, Texas.

Carleen Patterson (02:42):
Good old Texas. So, it sounds like when we deal with the public sector at Alliant, we're dealing with everything from the municipal risks to states, public health care falls under our umbrella as K through 12 schools, higher-Ed, water and sewer and some other special districts. So, it sounds like there's a lot of crossover. And with that, you get a lot of unique exposures, but we use the schedule of values for so many different things were looking at concentrations of values. So, we can do modeling. We're looking at what kind of blanket limits should an entity be purchasing and overvalued. It seems like the client will be paying more than they should. If they're undervalued, then the insurance carrier is not collecting the appropriate amount of premium. And in the past blanket limits helped with any kind of inconsistencies in your valuations. But over time we've been moving away and as pricing has gone up, we've been looking at ways and markets have been looking at ways to limit their exposures. And so, we've seen the values being more and more tied to the schedule. So, the limit that the carrier is willing to provide is more and more tied to that schedule. Justin, in your experience, have you seen where that schedule of values has come really critically into play when it comes to what the insurance carriers are willing to put up?

Justin Swarbrick (04:08):
Yeah. Carleen. I think in general, as the market's hardened, we've seen a lot more scrutiny on the values and public entities have such large portfolios of properties. You really run the gamut of clients that take it seriously and clients that don't and the clients that have taken it seriously for years and hired firms like CBIZ and others, we're not as surprised as the market started to harden. I think the ones that hadn't taken a lot of time and put a lot of effort into their valuation while it was something they were able to get away with in a softer market, you just can't quite get away with that any longer. And now without the proper valuations, we are seeing a lot more restrictions on coverage. Things like the margin clause have certainly come back into play, where they really had disappeared for quite some time.

Justin Swarbrick (05:01):
We're starting to see those again. So, valuation is extremely important and we typically will talk about replacement costs when it comes to buildings and things like that. But there really are a whole number of different kinds of valuation. And Tim, one of the things we run into is a risk manager may request the values from the accounting department, and they'll get the depreciated values. And, for our purposes, for buildings, at least that's really not what we're looking for. Can you talk about some of the different types of valuations that are out there and that you perform on types of property?

Tim Kolgen (05:40):
Thanks, Justin. Yeah, that's a common problem when people aren't too educated or just don't have the time or about how to report their values. We see a lot of actual cash value or we'll see it, construction costs value. What's the total cost of the construction of the project? And that's what the reporting for insurance purposes. That's not probably what the insurance carriers or brokers are looking for. What they're really looking for is the replacement costs new value, which is the insurable value. So that's excluding things like the land and certain insurable exclusions, like sometimes the foundation or the underground plumbing and wiring that if there was a loss, those things would still be there. So, they would only have to build from the foundation up. Sometimes they're included, sometimes they're not. So, you've got to read your policy and talk to your broker, but replacement cost new is the value that you want to be reporting. And the definition of that is long, but the gist of it is you're getting like kind and like materials. So, if you have an old building, you're going to get replaced with a more of a modern building, that's kind of the same quality materials and construction.

Another one is speaking of old buildings as if it's, you have a historical building or a very unique ornate building, you can consider reproduction costs. So, reproduction costs, which is different than replacement, reproduction cost is going to build an exact replica of that building. So you're going to use the same materials, the same construction methods. And typically we suggest first, how would you ensure the building or how would you rebuild if there was a loss. If you have a historical building, would you rebuild an exact replica or would you rebuild with a modern building? And that's how you should ensure it and value it.

Carleen Patterson (07:20):
When you have a historical building, especially on the east coast, history has a whole new meaning. And if it's on the historical registry, what are you going to do about it? And not only from a valuation standpoint but also from a pre-loss standpoint to say, if you have this and it was destroyed, how would you recreate it? So, there's some of that as well, but you're right. We run into that quite often and it can be the difference between what is true replacement costs versus that typical, the nuns from a monastery in Nepal, making bricks type of analogy, but how are you going to replace that with the exact kind of materials that were used 200-300 years ago?

Tim Kolgen (08:04):
And David with your ASA background, what type of historical reproduction costs things have you seen that really drive up the cost?

David Werch (08:13):
Usually, these properties are unique and obviously, they're old. And so, you're dealing with more artisan-type construction as it relates to cut stone, for example, or real ornate wood or timber construction. So, things that are definitely old. And one of the reasons why these valuations are higher than a replacement value is because one, we don't have as many artisan-type construction people around. So, in order to do a true rebuild of an actual historic property is just so much more expensive than replacement value. So, in the case of the public sector and what you're normally running into, it's the courthouse. It is the building that's been around for a long time. It's the pride and joy of the entity. And they want to make sure that it's properly valued.

Carleen Patterson (08:57):
Exactly. Any other types of valuations you run into, especially dealing with public entity?

David Werch (09:03):
I've been seeing this more in Texas and in the Southwest, but periodically it's coming up is the functional replacement value, or at least the request for that. And again, if you have a historical structure, would you truly rebuild it in the same manner today? And so, a lot of times what the client is looking for is, and I'll use a municipal city hall type building. You probably aren't going to rebuild it to the 1895 original construction, but they want to know what that functional value would be. And that's really the difference between your replacement value and its historic value where you're kind of looking at, I'm not going to redo that. It's going to be something less and it's showing them something that's going to give them the ability to determine how they want to put that value on that property. You don't see it on many requests, but it has been coming up more lately. And again, it's usually on the one building that they've got that they want to make sure it's properly insured. And they're trying to make sure that they're managing their premium dollars as well and not overpaying for something that they probably wouldn't rebuild in that same manner.

Justin Swarbrick (10:00):
That's a great point. Dave, not all carriers will pay for the historic replacement costs. So, if that's the case, there's really no point to report that historic replacement cost value because it's going to be much higher than let's say a functional replacement cost value. And when you think about property insurance, it's basically rate times total insurable value. And when that total insurable value comes down, you are saving some dollars. Obviously, when you go out on-site, that's the best way to get an appraisal done, accurately. Are there any tools that are out there that someone could use to help get an idea as to whether or not their properties are valued correctly?

Tim Kolgen (10:46):
Yeah. You know, with technology getting better and better every year, there are starting to see some artificial intelligence and other software that are good at verifying and getting some data. We have a service that we just started using where it gives a roof risk score. So takes artificial intelligence and aerial footage. And it'll calculate the quality of the roof by driven factors. If there's ponding, if there's rust, if there's tree overhangs, that type of stuff. Right? And that's great. But when you're coming down to the core data elements that really value your building, you got to ask yourself, where did they come from? How accurate are they? How updated are they? That type of stuff, because technology is great. But if the baseline data elements aren't there, you're going to get a bad evaluation. And as much as the technology is good, there are certain things you just can't verify without going inside a building, right? The roof could be covered over the whole entire building, but he'd go inside and could have a big courtyard that you're not going to report that square footage. So, technology is great. We use it, we love it, but nothing really beats that onsite appraisal.

David Werch (11:54):
And I think after 28 years, the thing that you do realize in inspecting buildings, is if you're working from a client SLV and they've got that information out there, that verification to confirm, is it really a joyce of masonry or should it really have been a steel frame, masonry non-combustible and you can't do that from the air. You've got to do that being in the building. And that's an impact substantially across the premium and across the rates that are going to be out there by knowing that that construction class is accurate. And even after all these years and looking at thousands and thousands of buildings, there are some buildings that are really hard to figure out and you can only do it by getting up in the roof and crawling around and really seeing what those things are. And so, without like Tim said that great baseline of having at least an appraisal that you're working from originally, if the data is poor, the outcome can be poor as well. So, the site visit is critical somewhere along the line.

Carleen Patterson (12:42):
You raised an interesting point when it comes to the data points that you collect. And so, we take all of that information and we put it on what we call a schedule of values that includes COPE information. So, in order to turn this over to insurance companies, they look at it from, what is the construction? Because obviously if it's difficult built, wood-frame, it's going to be more susceptible to fire damage than your highly protected risk that's construction with sprinklers, that kind of thing. So, can you talk a little bit more about COPE, what it means and how that falls into your valuation process?

Tim Kolgen (13:23):
Sure. COPE is commonly used in the insurance evaluation world; stands for Construction, Occupancy, Protection, Exposure. So those are the four categories that we're collecting data in. Construction, exactly what Carleen was talking about, Occupancy, what type of building is it? Administration building is going to have, one cost per square footage versus a classroom building. So different buildings have different costs associated with them based on the occupancy protection is what Carleen mentioned, fire sprinklers, fire resistant material, that type of thing. And then exposure, where is it? What's around it? What's the exposure to it? Those are the categories that we're collecting data and that underwriters like to see. And then when you get into more cat-exposed properties, coastal places where there are hurricanes and that type of stuff, surge exposure, you can get into secondary COPE data where you're talking more of a wind storm, wildfire, earthquake, that type of stuff.

So, those are typically what the re-insurance carriers like to see, is that secondary COPE data and that's often forgotten about right? So, a lot of people don't really talk about that secondary exposure until you get to the re-insurance level. There are also some considerations where some life safety considerations that we didn't see in coming up more. So, you say you have an older building that's not up to code anymore. A two-story building that doesn't have an elevator. If there was a loss, the code would make you have an elevator in that building. But if you get a replacement costs appraisal done, that's not going to be considered because of an elevator is not present. So, there are certain life safety considerations that you can account for in evaluation that would get that replacement cost more accurate to code if there was a loss in a rebuild. Things like fire, sprinklers, alarms, security systems, elevators, those are all things that even if they're not present in the building, you can account for those in your valuation because they will be present in a rebuild. Anything else, David?

David Werch (15:16):
I was just going to say the onsite inspection allows us to refine our value to be specific to that building if we're doing this for replacement value. So, there are guides that are out there that will tell you that a certain occupancy building like an administrative or a classroom building will fall in this range based on its construction class. But what we know after all these years is, Will district, for example, is 50 or 60 years old. So, they're going to have buildings that are built in the forties or fifties, and then they've got new construction in the last 10 years. And so, the site visit allows us to really specifically identify the construction materials and components and capturing that. So, you're going to see these values that are giving you consistent with current costs today based on how they were constructed. And that is I think huge from the standpoint. So, you don't get into your over-insured situation where they're just giving every building $250 a foot, but you're seeing that it's more consistent with the inspection itself.

Carleen Patterson (16:07):
You're talking a lot about the actual structures themselves when you are out doing valuations. Do you account for the personal property as well? Or is that something that's specific to the engagement or is that something that you typically collect when you're looking at it? How many offices, how many copiers, how many, whatever it is, do you look at that as well?

David Werch (16:28):
So, from my perspective, the short answer is yes. Most people are asking to get a sense for where these values are coming from on the equipment or the content side. So, in a non-school district or public entity space, the walkthrough is just as important on the contents at times, as the building itself. So, we are spending that time, making sure we're understanding what's there and that we're capturing it properly. As you've probably seen over the years, Carleen, these schedules are only as good as the data that's in them. And contents is no different than buildings. And so, we do try to review that closely in Tim's case, in the public sector, we are trying to make sure that they're not just using a percent across the board on the contents that they truly are trying to get close to reality. And what's there.

Justin Swarbrick (17:10):
Carleen alluded earlier that when we think of public entity, we think of health care, schools, universities, colleges, states, water and sewer utilities, cities. I mean, it's, it runs the gamut, but what are some of the unique exposures that you've encountered in your experience at the different types of public entities that you've visited and appraised?

Tim Kolgen (17:34):
I think the really unique ones, are ones that people don't really think of too much is where you get the utilities, the wastewater, water districts, where you're actually seeing how your water is treated and processed. And the waste is treated and processed things that no one really considers and those are harder to appraise. They're harder to value. There are no real pricing publications that you can really rely on. So, it really comes down to knowledge and experience. Especially too, when you're an appraiser looking at a wastewater treatment facility, you're getting short-around by someone that's involved in the process. And if you don't speak their language or ask the right questions, you're not going to get the data you need upfront. So really knowing the terminology, they use gallons per minute and some other things and knowing the processes, the different processes of the system, really helps. So, you get the answers that you need and ask the right questions.

David Werch (18:27):
To your point, Tim, on the water wastewater, the biggest problem with the SOV is normally it's recorded as one entry when they've got an addition to a plant. Well, the addition to a plant process, is going to include not just one structure, it's going to include a lot of different things. So, being on-site helps us fill in the blanks on what's at each physical address and get a sense that everything that's out there is scheduled properly when we've completed our evaluation. And then recently I've done a lot of correctional facilities. And one of the things that's really important for correctional facilities is the fire systems. They are so critical there and the underwriters really need to know what they've got in place and installed. So that really helps them know how that building is being properly protected, whether or not they have a public or private water supply. Do they have fire suppression in the kitchen? Do they have onsite water tanks? Those are some of the simple things that they're looking for. And as part of the secondary information we collect, we're able to capture that and provide that back to them to help them out.

Carleen Patterson (19:25):
Well, that is really helpful because you're right. We do run into a lot of very unique things and it just raises the question to me as Justin said, there are multiple appraisal firms out there and what can a public entity include in their solicitation process to make sure that they're going to get an appraisal company that can address some of these unique exposures? Is there anything that you've seen over the years that should be included to help raise the level? So, they're hiring the right firm, I guess.

David Werch (19:57):
So, from our perspective, of course, when we see these requests, we have to peel back this onion and see what they're really looking for. And we always would love the opportunity to actually speak to the underwriter or at least see, or get a sense of what the underwriters really looking for. So, we know how to better provide a solution for them. And I think that has always been the challenge, but to get to that point, then we can actually craft the proposal and provide the solution that what they truly ultimately need down the road. If you're just providing COPE data, which is great to get it updated, but the underwriters still going to assess some additional risk premiums because there's still some unknowns they're not familiar with, or they can't identify even after a firm has done the work. Yeah, we've helped them in those initial construction data points that are going to be valid for the next three to five years. But if they wanted some additional things like in Texas, for example, for wind we have all the roof data elements captured because we're in a wind area here. Those are the things that we want to do. So, we're providing a solution that captures something that's going to be useful for a long period of time. It gives us the ability to update it if we need to because we've done it correctly the first time. And of course, then we all have to make that work within that budget.

Carleen Patterson (21:07):
That's a good point. And we work with public entities, Justin and I do, and they're always very budget conscious and there's so many different demands on the funds. So, we're often looking at where can the funds be used that are going to make the biggest impact on our submissions and on ultimate pricing. We've seen clients who've said, well, just increase the schedule of values by 5% across the board. And over time it makes it very ineffective because certain values are getting increased when they shouldn't be, other ones maybe aren't getting increased enough, depending on cost of concrete costs, costs of steel, costs of labor and whatever it is. So, are there any tricks of the trade that would be more budget-friendly? So instead of just blanket increasing, are there things that a public entity can do to work toward that updated schedule of values through a process or something, or like I said, tricks of the trade.

Tim Kolgen (22:05):
I think what David said before involve your underwriters and your brokers let's collect the data that they want to see. Let's look at the locations, they have questions on, let's do what they want. So, let's just not collect all this data. And then they only use half of it. Let's really see what they want to use and get the information to them. That's a big one, involve your evaluation partner in those conversations with the underwriter and the broker. So, they have their input and then value also start the process early. I know property appraisals are usually come up right before renewal. The broker saying, my data's not so good. I need our appraisal. It takes weeks to schedule. It takes weeks to do it. So, start it early. No one wants to be in a rush situation. And sometimes the fee, if you do have to do a rush job could be increased because of that.

David Werch (22:50):
So, start early. Also, if it's a big risk pool or a city or a county state that has a lot of properties and they're eventually going to be appraising, all of them, group the buildings geographically. I know everyone likes to start with the highest exposures, the highest risks, which are usually the most expensive buildings, but if you're going to a site, get all the buildings in that site. So, you don't have to go back to that location in the future to get the smaller buildings. It's more, cost-effective just to get everything there at once.

Justin Swarbrick (23:18):
And those are all great points. And I know we're getting ready to wrap up, but one of the things that's been in the media the last six months, I guess, is the cost of lumber and just the cost of goods. How is that translated into valuation? Or is it a wait and see approach? Or is there some real material changes to how you're approaching your valuation for public entities?

David Werch (23:42):
So, when I'm reviewing projects, especially if it's something that's been recently completed in the last year or two years, obviously we're trying to request either the AIA document or something specific from our client that can kind of provide that support that we need to have. We use data sources that are out there that vide their updates on a monthly and then quarterly basis. But there's usually some lag time between that. These contracts that have been in place to build these public entity buildings. They set up those contracts 3, 4, 5 years in advance. And although that they've got an idea on the budget process, there's always things that happen during a construction project that they need to manage. And so, by getting those AIA and the other construction documents, it gives us the ability to kind of look at that, see the things that are truly part of the construction, the hard construction, the physical construction of the building, and separate from the other things that are out there. So, we try to manage all these different things to get to the proper conclusion but we need some assistance and we ask for it when it's needed.

Carleen Patterson (24:43):
So, how often do you think evaluation should be done?

Tim Kolgen (24:45):
Industry standards, typically every three to five years for a on-site valuation when things are easy and the market's really easy to place properties like it was maybe a few years ago, you could get away with five years, maybe a little bit longer, especially if you haven't had done any construction, no additions, no remodeling. In today's market where things are changing, costs of materials are skyrocketing, labor shortages are increasing. These buildings are hard to place right now. Property is hard to place right now. So, you probably want to do it more on the three-year term. Carriers want to see updated data, painting that picture for the underwriters to see. Make sure that you're a good risk and let them know. So quality updated data is better than old. Outdated data really depends on the market, three to five is a good term to follow.

David Werch (25:34):
I think Tim, if we've done some work for a client, we usually provide an updated service in between those years as part of our service. So, if we've done the onsite, we can also assist with doing an update and provide those interim years with some valuations that are going to be consistent with what's been going on in the marketplace. So yeah, that's a true point. And I think as you know, with the public entity who is limited on funds, they always are maintaining their oldest buildings because they need to use them. They can't just knock them down and build new construction all the time. So, we know that there's a lot of costs that's out there and we want to make sure we're capturing it through the site visit. And five-year window is probably pushing it on the public side. Although we've seen them go way longer in our experience, but being selfish as valuation people, would love to do them every three to five, for sure.

Carleen Patterson (26:20):
Well, thank you very much for joining us, Tim and David, we really appreciate it. And as we work our way through 21’ into 2022, we are going to continue providing information and resources that can help you navigate this challenging insurance market. Hope you enjoyed this episode of In the Public Eye.


Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.