The Value of Things
For most types of insurance – auto, fire and natural disasters, etc. – the insurance agent must eyeball whatever is being insured. This socalled inspection is a requirement for the agent to certify that the vehicle, property or items are in good shape. It is not to appraise; the National Insurance Institute (INS) forbids agents to appraise anything. And INS does not appraise anything, ever, until there is a claim.
INS requires that the applicant establish the value of whatever is being insured. It is inefficient to have insured values too high or too low. So what are the ground rules?
Automobiles. There is no official “Blue Book” to establish the values of vehicles for insurance purposes. The rule book puts the onus on the client to establish the value, which should be based on market value – in Costa Rica, of course.
If you didn’t recently buy the car, there are several ways to go: 1) Check out the classified ads in a local newspaper and see what cars similar to yours are going for. Shave off a tad (people always ask for more than they are expecting to receive) and use that. 2) Call up your friendly dealer. A lot of my clients use this system – but I don’t trust it. I suspect that when dealers think you are going to trade in your car, they appraise low – but if they learn that you simply want to know the market value, they “bid” high, to make it appear that their marque does not depreciate quickly. 3) The Web site www.crautos.com incorporates an unofficial Blue Book. As it supposedly has more than 4,000 used vehicles on offer, and has a huge volume of vehicles bought and sold, I think this Web site is the best bet.
And take note that INS does not adjust the insured value on auto policies year by year to reflect depreciation; it is up to the client to recalculate. Your agent should help.
The consequences of insuring too high or too low are not nice. Too high, and you’re throwing premium money down the drain. If, for example, your car were stolen, it would be INS’ option to pay you, or to replace the car with one just the same as the one that was lost – so they would replace the car, and you would have been paying extra premium on the extra value.
On the other hand, if you establish the insured value lower than market, in the case of a claim you would certainly get what you paid for – they would pay the claim for the stolen car based on the insured value. If an underinsured car were to have an accident, INS would apply coinsurance to the cost of the repair. Coinsurance? Read on – an explanation is forthcoming in the last section.
Insurance for buildings: homes, condos, apartments. In regard to the fire and natural disasters policy, the insured value should be based on the estimated rebuild value, less depreciation. Depreciation should be based on 2% per year for combustible structures, and 1% for noncombustible buildings – starting at their date of completion or the date they were last refitted.
This is simple if the building is fairly new; you take the amount you paid the contractor, minus the costs of earth moving, landscaping, architectural and legal costs, and there you have it. But what in Heredia do you do if the building is several years old, and you just purchased it?
You have several options: 1) A formal appraisal. Don’t! Formal appraisals are biased to come up too high – and they also cost the Earth. 2) In the neighborhood surrounding your property, look for a an empty lot with a “for sale” sign, call up and find out what the going rate is per square meter. Multiply by the dimensions of your land, and subtract from the price you paid – and you should come up with a pretty fair value. 3) Everyone knows a friendly builder. (I think builders are the friendliest blokes on the planet.) Invite him over for a glass of something, and ask him – in an aside, of course – how much construction “of this type” is going for nowadays, per square meter.Multiply the figure he gives you by the area under roof of your building, and there you have it.
What if you go too high or too low? Too high is not a good idea. The fine print in the policy contract says that if there is a claim, it is INS’ option to pay you or to do the repair itself, so it would probably favor the second option. As a consequence of paying too high a premium, you would have your building repaired or rebuilt by the insurance company.
Too low? When the INS adjustor visits the building to assess the damage, he forms an opinion as to the value of the entire structure. That value is compared to the insured value, and a ratio is established.
Suppose, for example, that the adjustor decides that the estimated rebuild cost of the building is $100, but Joe insured the building for only $70. This means that, implicitly, Joe has shown himself to be willing to selfinsure for 30% of whatever happens to that building, so INS would pay the claim based on 70% of the repair.
This is called coinsurance (“coaseguro” in Spanish) because, in our example, both Joe and INS are each “coinsuring” a certain percentage. Some people still believe that if you insure a building for $70, the insurance company will pay for repairs up to that amount – disillusionment is around the corner.
As far as my poor intellect tells me, this is a no-brainer: You set the insured value as accurately as possible. If you set the value a tad too low, it is the lesser of the evils; you will have to suffer some coinsurance if you have a claim, but at least you get what you paid for. Still, some of the reasons people give for over-insuring defy logic:
“If there’s a claim, I don’t want a deductible: I want to be paid for everything.”
“If the house falls down, I’ll go back to Wisconsin, so I won’t want the place at all, thus I will insure what I paid for the entire property, including the land.”
“The realtor told me this is what the property was worth.”
“In the United States, a comparable house would be worth much more, and I want the option to be able to rebuild in Florida.”
The writer’s purpose is to give you a better understanding of insurance in Costa Rica. The opinions and viewpoints are his, and do not necessarily represent the official position of the National Insurance Institute (INS). For more information, visit www.insurancecostarica.info, call David Garrett at 2233-2455 or e-mail david@InsuranceCostaRica.info.
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