Successful management
Chris Burand, your article was a good one, again (“Good statistics are key to management,” AA&B July 2009). Thanks for your insights. The EBITDA section is particularly good, as it does make a real difference in the value of an agency. When principals wax poetic about how their agencies are growing, it is usually bogus. It is especially misleading when agencies are growing through acquisitions. You always have to evaluate the sustainable cash flow an agency generates in relation to the capital expenditure it took to generate it. In MBA-land, it is called FCF (free cash flow). Keep the good articles coming.
David A. Rocchio
DAR The Rocchio Agency
Carmel, Ind.

Imperfect cost guide raises questions
Barry Zalma's article (“Cost guide software isn't perfect,” AA&B July 2009) isn't clear on the second trial calculation of damages. Is the excess of policy limit and $240,000 (as given in the cost guide formula) or $310,030.57 (the bid from a general contractor)?

If a general contractor provided a bid of $310,030.57, why is the figure of $328,843 given as the “full replacement value” of their home? What's the difference between the “replacement value” and the “full replacement value”? What does “full” add?
Frank R. O'Connor
O'Connor & Assocs. Insurance
Dubuque, Iowa

Zalma response: To answer your question, the court probably added profit, overhead or interest.

In regard to “replacement” and “full replacement,” there should be no difference. The problem is replacement value is usually not based upon the cost to repair after a casualty like a fire or windstorm or flood, but to build new with all of the savings that occur when there is no need to demolish damaged parts of the building, when you can take on the economies of scale because most builders build more than one building at a time.

The full replacement value should be the cost to rebuild, using material of like kind and quality and a builder with the same skill as the original, enough to upgrade the building to the current codes, and taking into consideration the extra costs of building after a casualty or after a catastrophe.

They are words of art and should be taken as such, with the agent or broker advising his or her client to think about the worst-case scenario when purchasing insurance and that the agent or broker is not a person who can properly and totally calculate the cost to repair. The agent or broker can only create a guess based upon industry standards. If the insured wants exact numbers upon which he or she can rely, it would be necessary to retain the services of a competent reconstruction contractor to make an estimate.