Last week, someone sent me a link to this article:
Family that lost home in Marshall Fire grossly underinsured
According to the article, the Colorado couple bought their home for $580,000 but insured it for only $240,000. Now they realize they are grossly underinsured for their fire loss. The question is, how can this happen?
Yes, in some communities or neighborhoods, a big part of the purchase price of a home is market or land value. It is entirely possible that the replacement cost of a house can be less than half the market value of the property. However, that doesn’t appear to be the case here.
One would think that, among the parties involved in the insurance process – insureds, insurer, and if an agent was involved, the agent – someone would have questioned the large gap between purchase price and homeowners Coverage A limit.
If there was a mortgage, wouldn’t the mortgage holder have red-flagged this? Or did the couple pay case or, perhaps a large deposit such that the mortgage amount was $240,000 or less?
The insurer is identified in the story and my first thought was that the insurer needs to reimagine their “You only pay for what you need” sales pitch. Maybe, “We only pay for what you buy” or “You only pay for what you mistakenly bought.”
But, again, we don’t know WHY this home was underinsured since the article was more of a human interest story than any kind of investigative journalism.
If I learn more about the details, I’ll update this article. In the meantime, industry valuation experts have repeatedly cautioned that a large percentage of buildings, both personal and commercial lines, are underinsured, often by significant amounts. This is another cautionary tale.
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I live close to Mayfield KY. We didn’t have any total losses. Many people are underinsured. Some are underinsured because they are with carriers who write the home limit for market value, around here replacement cost is much higher than market value.
But some who had solid limits even with extended replacement cost are underinsured due to building materials inflation of 50%-60% in the last 12+ months.
Our local bank was underwriting new construction at $120/square foot around 12 months ago. They just increased to $200/foot. You can’t find a contractor to work. It’s a crazy time.
We sell guaranteed replacement cost on homeowners for blue collar homes and are pushing it hard right now. It’s an option…sometimes substantially more expensive. But it’s pretty awesome right now.
Underinsurance of homes in the US are particularly common.
Despite living 80 miles from this wildfire, I had not heard of this underinsurance atrocity. Unfortunately, disasters seem to be quite good at finding these more exceptional cases which usually result in litigation unless the documentation is clear that insured asked for lower limits. Unfortunately, these are the cases that the media picks up on and excites everyone early in the process.
News article is not clear about what happened. We will probably never know because this is the stuff of confidentiality agreements because the parties do not want this to hit news again. Really hard to fathom why such extensive underinsurance but a couple culprits come to mind based upon my prior involvement with wildfire recoveries and writing a couple policies in the Boulder area: 1) Virtually every costimator I have used is challenged by the replacement costs in Boulder that have unusually high market prices; 2) Boulder County building codes require green replacement which usually jacks up the reconstruction cost significantly; and 3) recent supply and inflation issues are likely not reflected in the estimator value.
I expect this recovery to be very challenging, contentious, and prolonged. Hope I am wrong…
“Underinsurance” or simply the “wrong insurance”? The only way to avoid not having enough insurance to respond to a loss is to have an “unlimited” amount of insurance. Most insurers offer (or should offer) a “Guaranteed Replacement Cost” endorsement. These endorsements require the homeowner to purchase an insurance limit consistent with the pre-loss current cost to build a similar structure (Replacement Cost) and pay a nominal additional premium for an unlimited amount of insurance.
In most cases, this type of policy should cost less than the current inflated “reconstruction cost” based policies. And if one insurer doesn’t wish to offer GRC coverage, maybe the homeowner should consider other insurers.
If an insurer doesn’t wish to offer GRC coverage, I suggest that insurer may not have the policyholder’s best intersests in mind. Who is better able to respond to potential post-catostrophic surge priced rebuilding costs, the insurance industry or Mr. and Mrs. Average Homeowner?