Homeowners Insurance - Are You Underinsured?

Sometimes it seems like Mother Nature is out to get us. Hurricanes Katrina, Rita and Wilma; the wildfires in South Lake Tahoe, Utah, and throughout the West; the flooding in Texas and Oklahoma; the tornadoes that ripped through Kansas—the list of natural disasters wreaking havoc on lives and homes is endless.

What if it happened to you? If your home were destroyed, could you afford to rebuild? The answer may depend on how long you have lived in your home, what it is made of, and how recently you updated your home insurance.

Mortgage lenders require homeowners to insure their dwellings at the time of purchase. Lenders require homeowners insurance to protect their investments; they want to be certain that they can recoup the loan amount no matter what happens to the structure. As time passes, however, that insurance amount may not be adequate for rebuilding purposes.

The costs of labor and materials are constantly rising, sometimes faster than the rate of inflation. Hurricanes Katrina, Rita, and Wilma caused shortages in lumber supplies, causing prices to rise by as much as 30 percent in one year. Used red bricks have become such a hot decorator item that they have doubled and even tripled in cost, leading “brick rustlers” to demolish walls and steal bricks in downtown St. Louis and elsewhere. Architectural and labor costs are on the rise as well. Building codes also change, requiring contractors to incorporate environmental and safety upgrades mandated by law into their plans. These upgrades can drive up rebuilding costs substantially.

Any improvements made to a home—adding on a room, remodeling a kitchen or bath, or upgrading windows and doors—also can drive up the replacement cost.

According to Marshall & Swift/Boeckh, a company that monitors property values for the insurance industry, 58% of single-family homes are not insured for the full cost of rebuilding them. On average, these homes are underinsured by 21%. This means the insurance would cover only about 80% of the cost of rebuilding. For example, the insurance company would pay only $240,000 toward the rebuilding of a home that costs $300,000.

Many insurance companies offer “extended replacement cost” on their homeowner’s policies. This allows for up to 20% more than the stated coverage to be paid toward replacement costs. Marshall & Swift/Boeckh takes this coverage into account when calculating underinsurance, however, so the insurance gap remains.

To avoid underinsurance, read your policy to see if your policy offers extended replacement cost coverage. If so, find out how much coverage you have. If you have been in your home for a few years and especially if you have made substantial upgrades to it, contact your insurance agent for an analysis of your home’s replacement cost. This could result in increased premiums, but the additional amount you pay will be well worth it should Mother Nature happen to strike.

An award-winning author of books for young adults, Bradley Steffens is a frequent contributor to online and print publications, including Broker Agent Magazine and the Los Angeles Times. His most recent book, Ibn al-Haytham: First Scientist, is the world’s first biography of the medieval Arab scholar known in the West as Alhazen.