After each natural disaster, too many people discover an awful truth: They don't have enough insurance to rebuild their homes.
Nationwide, 68% of homeowners are underinsured, according to a survey by insurance-services firm MSB, by an average of 18%.
That means someone whose house cost $200,000 to replace would find herself short by $36,000.
Where homes and rebuilding costs are higher, the problem can be even more acute. A survey by United Policyholders, a consumer advocacy group, said 75% of California homeowners affected by the 2007 wildfires in San Bernardino and Riverside counties were underinsured by an average of $240,000.
Trying to figure out the right amounts of insurance coverage, however, is a tricky, frustrating process. Your insurance company or agent may be surprisingly little help and may even steer you wrong:
- Many victims of Hurricane Katrina said their agents had told them they didn't need flood insurance when, clearly, they did. Courts ruled that insurers didn't have to pay for damage caused by flooding.
- Likewise, many homeowners who lost property in the 2003 San Diego County wildfires complained that their agents had used a computer survey that vastly underestimated the cost of rebuilding their homes. The survey, called Quick Quote, was part of a larger software package sold to insurers to estimate replacement costs and was later removed.
Homeowners often compound the problem by failing to report renovations to their insurers or by simply assuming their coverage is keeping up with inflation and replacement costs, which probably isn't true.
You might think insurers would err the other way, pushing folks to over-insure their homes. But that's generally not the case.
Lulled into complacencyInsurance analyst Brian Sullivan says the annual premiums paid on most policies are too small for insurers to spend much time doing a detailed assessment of customers' needs.
"If you ask most insurance companies what they're insuring -- how many hardwood floors, how many fireplaces -- they have no idea," said Sullivan, the editor of Risk Information, an industry newsletter. "It's only companies like Chubb that have (policies with) premiums in the thousands of dollars that will come out and appraise your home and everything in it."
Homeowners are often lulled into complacency because they have "guaranteed-replacement" or "extended-replacement" policies, which sound like they'll cover the rebuilding of a home regardless of the cost, said attorney Amy Bach of United Policyholders, the consumer advocacy group.
But true guaranteed-replacement policies are almost extinct, and virtually all insurers cap their payouts at 100% to 150% of the amount for which the home is insured.
How to ensure adequate coverageBach recommends consumers buy the highest cap they can afford and take the following steps:
Use Web tools to estimate replacement costs. Bach recommends AccuCoverage, an MSB site that charges $7.95 and walks you through a questionnaire that usually takes 20 to 30 minutes to complete. Another site, HomeSmart Reports, charges $6.95 and takes less time but offers less detail, Bach said. HomeSmart Reports gives a low and high estimate of what it would cost to replace your home, plus a standard cost of construction in your area, but it doesn't account for custom features.
Compare the estimate with your policy limits. You'll find them on the declarations page of your policy. If your insurer can't explain discrepancies to your satisfaction, start shopping for another insurer.