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Many homeowners don't know they're underinsured until it's too late

January 22, 2025

Homeowners seeking to rebuild their homes after a devastating disaster may be surprised to find themselves in another conundrum their home insurance doesnt cover enough to help them move on with their lives and rebuild their devastated house.

They are underinsured.

Researchers who looked into the underinsurance phenomenon found that most homeowners lack enough coverage to rebuild their house after a total loss. By exploring the plight of 4,859 policyholders from 24 insurers in Colorado, where the December 2021 Marshall Fire took down more than 1,000 homes and 30 commercial buildings, researchers found that underinsured homeowners were more likely to sell off their home than rebuild it.

Wildfires in Southern California have already claimed close to 16,000 structures, according to the California Department of Forestry and Fire Protection, affecting people across various income streams and backgrounds. And with construction costs creeping up, it is unclear what rebuilding will look like for residents.

Most people dont have the money in the bank to rebuild a house, said Mark Friedlander, corporate communications director for the Insurance Information Institute. It makes a tragedy even worse.

Friedlander reminds that most mortgage companies require homeowners to carry adequate insurance, and consumers cant intentionally buy less required coverage. But most homeowners Triple-I surveyed in 2023 also didnt anticipate having to experience a severe weather event.

According to the survey, 25% of homeowners didnt believe their residence would be impacted by climate risk, and 42 percent said they didnt believe theyd be impacted within the next five years. And only four in ten homeowners stated they completed some preventative measures on their homes, which could help mitigate damage and reduce cost.

Carmen Balber, executive director of Consumer Watchdog, said the wildfires impact in Los Angeles will be massive, and while underinsurance is always a problem, she suspects it will only worsen in California.

The whole point of insurance is to make our communities whole in times of crisis. If the policies arent doing that and were still paying through the nose for them, then what are we paying for? she said. It will be really important for regulators and potentially lawmakers to step in and make insurance companies meet their obligations.

Making sure youre not underinsured

Sharon Cornelissen, housing director at Consumer Federation of America, said its getting more difficult to get insured and shop around for affordable insurance options in disaster prone areas as insurers pull out. And insurance prices can vary year by year.

Its good for everyone to reexamine their coverage every now and then, to ensure theyre still fully insured for both the replacement value of their home and their property within that, their possessions within the home, Cornelissen said. Both should be covered by their policies.

Cornelissen provided important tips for consumers who need to recheck or shop around for insurance policies:

• Ask what the policy excludes Some policies do not cover flooding, wind events, or fires, and consumers may need to look at supplementary policies to help fill the gap
  

• Understand the high deductibles While a higher deductible can mean a lower monthly payment, it has to fit the consumers budget and comfort so that it doesnt become a problem once an event occurs. Cornelissen also reminds that the value of the home is not linked to property value, but to replacement value which is how much it would cost to rebuild the house in the case of total destruction. She advises that consumers check if they are covered for the full replacement value of the house.
  

• Shop around for the insurance Even if a broker offers the best price on insurance, there may still be limitations. Compare prices and see if it is a good value for the protection you need.
  

For homeowners recovering from a disaster, Cornelissen also advises they take advantage of help from The Federal Emergency Management Agency, as they may qualify for additional help when they discover they are underinsured.




Photo Credit: Consumer Affairs News Department Images