Chances are, if your home were destroyed tomorrow, your insurance company would only pay for part of it.
According to national surveys, 60% of all homeowners are underinsured. And not just by a little: CoreLogic estimates that some homes are underinsured by as much as 60%, and the average insurance policy falls short by 22%. The Connecticut Insurance Law Journal pegs the “protection gap” as closer to 80%.
As a result, many insurers are taking a harder look at construction costs and other factors that can affect potential underinsurance, with an eye towards helping homeowners make better decisions.
Why are homes underinsured?
Many homeowners base the amount of coverage on the price of their home. That seems logical. Shouldn’t a home that cost $400,000 be insured for $400,000? The mortgage lender is fine with that amount, so what’s the problem?
The problem is that the mortgage lender cares about protecting its investment, not yours. If you borrowed $350,000 to buy a $400,000 home that carries $400,000 of insurance, your mortgage lender will be paid if your home is destroyed.
But you probably won’t be so fortunate. It may have cost you $400,000 to buy your home, but the cost to rebuild it in your area could easily be more. If rebuilding requires $450,000, you’re on the hook for the extra $50,000. If you only purchased enough insurance to cover the mortgage amount, the financial hit is even worse.
Because construction costs have been increasing far faster than inflation (5.8% a year for the last few years), many insurance policies haven’t kept up. And, in an area where a disaster destroys many homes—such as wildfires in California or hurricanes in Florida—construction costs can double almost overnight due to overwhelming demand.
Often, too, homeowners upgrade their properties or put on an addition. If the insurer isn’t informed and doesn’t adjust the property insurance coverage, the shortfall becomes even greater.
How to protect against underinsurance
To protect against underinsurance, you need to know three things:
- The square footage of your home
- The average cost of construction per square foot in your area
- Any materials or features in your home that will affect the cost to rebuild
A good insurance agent/broker should be able to provide accurate construction costs for your area. But they won’t know about the pressed-tin ceiling, hand-carved wainscoting or other features that are expensive to replace unless you tell them or they inspect your property.
Our proactive approach
At City Building Owners Insurance, we employ three strategies to help our clients get the right amount of protection:
- We monitor construction costs and trends in the area
- We perform a comprehensive, annual review of every policy to match coverage with costs
- We educate clients about replacement and construction costs
Remember, the market value of a home is the price that both buyer and seller think is fair and reasonable. That value can be affected by the quality of schools, proximity to a park, a nearby highway or other factors that have nothing to do with the cost to rebuild.
Insurance that will completely pay to rebuild your home might cost a little more. But it could save you from an expensive disaster.