The Hidden Risk of Underinsurance in California
SACRAMENTO, Calif. – The California Board of Equalization recently held a hearing to address concerns about the state’s revenue shortfall following wildfires. The investigation revealed a shocking truth: 50% of California homeowners are underinsured, leaving them financially vulnerable in the event of a disaster.
The issue stems from insurance companies using algorithms to determine coverage amounts. Experts, including law professor Kevin Kline, have found that these algorithms consistently underestimate the cost of rebuilding homes. Kline’s review of 62,000 claims showed that the estimated coverage was low 95% of the time, with an average shortfall of half the actual rebuilding cost.
“Everything we know is that people do want to buy enough. They think they have bought enough. And they only learn that they’re wrong after they’ve lost everything,” Kline explained.
The problem lies in the algorithms’ default settings, which often assume homes are being rebuilt in tract developments on flat land. This doesn’t reflect the reality for many California homeowners, particularly those in areas prone to wildfires or with unique property characteristics.
“These software programs, their defaults are, you know, building a tract home development in a flat area, when a lot of these areas don’t have those characteristics,” said Amy Bach, director of United Policyholders.
To address this issue, experts are calling for California to develop a universal rate calculator that all insurance sellers must use. “Underinsurance is the silent thief of irreparable financial harm,” said David Shaffer, a multi-line insurance agent. “Market competition will change when we’re all competing with the same building limit to begin with.”
The California Board of Equalization’s findings highlight a critical issue that affects not only homeowners but also the state’s revenue. As the state continues to grapple with the aftermath of wildfires, addressing the problem of underinsurance is crucial to ensuring that Californians are adequately protected against future disasters.
