Many Homeowners Lack Adequate Insurance to Cover Disaster Losses
When disaster strikes, many homeowners discover a critical gap: They don’t have enough property insurance to cover all their losses. This is a growing problem, especially for those impacted by recent wildfires in California and hurricanes in the Southeast. A report by Spotlight on America correspondent Angie Moreschi investigates why being underinsured could also be a problem for you.
3 out of 4 Underinsured
Residents near Asheville, North Carolina, faced unprecedented flooding when Hurricane Helene hit their area last September. The aftermath revealed the harsh reality for many homeowners. Their insurance policies didn’t fully cover their losses. “The water started coming in the house,” one man told President Donald Trump at a news conference in January. “We got out on our roof. And we spent four hours on the roof.”
Many homes were left 25 feet underwater after the hurricane hit. “I didn’t think we were going to make it, but we did make it out,” another resident said, describing the harrowing experience that left so many trapped and more than 100 dead in North Carolina alone. Now, six months after Hurricane Helene, many are still recovering and realizing they didn’t have enough insurance to cover their losses.
“No insurance on flood insurance. We had to depend on FEMA,” the man continued. “Of course, it’s not enough.”
A recent study out of the University of Colorado Boulder found that three out of four victims of the 2021 Marshall Fires near Denver were underinsured.
Making matters worse, most had insurance, but they didn’t realize they didn’t have enough coverage to rebuild their homes.
“Most people are surprised by this,” Emily Gallagher, the co-author of the study and assistant professor of finance at the University of Colorado, told Spotlight on America. “It can be quite devastating. You’ve just lost your home, you’ve lost just about everything you have, and to realize that you’re going to be relying on charity.”
Gallagher’s research into the home insurance crisis began when she and her family nearly became victims of the Marshall fires.
“My family packed up, got everything in the car. We were about to evacuate, and you could see those flames from the back of my house,” she said, recounting the harrowing night. Luckily for her, the winds shifted, and the fire turned away, but many of her friends lost their homes. This motivated her research into why so many homeowners, including herself, didn’t have enough insurance.
“What we’re finding is that homeowners seem to pay a lot of attention to premiums and less attention to coverage limits,” Gallagher said.
Lack of Coverage Traumatic
Doug Quinn, the executive director of the American Policyholder Association (APA), knows the challenges of inadequate insurance coverage firsthand. He is an advocate for homeowner’s insurance issues.
“Nobody realizes they don’t have enough coverage,” Quinn told Spotlight. After his New Jersey home was severely damaged by Hurricane Sandy in 2012, he learned this lesson. “It was devastating. It changed the whole course of my life,” he said. “It took me seven years to get back home and I was fully insured.” This traumatic experience led him to found the APA.
Following the recent hurricanes in the Southeast and wildfires in California, Quinn witnessed, with his team, victims realizing they didn’t have enough insurance.
“It’s a shock because many people sort of have this belief that I have insurance, everything’s going to be okay,” Quinn said.
Look at More Than Premiums
Insurance policies are often complex. It’s critical to review your policy and understand what’s covered. Be sure to look for changes in coverage when you get your renewal notice each year.
“It’s not just the premium, which is the one thing everybody looks at, but there could be exclusions from coverage. There could be a change in your coverage,” Quinn said.
When setting your policy limit (the highest amount it will pay out for a claim), it’s important to estimate the replacement cost to rebuild, not market value; and consider inflation on labor and supplies, which can drive up costs. Then, shop around. Compare the same coverage between carriers. This is something Gallagher found many homeowners weren’t doing, including herself.
“All of the issues I’m talking about, I was subject to those exact same issues. I went with whatever the agent told me. I didn’t get any outside estimate of what it would really cost to rebuild my home,” Gallagher said.
Cost is always a concern with rising home insurance premiums nationwide, but Gallagher warns that cheaper coverage can leave you exposed in case of disaster. “When they’re getting that lower premium, it’s partly because they’re being underinsured,” she said.
There are online tools to estimate rebuilding costs. It’s a good idea to do the calculations when determining your coverage. Also, be aware that to cover flooding, you need a separate policy.
According to FEMA, 99% of counties nationwide have been impacted by flooding, but only about 5% of homeowners have flood insurance. This is a reality so many in North Carolina are just now discovering can have catastrophic consequences.
“They’re forced to make a new set of decisions on what am I going to do? Will I be able to rebuild my home? Do I have to just sell my property at a loss?” Quinn said, explaining the impossible situation so many recent disaster victims face. “You will have to go into debt. You’ll have to use your personal savings, your college funds for your children, your retirement money. Hopefully, you’ll be able to apply for some form of federal aid.”
Understand Your Coverage
Insurance policies have different levels of coverage based on what you choose. It’s important to understand the difference between replacement value and actual cash value.
Most policies cover replacement value for the structure of your home, up to your policy limit, but when it comes to contents, replacement value isn’t automatic. You have to opt for it. Instead of replacement value, some homeowners choose actual cash value, which is cheaper, but also subtracts depreciation. So, you will get less. Liability coverage is another portion of your policy that you must pick. It covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by your pets.
Gallagher hopes her study will help to raise awareness about the underinsurance crisis in America, so at the very least, homeowners can be better prepared in the future.
“They’re just learning after the disaster that they’re underinsured, which means they weren’t able to plan for it, and they didn’t prioritize things the way they might have had they realized they were underinsured,” she said.
