Many Homeowners Lack Adequate Insurance to Cover Disaster Losses
When disaster strikes, many homeowners may discover a harsh reality: they don’t have enough insurance to cover all their losses. This is becoming a major problem, as highlighted by recent events like the devastating wildfires in California and the hurricanes that have ravaged the southeastern United States. Spotlight on America correspondent Angie Moreschi explores why this could pose a significant problem for you.
The Underinsurance Crisis
In the wake of Hurricane Helene’s impact last September, residents near Asheville, North Carolina, faced unprecedented flooding. One resident recounted the harrowing experience: “The water started coming in the house… We got out on our roof. And we spent four hours on the roof.” Homes were left submerged in as much as 25 feet of water. Many lost their lives. Six months after the hurricane, many are discovering they did not have sufficient insurance to cover their losses. “No insurance on flood insurance. We had to depend on FEMA,” one resident explained. “Of course, it’s not enough.”
A recent study conducted by the University of Colorado Boulder revealed that three out of four victims of the 2021 Marshall Fires, near Denver, were underinsured. Many had insurance, but it was inadequate to rebuild their homes.
“Most people are surprised by this,” stated Emily Gallagher, co-author of the study and assistant professor of finance at the University of Colorado. “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 own experience, where she and her family nearly lost their home to the Marshall fires, spurred her to investigate why so many homeowners are underinsured. She realized she and her family were in this position as well before the fire. “What we’re finding is that homeowners seem to pay a lot of attention to premiums and less attention to coverage limits,” Gallagher noted.
The Human Costs of Inadequate Coverage
Doug Quinn, the executive director of the American Policyholder Association (APA), a homeowner’s advocacy organization focused on insurance issues, knows firsthand the impact of inadequate coverage. His New Jersey home was severely damaged by Hurricane Sandy in 2012. “It was devastating. It changed the whole course of my life,” Quinn shared. “It took me seven years to get back home and I was fully insured.”
Following recent disasters, Quinn and his team have assisted victims struggling with the realization that their insurance is insufficient. “It’s a shock because many people sort of have this belief that I have insurance, everything’s going to be okay,” Quinn said.
Tips for Homeowners
Insurance policies can be complex, so it’s crucial to take the time to thoroughly review your policy and understand what it covers. Be sure to check for any changes in coverage when you receive your renewal notice each year. Quinn advises, “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.”
When determining your policy limit, estimate the rebuilding cost, not the market value of your home. Also, consider inflation in labor and supply costs that can drive up rebuilding costs. He recommends shopping around and comparing coverage options between different insurance providers.
Gallagher found that many homeowners, including herself, weren’t following these recommendations. “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,” she said.
Homeowners should be aware that cheaper insurance can expose them to financial risks in the event of a disaster. Gallagher stated, “When they’re getting that lower premium, it’s partly because they’re being underinsured.”
Online tools can help you estimate the rebuilding costs of your home. Keep in mind that flood insurance is usually a separate policy. According to FEMA, while flooding impacts 99% of U.S. counties, only about 5% of homeowners have flood insurance. Underinsurance can lead to devastating consequences, including debt and the use of personal savings. Quinn explained, “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?”
Understand the different levels of coverage in your insurance policy, including replacement value and actual cash value. Also, be aware of the liability coverage included in your policy, which protects you against lawsuits. Gallagher hopes her study will boost awareness of this problem, so homeowners can better prepare for the future. She noted, “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.”
