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Homeowners – Are You Underinsured?

About two out of three U.S. homes are underinsured, according to a 2008 survey by Marshall & Swift/Boeckh LLC (MSB), a leading provider of building replacement cost data. Based on this new data, the average homeowner’s policy only insures the home to about 82% of the projected replacement cost of the home. Over the past decade, this point has been driven home as the U.S. has endured hurricanes, wildfires, and tornadoes.  Throughout the course of natural disasters, thousands of homeowners were left without enough coverage.

Although the study did not show results regionally, nationwide the average policy falls 18% short of the projected cost to rebuild the house. Put in other terms, the owner of a house insured for $200,000 would be short by $36,000 of the funds needed to rebuild, if the averages held true.

Why do thousands of Americans find themselves in this predicament?  The most common reason for all of this is quite innocuous: homeowners often forget to update their policies.  For instance, suppose a homeowner decides to put an addition onto their home, which would drive up the value of the property beyond the stated policy limits.  If the home improvement is never reported to the insurance company, no additional coverage is added to the policy. Additionally, rising construction costs and ever-changing building codes are raising the price tag to rebuild.

To avoid this problem, homeowners should re-assess policies as they renew each year. If a homeowner suspects a change in the value of their home, this suspicion should be communicated to his or her insurance agent.  Although not every homeowner wants to insure to the full replacement cost of the home, this possibility should at least be examined and considered.

Is Your Home Properly Insured?

Here are some tips to help you evaluate your homeowners’ insurance:

  • Understand what your policy does and does not cover.  Remember that  just because your bank requires your policy to cover the mortgage at a minimum, this does not mean your insurance should be based on this amount. You need to insure your home, not the mortgage on your home.
  • If available, consider adding an inflation guard to your policy.  Although this will cost extra money, it will help offset the rising cost of rebuilding, should disaster strike.
  • If building codes change, which they inevitably do over time, you will most likely be required to rebuild according to the new laws. The older the home, the more expensive it will be to bring it up to code. In most cases, policies will not pay for these extra costs. An “Ordinance or Law Endorsement” can help pay these hidden costs.
  • Talk to builders in your area to get an approximation of replacement costs. The going rate per square foot for new construction should be considered in estimating replacement costs.  Current appraisals are also an excellent source to utilize.