The Majority Of Homes In The U.S. Are Underinsured. Is Yours?

The Marshall wildfire that devastated parts of Boulder, Colorado, in early January has left many homeowners reeling not only because they lost their homes but because they are discovering their home insurance won’t cover the costs to rebuild.

According to the Insurance Information Institute (III), the average underinsurance amount for U.S. homeowners is 23%, though some homes are underinsured by 60% or more. Another research group, CoreLogic, states that 64% of U.S. homeowners don’t have enough insurance to rebuild their homes and are underinsured by an average of 27%.

Why Is This Happening?

There is no one cause for this phenomenon, but experts point to the following as the leading causes:

Property is undervalued.

Many homeowners will insure their properties for the cash value of the home, not the replacement value.

Homeowners misunderstand what’s covered.

The difference between the cash value and replacement value can be vast. If a homeowner insures the home for cash value thinking it will be enough to rebuild, odds are out-of-pocket expenses could exceed the cash value received.

Failure to account for construction cost increases/inflation.

Materials and labor prices fluctuate daily. Policies should include a percentage cushion written into the replacement costs to ensure adequate coverage.

Homeowner failure to report upgrades to the insured property.

Additions and upgrades to kitchens and baths will increase a home's value and replacement costs. Failure to report these to your insurance provider can mean the difference between having your gourmet oven replaced or purchasing a new one out of your pocket.

An increase in catastrophic events due to global warming, adding pressure to the supply chain.

Where Rebuilding Costs Stand Today

For the homeowners in Boulder, inflation and high demand have caused a 24% increase in construction costs since the start of the pandemic. Further increases are expected due to the widespread destruction of the fire.

The following chart shows how shipment delays, production cancellations, and labor shortages have affected construction across the nation:

This chart shows how these delays, demand, and shortages have dramatically impacted the costs of materials since the pandemic started:

While some market analysts are predicting a return to more normal prices by the end of 2022, others are looking at China’s reinstated COVID isolation policies due to Omicron and rising inflation as reasons a recovery may not occur until well into 2023.

How To Prevent Being Underinsured

Most homeowners fulfill their mortgage company’s insurance requirement and are done with their policy until it’s time to renew. While your bank may be satisfied, you’re probably better off taking the time to dig a little deeper into your policy. Is your home insured for replacement or cash value? Are your furniture and appliances adequately covered? Do you have all of the supplemental coverages pertinent to your home, such as equipment breakdown, sewer line, or water back-up?

At Mutual Assurance, being underinsured is not an issue. We insure your home for its replacement value, not its cash value, and have an automatic 25% cushion for construction costs built into your policy. Your premium is also adjusted annually to account for inflation and material cost increases to ensure you have all the coverage you need.

For your part as a member, it is important that you provide us with the most up-to-date information on your home. If you have made an addition, updated a kitchen or bath, or made any other improvements to your property, please let us know so we can factor that into your policy. This way, you’ll have the peace of mind that should a catastrophe occur, you’ll know you can rebuild with confidence that there is very little chance you’ll be underinsured.

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Sources: bcdnetwork.com, wsj.com, kin.com, insurance institute,corelogic.com,