September 14, 2016
How did my home get so under insured? Why underinsurance matters. Where under insurance begins.
Near and Dear to my heart is home rebuild coverage amounts. I am constantly amazed at how often I see home insurance policies written with peanut coverage amounts. Amounts that should make a licensed insurance agent squint and scrape at the computer screen. Often I am requested to competitively quote out against these policies. It can be difficult to inform a client that they are extremely under insured and decline to participate with the requested coverage limits.
According to: “United Policyholders, a consumer advocacy group…75% of California homeowners affected by the 2007 wildfires in San Bernardino and Riverside counties were underinsured by an average of $240,000.” The average was $240,000. The average. Is your home underinsured by that amount? If its in Marin, Sonoma, San Francisco, the East Bay, San Jose it might well be more than just two hundred and forty thousand dollars. Maybe $340,000.
But just how did your home insurance policy become so underinsured? Below is a list of just ten possibilities. Likely you and your insurance policy may have been affected by more than one.
Do any of these sound familiar? If you are concerned or worried about any of these, read below to find out what can be done to counter these issues moving forward.
“75% of homeowners… were underinsured.”
The original sin of many homeowners insurance policies often is inadequate Coverage A amounts. Often this is a function of laziness or price. According the California Department of Insurance, Agents are required to take a “Home Valuation” training course. Insurance agents and Insurance companies will typically utilize programs to assist in this arena. I personally find the “software programs” to be less than perfect. However at least they are starting point for a discussion. Occasionally its just a function of the system for purchasing and buying home insurance in the United States. However much the onus sits on the insurance agent an equal amount of responsibility sits on the owners of the home. As the owner of a home, you need to understand your insurance policy. In understanding your insurance policy you must understand the coverage amounts. My advice to potential clients is to sit down and attempt to figure out how much coverage you would need to completely rebuild your home. Ask a contractor in your neighborhood what rebuilds are going for.
Guaranteed replacement cost coverage in California essentially no longer exists. Yes there are a few holdouts, but I doubt they will last much longer. In other states it may. Typically the most coverage you are likely to see anymore is 100% of additional coverage to the coverage A. In other words 200% of what Coverage A says. I realize that this is confusing. In general this is the coverage that you should seek if you can afford it and get it. In general insurance companies in California offer 25% of coverage A extended amount. This is rarely enough. Likely you can request (via endorsement) a 50% amount. For certain good insurance companies this is as good as it gets. If you do not have the option for guaranteed replacement cost, seek out at least the 50% endorsement.
Inflation Guard is an endorsement that allows your coverage A to incrementally and automatically increase each year. I like this feature where available. Certainly I have seen instances of overcreep over the years where a policy has incremented up too high. Generally we can correct that. Although not a perfect feature, it is generally a good selection to make.
In the instances where clients do not want it or when it is not available it becomes more important than normal to review the Coverage A amounts, Extended Endorsement, and Ordinance and Law each and every year. As you can imagine, its far simpler to opt for the endorsement.
Why clients don’t contact their insurance broker when they do a remodel I do not know. Perhaps they are concerned about getting their existing home insurance policy cancelled because of it, perhaps they would just rather not know, if they are covered for their contractors. None the less, it is a good idea.
First off, you want to make sure your home still has coverage. Second there is a bit of advice most insurance agents will dispense when hiring someone for remodel work. Third and Last, the final project work likely will make your home rebuild value more. Often times this work can easily slip into your current rebuild amount, especially when you are dealing with Coverage B amounts, such as work done for Jacuzzis, fences, and the like. Other times, it may require you to up your coverage A some. However look on the bright side, sometimes remodeling work, if it focused on some of the house systems can actually lower your rate. An example of this might be if your house pressurized plumbing system was fully changed out from Galvanized Steel to Copper. This typically would not only lower your insurance rate but would also increase the pool of potential insurers.
Why does it matter if your home becomes more and more behind on building codes is hard to explain. Lets just say that in today’s modern society, a home is merely inspected when it is built, rebuilt, gets a remodel, or needs a permit. Whenever you need a permit, the codes that you face will not necessarily be limited to the work originally needed to be done. In other words, you might just need to replace the tile. But the inspector may not be able to sign off on the tile, because your plugs in your bathroom are not GFCI compliant. Now you need an electrician to replace some electrical when you thought all you needed was a tile expert. Think this is crazy? It is, but it happens all the time in the permitting world.
There is a way to solve this, though for insurable events. This is called Ordinance and Law coverage. This is available via endorsement. Standard coverage amount is usually 10%. However you can up these amounts to 25% or even 50%. A more full example is where the second floor of a house is burnt enough to make the house unlivable. Permits could require that the whole house be leveled and Rebuilt from scratch. You could find yourself having to pay for a third of the total rebuild amount amount yourself to move back in.
As you added granite to the new kitchen countertops and choose marble for your laundry room countertops, your home takes on a much more expensive rebuild requirement. This is obvious. However clients rarely think to inform their insurance agent. Often the year over year improvements don’t seem like a lot by themselves but measured in a decade can be a significant jump.
It can be difficult to suggest at what point you should contact your agent. Perhaps its two years in, perhaps its five. Each client insurance agent relationship is different.
The principal of Demand Surge is seldom discussed but often uninsured for. Basically it will cost more to rebuild everyone’s house on the block at the same time. Why? Well wood will be more scarce and will come from farther. The labor pool will evaporate overnight. Local Contractors will be booked out for years to come. Lastly, you will just not have that much negotiating power when there is so much devastation.
Ideally demand surge should be calculated within the Extended Rebuild Endorsement coverage. Often though, I find it is forgotten or ignored by insurance agents. Either to keep the Coverage A low and increase their odds of keeping your insurance business by presenting you with a low premium or from lack of understanding on their part. Either way you want wiggle room with your total coverage amounts in the event of a large scale disaster. Plan for it. Insure for it.
Why and how a building ordinance requires demolition of your home is pretty hard to explain to consumers. Lets just say that some communities have rules that say that if a certain percentage of your home becomes damaged through a peril, than you cannot just rebuild the broken portion. You must scrape the entire structure and rebuild the whole house from scratch. Sound Crazy? Well its true in some towns and areas. To protect yourself from this – clients should consider affluent insurance carriers and really build up a good amount of Building Ordinance and Law Coverage.
Lets face it, things are more expensive pretty much each and every year. Wood, Steel, Copper, the list goes on. In addition to the materials cost, hiring people keeps getting more expensive as well. There is no way around it in American society. As discussed previously in this piece, inflation guard should be able to assist you with this as an issue. However even with inflation guard, you will still want to periodically reestablish a coverage A rebuild amounts. Speak with a licensed and bonded AND experienced contractor around here. Likely you will have an issue finding a contractor with experience building entire homes from scratch, mostly because so few homes get build in Marin County these days. But at least you should be able to find one with experience in major remodels.
“Has the online insurer been all the way up Summit Drive in Corte Madera?”
Potential clients may read this and be put off, but I cannot close this article without pointing to this as one of the potential sources of the issue. If originally when you purchased your house, you bought a simple cheap online insurance policy then you may have originally been under insured from the start. As to why online insurers continue to pump out under insured coverage A home insurance, I can not say. However, I can tell you that increasing your coverage A coverage amounts is extremely important. I battle with insurance companies about home rebuild valuations almost constantly. Ask yourself this question when reviewing a rebuild amount from an online insurer. “Has the online insurer been all the way up Summit Drive in Corte Madera?” (There is also a Summit Ave in Mill Valley that is no tip toe through the tullips to get up as well.) Do you think its possible for an 18 wheeler to deliver wood to the homes near the top of that hill? I can barely drive my SUV up to the top, barely…. The transportation costs to deliver material to those homes will cost many times the typical delivery costs. You, as a reader, may not live on Summit Drive, but there likely is something that is almost just as unusual for your Marin County home as well. Your home may be behind a sea wall. Your unattached pool house may be worth more than your main house. Your open pier home may be more stable than a more traditional crawlspace.
Sources: United Policy Holder: http://www.uphelp.org/library/resource/your-home-underinsured-8-key-points
Many of my insurance articles were started on a scrap of paper. This one was not. This blog piece was literally 90% written in front of the computer in one fell swoop after receiving a bid request for an insurance quote. The owner of the home lived out of state. They were not fully aware of the costs to rebuild homes in the San Francisco region.
Kindly read our full set of disclosures. Reading about insurance soley online is not a sufficient to make insurance decisions. Please speak with a licensed and insured specialist in your jurisdiction.