How Disaster Strikes Twice For The Underinsured Homeowner

When Hurricane Katrina struck the Gulf Coast in 2005, winds of up to 174 mph caused $81 billion in property damage, and Hurricane Katrina made its mark as the costliest natural disaster in U.S. history. Homeowners were in for yet another staggering surprise when they realized their homeowners insurance wouldn’t cover the cost to rebuild their homes.

The occurrence is the result of being underinsured. Though it is a mistake far too costly to be so common, the percentage of homeowners who are underinsured now exceeds those who are uninsured.

Underinsured

In early 2011, a tornado destroyed Joplin, Mo., resulting in almost 17,000 insurance claims.

The Unsettling Truth

Hurricane Katrina was just one of 24 natural disasters in 2005, yet experts at the Insurance Information Institute cite it as evidence of the relentless threat these catastrophes pose on American homeowners.

“It’s devastating enough to lose your house to a disaster, but not to receive adequate funds to replace it just adds insult to injury,” said Dave Jones, insurance commissioner.

A survey from Marshall & Swift/Boeckh, the leading provider of property intelligence, found that almost two out of every three homes in America are undervalued and underinsured, putting the homeowner at risk of substantial loss.

Typically, these underinsured homeowners have only enough coverage to rebuild or replace less than 78 percent of their homes in the case of a disaster. In the scenario that a $250,000 home was entirely destroyed, this means the homeowner would be at a loss of more than $50,000.

A Common Mistake

According to Kenneth S. Klein, an associate professor of law who lost his own home in the Fire Siege of 2003, says this mistake happens all too often because homeowners are unclear on the true “value” of their homes. Although a homeowner may understand the value of the home being put up for sale, that value is not equivalent to what it would cost to rebuild the same home.

“The real estate value of a home, that is the price you can buy or sell it for, has absolutely nothing to with the amount of insurance needed to financially protect the homeowner in the event of a fire or other disaster,” said Jeanne Salvatore, senior vice president of the Insurance Information Institute.

When it comes to selecting a homeowners insurance policy, this difference between market value and replacement value can mean the difference for tens of thousands of dollars.

“At a time when many are working hard to save more and spend less, many Americans are leaving themselves open to costly surprises by not fully understanding the details of their policies and the scope of its coverage,” said Bill Moore, president of MetLife Auto & Home.

Of course, the policy that actually covers full replacement costs comes at a price much higher than that of its counterparts. Some homeowners live by the “It won’t happen to me.” mentality, while others choose not to splurge because they can’t or don’t want to pay more. Most often, homeowners simply fail to realize how essential it is to update their insurance policies as they update their homes.

No Quick Fix

One way homeowners can protect themselves against costly surprises is to regularly review their insurance policies. Examiner.com recommends taking the time to update a policy when it is up for renewal, when any major lifestyle changes occur and when a home remodel or other improvement is made. A home remodel increases the value of the home, as does major new purchases, which is cause for an increase in insurance coverage. An improvement, such as an extra safety measure, can result in discounts.

Talking with an insurance agent can also help ease some confusion concerning policy jargon. Typically, a “replacement cost” policy offers the best protection, if the homeowner can afford it. At the very least, it’s important for homeowners to be informed and fully comprehend all limitations of their current coverage. Acknowledging these limitations eliminates the surprise factor in the event of a loss, entrusting the homeowner with the power to increase coverage before it’s too late.

It becomes easier for homeowners to shop around for rates as their understanding of the policies improves. Selecting a policy with a company known for great customer service and handling claims quickly and efficiently is almost as important as one with a good price.

Ultimately, homeowners should use their best judgment when it comes to coverage. As thousands sought insurance compensation following Hurricane Katrina, the court proceedings were nothing short of a tragic reminder to homeowners everywhere that it is them who assumes primary responsibility in the event of a disaster or loss. 

For more info on finding help after natural disasters, check out:  5 Steps for VA Borrowers After Disaster.

Photo courtesy of Kansas City District