By Barbara Bryant
Public Policy Technical Writer
You just put a down payment on your new dream home but have learned that it’s in an earthquake, flood, or wildfire zone. Will your home insurance policy cover those risks?
Or maybe you’ve found a second home at a very affordable price only to learn that the cost of insuring it will match or even exceed its purchase price. What is causing that to happen?
The answers to these questions, and many others that homeowners and buyers face when deciding the types and amount of insurance to purchase, are discussed in the Academy’s latest issue brief, “Homeowners Insurance: Filling the Coverage Gap.” The roles insurance agents and actuaries can play in helping to address coverage gaps are discussed as well.
For example, some may not realize that most standard property insurance plans don’t cover flood or earthquake damage; that requires additional insurance.
At the same time, many policyholders may not know the difference between a home’s market value (the price a buyer is willing to pay for it, which can be influenced by considerations that have nothing to do with the home itself) and insured value (the amount an insurance company must pay if a home is destroyed, which does not include the value of the land).
Many homeowners may also be unaware that replacement cost insurance (which would typically cover the cost of replacing a destroyed home on the original site, using the same type and materials as the home it replaces) may not provide enough coverage when destruction is more widespread due to a natural disaster. In such cases, the need for extensive recovery to a neighborhood after such devastation often heightens the demand for building materials and labor. Fortunately, many insurers offer extended or guaranteed replacement cost coverage, which pays more than replacement cost insurance.
Other factors to consider are the extent to which an insurance policy will cover damage to a home’s contents and whether the policy offers total replacement of the destroyed item or at a rate that reflects the item’s depreciation over time. It’s also possible that the detached structures on the property would have to be covered separately. And many insurers offer fewer options to cover roof damage—a very common expense—than they do for home coverage.
There are four steps homeowners can take to evaluate their insurance needs and identify potential gaps:
- Determine the home’s current value, which usually consists of the replacement cost of the home, other structures, and personal property. Reviewing property details with a qualified, licensed insurance agent or broker and up-to-date documentation of the home’s characteristics will help to determine the necessary coverage. Other sources of relevant expertise include local contractors and home replacement cost estimators.
- Examine the types of risks and hazards the local area may incur. Sources to consult include FEMA flood maps, climate risk data, local government preparedness guides, and third-party risk assessment tools.
- Match the insurance risks and needs to an insurance policy that will cover them. Using rebuilding cost estimates will help consumers choose a policy that is set at or above their replacement cost levels. Coverage limits can be made on a replacement cost or actual cash value basis and may not cover cosmetic damage or non-home structures on the property.
- Find a reliable insurance company with a good track record for fulfilling contracts and paying claims. Ratings experts such as A.M. Best, Fitch, Moody’s, etc. review company financials, history, and future outlook. The National Association of Insurance Commissioners maintains a database of insurance carrier complaints, licensing information, and financial data. Third-party companies such as J.D. Power and Consumer Reports have useful information as well.
Insurers are well positioned to educate consumers about advisable levels of coverage during the quote or renewal process and valuation methods to ensure homes are not underinsured. And actuaries should be aware of how insurance valuations affect rate adequacy and equity. Pricing actuaries should understand how replacement costs are determined and ensure that the data used to calculate them are accurate.
The Homeowners Insurance issue brief contains a wealth of additional information that can help homeowners understand what insurance available options are available and how to choose comprehensive coverage.
Interested in other property and casualty issues? Check out the Casualty Practice Council’s web page, as well as our Policy Forum under the section titled “Access to and Affordability of Insurance.” You can also access the Academy’s “Examining Home Replacement Costs” webinar held last November.