Most Homeowners Are Underinsured

Ray Martin, Harry Smith
CBS/The Early Show
According to The Early Show's financial contributor, Ray Martin, most homeowners have homeowner's insurance but many are not adequately insured.

Nearly two out of every three American homes, or 59 percent, are underinsured as homeowners, on average, have only enough insurance to pay for 78 percent of costs to replace or rebuild their homes. This is according to Marshall & Swift/Boeckh LLC (MSB), a leading provider of building replacement cost data.

With the median value of an existing single family home across the nation of about $227,500, a homeowner with a typical shortfall in coverage is at risk to pay an additional $30,000 to $50,000, or more, towards the actual cost to rebuild their home that their insurance does not cover.

This underinsurance problem was a hard lesson learned by homeowners such as those in the Gulf region who were affected by last year's hurricanes. Many of those homeowners found out that their cost of rebuilding outstripped the benefits provided by their homeowners insurance.

How Does Underinsurance Happen?

One concern in the insurance industry is that many homeowners do not update or periodically increase the coverage on their homes. When homeowners remodel and improve their homes, they often fail to follow through with a call to their insurance agent to update their coverage.

Another contributor is the surging price of building materials, energy and labor, all which have increased replacement costs up by over 7 percent a year since 2001.

But in an industry that prides itself on customer service and providing peace-of-mind to its customers, why would property insurance companies and their agents knowingly allow their customers to underinsure their homes?

After all, buying the right amount and the right type of insurance means larger insurance policy premiums, and profits for the insurance companies.

Consumer advocates say that the problem lies in the way that homeowners insurance is sold. In the competitive marketplace, the last thing an agent wants is for the customer to run down the street to a competitor because they got a quote for $50 a year less.

They say many agents provide quick quotes to close a sale, lack the training to properly asses the value of the homes they insure and often rely on over-the-phone interviews to estimate the amount of coverage for a customer's home. The result being that homeowners buy cheaply priced coverage that they mistakenly believe will replace their home in the event of a full loss.

To be fair, many homeowners have made home improvements. These improvements will increase the home's replacement value, and the dwelling limits in the homeowner's insurance policy should be increased accordingly.

Finally, not only have home values gone up, the price of materials and labor has also increased. Homes lost in disaster areas typically have to be rebuilt to conform to new building codes, to protect against wind damage or earthquakes for example, adding to the costs to rebuild the home.

Clearly the homeowner bears the responsibility to select the proper policy coverage limits, a position that is supported by laws in many states. However, if you are advised by your insurance company, agent or broker that your coverage and its underlying limits are enough to fully pay for the cost to replace or rebuild your home, then the insurance company or agent has assumed a special duty of care. If later your loss is not covered by the insurance, you may have a claim against them.