What is "underinsurance", and how common is it?
Underinsurance is a chronic problem that home and business owners experience after their property is damaged or destroyed in a fire or other catastrophe and it turns out they have less insurance than they need to repair and replace what they lost. United Policyholders ("UP") maintains a database that consistently finds more than half of homeowners do not have adequate coverage to replace or rebuild their homes in case of disaster. Underinsured is the word that describes this situation.
A property can be underinsured due to:
- Insurance limits that are too low
- Gaps due to policy exclusions
- High deductibles
When you’re underinsured there is a gap between the actual cost of replacing your destroyed home or business and the payout you receive from your insurer. Underinsurance causes claim settlements to be delayed or derailed into litigation. Underinsurance is one of most challenging obstacles to loss recovery.
Why do insurance companies consistently set inadequate policy limits?
Underinsurance happens because insurance companies have little reason, either legally or economically, to set policy limits accurately and, contrary to intuition, are actually incentivized by market pressures to set lower limits. To afford the risk of setting higher policy limits, insurance companies would have to charge higher premiums. Regardless of whether only a slight increase in premium could cover the property in full, insurance companies fear higher premiums could deter potential consumers. By setting low policy limits, insurers are able to offer more competitive premiums. Unfortunately, this practice of providing inadequate insurance coverage for lower premiums, known as price-optimization, unfairly shifts the liability to policyholders to pay out-of-pocket for a significant portion of repairs or replacement in case of disaster. UP has been aware of this problem since wildfires swept across southern California in 2003 and has since worked with insurance companies, regulators and consumers to help alleviate the problem. At an event sponsored by Chartered Property Casualty Underwriter titled Holding Hands While Pointing Fingers, UP represented insurance consumers in a panel discussion and advocated for a three-pronged solution.
What is UP doing to solve this problem?
UP is working hard every day to help solve the underinsurance crisis. UP first saw the underinsurance problem after a 1991 wildfire in Northern California. We've seen it after every disaster since that time and are cataloguing the ongoing crisis. Underinsurance has reared its ugly head in Arizona, California, Colorado, Kansas, New Mexico and Texas after wildfires and in every one of the Gulf Coast states that have been hit by hurricanes in recent years.
UP is fighting for underinsured consumers in courts and legislatures. In its recent decision to uphold the California Department of Insurance Commissioner's regulation requiring insurers to provide more accurate estimates of home replacement costs, the California Supreme Court cited UP's amicus brief and survey finding nearly 75% of disaster victims were underinsured. With the regulation reenacted by the Court, homeowners should have more certainty about their policy coverage, and litigation between policyholders and insurers should be reduced as a result.
Additionally, UP is educating consumers to get second opinions on dwelling replacement values when insuring their homes and offering strategies to underinsured loss victims.
Underinsurance most often affects disaster victims, but it also affects people who lose structures in isolated incidents. Underinsurance is economically devastating to people and communities and is patently unfair:
Insurers paint a rosy picture in ads that tout their expertise and honor: "We'll put you back where you belong" They label their products "Deluxe Home Replacement Policy." At the point of sale, they invite trust. They ask only a few questions about the property. They run some numbers. They issue the policy and cash the premium checks. But when policyholders come up short, suddenly its not their problem. And the laws in every state allow them to pass the buck and say "hey, it's your property, your problem."
With regard to responsibility for setting adequate insurance limits, LAW DOES NOT REFLECT REALITY. Reality is, insurers do the math and set policy limits. Reality is insurers know what it costs to repair and rebuild homes - that's the business they're in. Our laws need to change, and UP is working toward that goal.
The following links will lead you to resources to help you avoid being underinsured in the first place or solve the problem if you suffer a loss and find yourself underinsured.