Underinsured: When insurance companies won’t pay enough to restore everything.

The Monument Fires that tore through southern Arizona this past summer left many residents without their homes and businesses.

A cry rang out on local news stations, KOLD & KPHO,  that the insurance companies were not paying out on claims.

Owners seemed to have felt duped by the insurance companies and their insurance agents. They felt that since they had been paying insurance all these years that the insurance company should pay to replace everything they had lost.

While these folks received some money from the insurance companies, they did not receive enough to replace everything they had lost and restore them back to where they were before the loss.

Why? They were UNDERINSURED.

Photo used under Creative Commons from simplifies.

Underinsured means you do not have enough insurance to pay for everything you own. What is the “Dwelling Replacement” limit on your insurance policy? If the dwelling replacement limit on your policy is $100,000, but the cost to rebuild your home costs $150,000. You are underinsured.

Whose to blame?

Becoming underinsured is the responsibility of one of two people or both. The agent or the homeowner.

The agent

The agent can recommend a replacement cost to a homeowner that is too low because:

1) The agent does not have any experience in the construction industry to make an accurate evaluation. After all, if he/she is an insurance agent not a homebuilder.

2) The agent uses a lower limit to lower the premium cost in order to make the sale to a customer who is looking for the cheapest priced policy.

The homeowner

The homeowner can accept a replacement cost that is too low because:

1) The homeowner does not know anything about insurance or construction and trust his/her insurance agent without asking questions. After all, the homeowner is not an insurance agent or a homebuilder.

2) The homeowner is looking for a policy that will cost him/her as little as possible and still satisfy the mortgage company.

In then end, it does not matter who is to blame, Arizona law supports that it is the homeowners’ responsibility to make sure they have enough insurance. However a good insurance agent and a homeowner who cares about protecting his home will be able to work together to make sure that the home is adequately covered today and each year to come.

Underinsurance and the insurance company

Insurance companies frown on being underinsured. Since they are agreeing to pay for your home to be replaced if it were damaged, they expect you to pay for the right amount of insurance. In fact, most standard insurance policies include specific rules for being properly insured in the condition section of their policies. And they can have penalties for being underinsured; ultimately reducing the maximum amount they would have paid out. This concept gets into serious insurance lingo. Read your own policy or talk to your insurance agent about this penalty if you wish to know more.

Am I underinsured?

Follow these steps for a quick way to determine if you have enough insurance to cover replace your home.

  1. Dig out your insurance policy declaration page
  2. Find out how much dwelling coverage you have (This will be found under Section I, Part A.)
  3. Use an online replacement cost calculator to determine the replacement cost of your home
  4. Add 10% to these amount to cover debris removal (The cost of removing what was left of your lost home)
  5. Match the results of your calculations to the dwelling limits on your policy

If the numbers differ significantly, you should contact your insurance agent immediately and discuss revisions.

Other sources for replacement cost

Here are some more resources for determining replacement cost:

1) Contractor- Consider talking to someone in the construction industry. Ask a local contractor what the cost per square feet is for residential construction.

2) Appraiser- Contact a professional appraiser. While they work with market value, their reports usually require the cost to rebuild the home new.

3) Internet recourses- The internet has a few resources available for determining replacement cost. Some are free and others are for a fee. These companies and programs use the latest construction industry information to make accurate determinations. The Arizona Department of Insurance offers a list of these sites.

It’s YOUR home

As a homeowner you should always remember your house is your family’s home. A roof over your head, a significant financial investment, and the place your family grows and make memories. Take a couple of extra minutes when talking with your insurance agent to ask if the dwelling replacement limit is enough. The few extra dollars a month could mean the world if you fall victim to devastations like the fires the swallowed up our neighbors’ homes in Sierra Vista.

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