How to fix the widespread underinsured-home problem
Lisa Lindsay with the Private Risk Management Association discusses how homeowners can better understand their insurance coverage.
The insurance carrier Nationwide estimates that two out of every three homeowners in the U.S. lack sufficient coverage to protect their property against damage from a disaster.
The carrier reports that the average underinsurance amount is 22%, but some homes are underinsured as much as 60%. It follows that millions of homeowners risk financial ruin should their homes sustain serious damage.
In the five questions that follow, Lisa Lindsay, executive director of the Private Risk Management Association (PRMA), discusses how homeowners can better understand their insurance coverage and correct the problem of being underinsured.
PC360: How common is the problem of underinsured homes?
Lisa Lindsay: The underinsurance problem is widespread. Underinsurance often occurs when the homeowner fails to carry adequate insurance coverage limits on a policy, fails to have all the necessary coverage categories or makes renovations and upgrades without increasing their coverage limits to keep up with current market replacement costs. When making sure a homeowner is adequately insured, there are many variables to consider that need to be reviewed with regularity.
PC360: How serious are the risks associated with insufficient homeowners’ insurance?
Lindsay: The risks of being underinsured can be significant. When you think of inadequate insurance or underinsurance, most people think of property values (home and contents). For many, the value and equity they have in their home represent their greatest asset. Without proper insurance, suffering a significant loss could be financially disastrous. Insufficient coverage also occurs when people have not fully assessed the need for additional coverage and features such as rebuilding to code costs, additional living expenses and other structures coverage. Lastly, insufficient homeowners insurance also presents a problem when a homeowner does not carry liability limits that align with the liability risks associated with their lifestyle (pets, pools, activities, etc.).
PC360: PRMA suggests that homeowners conduct a regular policy and property review. Why is this necessary?
Lindsay: It is vital to have a comprehensive risk and insurance review at least once a year and more frequently, depending on individual circumstances. By taking the time for this annual review, homeowners can ensure that everything is in order and all risks and values have been properly assessed. Risks associated with someone’s lifestyle and the property they own and acquire change with regularity. Without the aid of a checklist and regular reviews, the likelihood of being underinsured is greater.
PC360: What, in your opinion, are the least understood aspects of homeowners’ insurance policies?
Lindsay: The least understood aspect of homeowners insurance policies is that all policies are the same, so there is no need to understand all the coverages fully. Homeowners’ policies are not all the same; the coverage differences can be quite dramatic. A few examples of coverage differences relate to replacement cost clauses. Some clauses provide unlimited replacement costs with no cap. Some provide replacement costs up to a percentage of the dwelling value listed on the policy and can be up to 125%. Other policies offer a cash settlement option should someone not want to rebuild after a total loss. Another example is other structures coverage, which can be as little as 10% of the home’s replacement cost. The coverage does not account for pools and hardscape, which are often overlooked. The bottom line is that insurance policies are complex and provide different types of coverage. Each client will have different needs, and risk managers should assess risks and coverages needed on a client-by-client basis.
PC360: What role can insurance agents and brokers play in remedying the problem of homeowners lacking sufficient insurance coverage?
Lindsay: Insurance agents must work hand-in-hand with their clients to educate them about the importance of having adequate insurance coverage. This education begins with making sure homeowners have a complete understanding of what is and what is not covered by the homeowner’s policy and what role they play in making sure their information is up to date. It’s also crucial for risk managers to gain buy-in with homeowners about the need for transparency and frequent check-ins.
Many homeowners have been conditioned to believe that saving money is their number one priority, so they may not be transparent and forthcoming. Agents should educate clients about the benefits of transparency, and through a thorough risk management review, help them spend their insurance dollars in a way that meets their risk management needs. An example of wisely spending insurance dollars is discussing why increasing the homeowner’s deductible from $500 to $5,000 is beneficial. They could use those savings to raise the personal liability limit from $1,000,000 to $5,000,000, which would make sense for their specific risk profile.
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