Homeowners in disaster-prone areas of the U.S. increasingly are
dealing with nightmare
In the wake of tornados like the one that recently devastated
the town of Joplin, Mo. -- as well as fires, floods and hurricanes
elsewhere -- many homeowners who thought they were fully insured
are discovering that the replacement-cost policies they bought are
dramatically insufficient to replace or rebuild their homes. (Read
home insurance basics
As a result, scores of underinsured homeowners face potential
losses of tens or even hundreds of thousands of dollars.
"I would be conservative in saying that 70 percent or more of
all homeowners are underinsured," says Joe Brennan, owner of
Insurance Claims Group Inc., based in Cary, N.C. Most people
are underinsured at least 30 to 50 percent, he adds.
Chris Amrhein, president of Amrhein and Associates in Lorton,
Va., and an insurance industry veteran of more than 30 years,
agrees that the problem is serious. Amrhein recently taught a
seminar on the topic of underinsurance for the Academy of
Insurance. He believes that most people's property insurance
valuations are off the mark by anywhere from 25 to 60 percent.
Insurance agents won't know
Brennan and Amrhein say homeowners often trust insurance agents
to tell them how much coverage they need to replace or rebuild
their homes in the event of a total loss and the agents simply
aren't equipped to know the answer.
home insurance quotes
and helping to assess a customer's home insurance needs, the
typical insurance agent might use ballpark replacement-cost
estimates based on generic online programs. He or she may obtain
figures from real estate appraisers and realtors, or simply ask a
homeowner how much coverage they want.
Amrhein likens the process to a consumer asking an agent how
much insurance to buy on a valuable item, such as a 3-carat diamond
ring or a rare painting.
"There's no way I would attempt to say what those things are
worth," he notes. "I'd get a gem specialist or an art dealer's
Amrhein contends that insurance professionals shouldn't be the
experts tasked with helping consumers come up with home-replacement
estimates. He thinks that builders, who know local construction
costs and labor prices, should do that.
Compounding the problem is consumers' desire to save money on
home insurance rates
"A lot of people also don't want to buy more insurance than they
absolutely have to," says Amrhein. "People think they're going to
be ripped off or they want to cut costs, so some will automatically
drift to the lowest number or cheapest quote they get" and wind up
Don't confuse replacement cost and market value
Many insurance valuations are erroneously based on real estate
market values, Brennan says. That's a major blunder, because market
value and replacement cost value are very different things.
Your home's market value can fluctuate wildly based on what a
buyer is willing to pay. But replacement cost, which is the value
used by insurance companies, is the cost to rebuild your home.
Replacement cost is based on a host of things, ranging from the
quality of materials used in a home and the local price of labor to
demolition costs and zoning expenses.
"The average 1,500-square-foot home in the U.S. cost about $100
to $150 per square foot to rebuild," Brennan says, adding that
these are ballpark figures, since location and building materials
matter greatly. Homes in California and New York often run $200 to
$250 a square feet to rebuild.
The Property Casualty Insurers Association of America encourages
homeowners to conduct annual reviews of their insurance needs, to
notify their agent or insurers about remodeling work or additions,
and to find a reputable contractor to provide a good estimate of a
house's replacement cost.