Hurricane Katrina was a huge warning to me about the problem of underinsured homes. We represented hundreds of “slabbed” homes—those where the only thing left was a concrete slab. Virtually all of them were severely underinsured. Some may suggest that this is the most widespread coverage gap.

Charles Miller wrote an excellent paper, Burned Out and Underinsured: A Look At Why California Homes Are Underinsured and the Litigation that Arises Out of that Underinsurance. Miller commented that the problem is widespread and has been going on for a long time with industry knowledge of the issue:

It is…recognized that underinsurance is a national problem. One study by Marshall & Swift/Boeckh found that, from 2002 to 2006, between 58% and 73% of homes in the United States were underinsured….


The problem of underinsurance has been recognized in the insurance industry since at least the 1930s

An academic friend reading Miller’s article said it raised many issues never published but often discussed, stating:

The maze of intersecting disincentives that prevents cures of this problem just keeps going on…and on. Competition for market share, contingent commissions, absence of uniform standards, outdated production of nomographs, redesigned outcomes for reported claims, and [Artificial Intelligence] latency all seem to require fixes to prevent seeing the public underserved. And your article is probably going to be followed by others with more ideas. Your efforts won’t receive the admiration they deserve because you will help future loss victims mainly. But it’s to your credit that you’re giving this so much thought. I hope there is more feedback.

Merlin Law Group raised has raised this issue a number of times. In a 2012 blog post, Is Your Home Underinsured? we tried to raise awareness of the underinsurance problem:

Imagine for a moment your home is severely damaged as a result of a hurricane or tornado. The damage is so bad, you think the damage merits the maximum coverage your insurance policy provides, and it turns out you’re right. Your insurance company pays you the maximum policy limits, and you’re sitting pretty with what looks like an amount sufficient to repair your home. However, you receive bad news when your contractor tells you he will need more than your insurer gave you to fix your home. Turns out you did not have sufficient insurance to protect your home, and according to a recent CNBC article, this problem is more common than you may think.

Part of the problem involves people’s failure to shop around for their insurance. In fact, 60% of respondents to a Deloitte survey indicated they rarely shopped around when their policy was up for renewal, even though 75% said price was very or extremely influential in decision-making. The article advises policyholders to shop around because there’s a good chance that you are under-insured when it comes to replacing your home.

Charles Miller provides a refreshingly honest discussion of this serious underinsurance problem that needs to be fixed. If we are being ethical rather than trying to hide from accountability from the problem, the question is how underwriters and those selling the insurance product fix their customers’ insurance to value problem rather than just pretending that the customer knows how to make construction calculations. Policyholders obviously are ignorant on the how to estimate replacement construction costs—-do they really expect all of us to be expert construction cost estimators? The insurance industry and its regulators should force a solution that serves, rather than harms, the insurance customer when it comes to the underinsurance dilemma.

Cheers to insurance expert Charles Miller for his work and thought-provoking views.

Though For The Day

Every human being is under construction from conception to death.
—Billy Graham

  • Bruce Holmes

    “However, there still is no notice to
    insureds that the insurers’ attempts to
    accurately determine replacement cost
    are unreliable. Given the insurance
    industry’s historic knowledge of underinsurance, its present failure to provide
    insureds with such notice may not only
    be a violation of the California Unfair
    Claims Settlement Regulations and Act
    but may also amount to fraud.”

    It’ all about the money. It’s always all about the money. Who has it, who doesn’t, who wants it, etc.

    On the other side, in Floriduh, insureds lower the cost of a policy by picking high deductibles or they use a lower replacement cost.

    • Chip Merlin

      Bruce—thanks for your comment.

      Still, I would want to know your opinion about:

      What good does it do if you have lower RCV and get stuck with a coinsurance penalty?

      What good does it do to underinsure when you have a total loss?

      What good does it do to select a deductible you can not afford when the loss happens?

      And what do you say if you cannot afford to pay the pennies of a premium for a full RCV or lower deductible,, how in the world are you ever going to afford the loss when the day of reckoning comes?

      • Bruce Holmes

        Chip, I think the insureds get talked into this by agents/underwriters which provides them policy income and less or no exposure to losses. The insureds don’t have the knowledge to understand what is going on. Like my little old lady friend that raised her deductible on her policy at the advice of the agent so her premium would be lower….until…. a loss happens.

  • John Gardner

    This is certainly a real and legit problem but no simple fix. Consumers are all about price. They are more concerned about the cost of the policy than they are the cost to remove what’s left of the house and reconstruction costs. It doesn’t help that online direct to consumer carrier websites allow them to bind coverage at just about any Coverage amount that they choose. It also doesn’t help that EVERY RCE vendor allows the carriers to manipulate the replacement values in order to be competitive. We can run the exact same RCE with 2 different companies and be 40% difference in the values. Carriers have told us there are 3 different “notches” or levels that they can select to bring back low, medium or high values. The even bigger problem is demand surge after a cat event. Look at the cost of tile roofs in Florida. from $25k to $75k in the last 2 years after Irma, Michael, etc. If consumers buy based on price they have to live with the end product. and if agents sell based on price… well… they have ramifications also. But what roles do carriers play when they manipulate replacement values just to be competitive? I guess you could ask the question of the RCE vendors as well since they provide the “notches” in the first place. As an agent, I am not a licensed property appraiser. I am not a general contractor and I do not get paid to do either of these functions. I am stuck using the tools that the carriers provide and I am stuck entering data that is provided by the insured or public records, neither of which is very reliable. My target client is not a price shopper, we often weed those out if we can. but the struggle is still real when they gut the kitchen but never tell us or add a swimming pool and cage but never add that to the policy. We sometimes find out about these changes when we go to rewrite the policy years later.

  • “One study by Marshall & Swift/Boeckh found that, from 2002 to 2006, between 58% and 73% of homes in the United States were underinsured….”

    M&S/Boeckh publishes these statistics annually. Historically, they have dominated the market for valuation software so, if the undervaluation problem is this significant, isn’t there potentially a problem with their software or how it’s used or its users are trained (or, more likely, not trained)? Garbage In, Garbage Out.

    In addition, how much of the problem is deliberate underinsurance to land the account, knowing a total loss is unlikely, especially with “guaranteed replacement cost” policies that at least provide a 25% safety net. I’ve heard from agents for years about competitors, especially captive agents, allegedly doing this to book the business. Is this not fraud? Or is it incompetence if it isn’t deliberate? If the latter, Florida has a law that governs if regulators actually enforced it:

    “626.611 Grounds for compulsory refusal, suspension, or revocation of agent’s, title agency’s, adjuster’s, customer representative’s, service representative’s, or managing general agent’s license or appointment. The department shall deny an application for, suspend, revoke, or refuse to renew or continue the license or appointment of any applicant, agent, title agency, adjuster, customer representative, service representative, or managing general agent, and it shall suspend or revoke the eligibility to hold a license or appointment of any such person, if it finds that as to the applicant, licensee, or appointee any one or more of the following applicable grounds exist:

    “(8) Demonstrated lack of reasonably adequate knowledge and technical competence to engage in the transaction authorized by the license or appointment.”

    Also, following a major catastrophe, the cost of material and labor, along with time delays, can significantly increase the claim amount far beyond what it would have been if the cause of loss affected only that individual insured. I know the Big “I” agents association has lobbied ISO for a solution to this problem.

  • Frank Lombard

    I’m always amazed at these discussions of “underinsurance” without some discussion of “guaranteed replacement cost”. GRC doesn’t have a 25% cap or a 50% cap, GRC doesn’t have a fixed limit. GRC requires homeowners to maintain replacement cost (not the inflated reconstruction cost most insurers are requiring) limits and the insurer assumes the risk of a spike in post-loss building costs.

    The problem I see is not “underinsurance”, the problem is the “wrong” insurance. GRC not offered by some insurers? Consider coverage from the ones who do. The insurance industry should be better able to handle this potential gap between replacement cost and actual post-loss rebuilding cost than the average insurance consumer. But if we don’t talk about it, how is the average homeowner or professional agent supposed to be aware of it?