One of the painful aftermaths of fires and tornadoes that decimate homes may be the crushing realization that the home is dramatically underinsured. According to one of the largest residential building cost data companies, Marshall & Swift/Boeckh, 64 percent of U.S. homes are undervalued by an average of 19 percent. If this figure is applied to a home with a replacement cost of $400,000, it might be insured for only $324,000, a shortfall of $76,000.
This underinsurance results in a potentially huge coverage gap, particularly if the home is not insured with a guaranteed replacement cost provision. A survey by United Policyholders, a consumer advocacy group, said 75 percent of California home owners affected by the 2007 San Diego wildfires were underinsured by an average of $240,000.
Here are some general tips to consider to reduce the likelihood of your home being underinsured:
Make sure your home has been physically inspected. This will increase the likelihood that it is insured for its replacement cost value. Ask for periodic reinspections of your home (particularly high-end ones) to ascertain whether the dwelling limits are adequate.
Consider guaranteed replacement cost (or guaranteed rebuild) coverage; an alternative would be to procure coverage that offers a 30 to 50 percent cushion above the dwelling limit (extended replacement cost coverage).
Increase the ordinance or law coverage (10 percent of dwelling limit for many homeowners policies) to a higher percentage of coverage. Note that this recommendation is particularly important if you have an older home.
Keep the insurance company informed about any remodeling at your home, since remodeling can dramatically increase the need for higher dwelling limits. Americans spend more than $170 million annually on home improvement projects, according to the National Association of the Remodeling Industry.
If building costs are rising rapidly, an inflation guard endorsement is worthy of consideration. This endorsement increases the dwelling limit of insurance (along with other coverages) to reflect increases in values due to inflation.