California Fires and Underinsured Homes

My LinkedIn feed alerted me to an article titled “Wildfire victims are largely underinsured.” The tagline caught my attention and I jumped in.  I am going to leave the author of the article out of this blog as it is not my direct intention to bash their work. However, I do not want people to read that article and be mislead.  Maimonides said (I am paraphrasing here) “In order for a lie to have legs, it must be interwoven with the truth.”

Many true and valid points were raised and then used to twist ideas and blame the wrong people. This is my attempt to correct that wrong.

The article pointed to “latest figures” (unsubstantiated) that 80% of the homes affected by the wildfires were underinsured and 60% were severely underinsured.  Additionally, they claim that greater than 60% of affected homeowners planned on suing their insurance company and/or broker.  The main factors driving this underinsurance that they point to:

• Insurance buyers using market value as opposed to replacement cost
• Building code upgrades add 35-50% of the cost of the home
• Construction costs post disaster are increased 30-35%
• Insurance company programs that estimate replacement cost are incorrect 90% of the time
• Agents/Brokers are engaged in downward spiral to be competitive

My Rebuttal

Underinsurance is an ongoing problem nationwide as individuals try to balance cost and coverage.  Without the proper information people make the wrong choices.  However, I am not sure how they tallied 80% of affected homes or surveyed how many were preparing lawsuits.  Moreover, the primary factor cited was insurance buyers using market value as opposed to replacement cost.

That is a HUGE problem in depressed areas of the country i.e. inner city Baltimore, MD, where you can buy a 2,500 square foot brick home for $50,000 and the replacement cost is $350,000.  However, the market value of a great deal of the Malibu homes destroyed was far greater than the replacement cost.  So if in fact buyers were making this mistake, they would have been OVERINSURED.

Building code upgrades for older homes can be costly, however, many carriers offer a separate line item called ordinance or law that offers additional coverage specifically for this risk.  Newer homes are not nearly as affected as older homes as the codes have not been radically changed since the home was constructed. So it is not a problem across the board.

Construction costs do increase after a large disaster as it is a function of supply and demand.  With great demand and a limited number of qualified contractors, prices rise post disaster.  We have seen this in Louisiana, Florida, and certainly California.

Insurance companies that are in the business of indemnity are not wrong 90% of the time on values or any of their calculations.  If they were, they would be out of business.  There are some carriers who looking to protect the maximum outlay in the event of a claim lean towards underinsurance on their replacement cost estimators.

I think this is wrong and should be handled appropriately.  However, many carriers like Chubb, National General, AIG Private Client Group, Cincinnati offer guaranteed replacement cost—a feature that rebuilds the home regardless of the dwelling limit posted on the policy.  Further, many of the main street carriers i.e. Travelers, Safeco, Hartford etc, offer endorsements allowing one to get 125% or 150% replacement cost.

Finally, there is precedence for states to discipline carriers with hefty fines if they find them abusing i.e. purposely underinsuring homes. Then there is a CAT disaster—people are not properly covered and the state is forced to pay.  Bottom line: as a result, I do not believe the carriers are wrong 90% of the time.

Finally, if blaming everyone else was not enough, the article blames brokers for being self serving trying to sell the cheapest policy.  This is counter intuitive to me.  If the unscrupulous brokers/agents were that way, I would argue they would sell the buying public more than they need in order to get paid a higher commission.  Why would they look to SAVE their clients money?

In conclusion, I did not attempt in this blog to offer what I believe to be the real drivers of incorrect coverage as that is too lengthy for one blog.  Simply blaming everyone from the carriers-agents-construction companies after a claim-municipal building codes etc. is par for the course in America 2018.

Someone needs to be blamed, and it is preferable for it to be someone other than the person most responsible for the property!