The odds are that your house is grossly under-insured. According to United Policyholders surveys, two-thirds of Californians who lose homes in wildfires are under-insured an average of more than $200,000. This is because the insurance companies don’t sell the necessary amount of coverage when you buy a policy.

Here’s how you can find out:

United Policyholders:

• Is Your Home Covered for a Total Loss?
•  How to Avoid the Underinsurance Crisis
• How much would it cost to replace your home? We test two online estimator services

Why this is so important

Most homeowners now purchase replacement cost policies with “extended coverage” endorsements including inflation adjustments and code upgrade coverage.  These policies are far more expensive than Actual Cash Value policies, because they provide the insured the security of knowing they will have enough insurance proceeds to replace their home after a disaster.

If you don’t rebuild your home, the insurer will only pay the actual cash value, a lot less money than the replacement cost policy you paid for.

So it is in the interest of the insurance company to sell you too little insurance.  This is why United Policy Holders broght a case against the Association of California Insurance Companies — the court case is where the material in this post comes from.

Under insurance causes delays in the claims process, and often the homeowner can’t borrow an addition $200,000 to complete building a replacement house.

Calculating the cost to rebuild a home requires a complete review of the size, style, components and materials of the welling, as well as consideration of local market conditions.  The average homeowner has no idea what that cost would be, so they rely on insurance professionals to perform this estimate.  It’s absurd to suggest that every homeowner would hire a contractor every year to have his home value calculated. That’s way too expensive.  And even if a homeowner did this, it’s highly unlikely the insurance company would use a value determined by the insured.

Insurers use detailed software programs and other underwriting guidelines to determine how much insurance to provide.  They are in a much better position to come up with an accurate estimate of the needed amount of insurance than individual homeowners,who have no idea how to calculate construction costs or what the value of their possessions are in a total loss.

Very importantly, insurers must properly estimate the replacement cost or there will be too much of a temptation to lowball the amount of coverage needed, so they can pay the much lower actual cash value amount instead of the replacement cost coverage the insured paid higher premiums to receive.

It’s important for you to know that the cost to rebuild your home could be more than what it’s worth on the real estate market.

United Policy Holders won this court case.  So if you have insurance, you should ask for one of their employees to come over to give you a proper value for your home, as well as check out a new company with a higher financial rating (step #3) and most likely to actually pay you after a disaster (step #4).    And if you suffer a loss and are way underinsured, perhaps you could cite this case to show that there was a pattern of under insurance and that if the value of your home was calculated incorrectly, that’s the insurance companies fault.  But I don’t know if that’s a good idea, I’m not a lawyer (hiring a lawyer is the first step you should take after a large loss, (s)he’ll be able to tell you if that’s a good strategy).

Sources:

July United Policyholders What’s Up California. Association of California Insurance Companies V. Jones (2012) Court of Appeal of the State of California, Second Appellate District, Division One No. B239943