The Problem of Property Underinsurance

How Prevalent Is Underinsurance?

While I am certain that I do not have all the answers (I never do, just ask my sweetheart), I do have some opinions and statistics that alarm me and hopefully will also alarm you. Maybe they might even give all of us some impetus to do better.

Consider this information from various sources.

• Approximately 2 out of 3 homes in the US are underinsured and, on average, underinsured by 22 percent. ¹
• 18 percent of homeowners say they are underinsured—but 38 percent do not know how to tell if they are underinsured. ²
• 77 percent of small businesses in the US are underinsured, but not just with their property insurance. ³
• Economic losses from US disaster events in 2024 were $318 billion, 57 percent of those were underinsured. ⁴

The issue isn't solely a personal or commercial insurance issue; it is a property insurance issue that affects most insureds. The sad reality is that, when insureds need their coverage, is when they find out that they do not have enough.

The reasons are myriad. Among those are the following.

• Most customers of insurance do not understand what they are buying, what it protects, or how it functions. This is true in both the commercial and personal lines areas. It comes down to that trite saying, "You don't know what you don't know."
• Many insureds—since they do not understand their insurance or how it works—will readily assume that any increase in their coverage amounts will be financially daunting. Many of us in the business realize that coverage increases are not a simple mathematical equation that most insureds would want explained to them.
• Agents often add to this confusion by not properly explaining insurance coverages or language. Two examples are inflation guard provision and extended replacement cost coverage. I cannot tell you how often I have had agents of all degrees of experience confuse how these work.
• Rebuilding costs have increased significantly over the last few years. According to ConstructionDive, construction material costs for just this past year have increased some 9.6 percent. Yes, it varies by geography and materials, but nonetheless, it is a significant number to contemplate.
• Rebuilding cost versus replacement cost varies significantly. More often than not, we work with "replacement cost" estimators when what we really should be looking at is the actual "rebuilding cost" of a home or structure.

Replacement cost estimators used by many insurers lend themselves to inaccuracy. This past year, I have viewed a number of these estimators and then looked at the actual property being insured. The numbers were so far off (too low) that they bordered on the ludicrous.

It's Everyone's Responsibility

How do we justify this? How do agents look insureds "in the eye" and with a straight face tell them that they are there to help them when the numbers seemingly tell the opposite story? Look, I know that there is more than enough blame to go around. Agents will blame insureds by saying "they are only interested in the cheapest," "they only are interested in saving money," or other words to that effect. Insureds will blame insurers, saying that "they don't want to pay what is owed to me," "it's a rigged game," or other similar thoughts. Insurers will blame both agents for not doing a better job of explaining coverages and the insureds for not buying adequate limits, among other things.

Let's stop with the blame game and actually do something about it!

• Agents. Educate yourselves on how insurance really works and what the policies that you sell and service really promise. Quit blaming the insured for not wanting to spend more money. If they do not see the value, they are not going to pay the premium. Consider your approach; is it too focused on "saving money" rather than providing insureds with better value and a better policy? As agents, we need to educate our customers.
• Insurers. If it's your cost estimator that is being used, why is it so wrong so often? Perhaps you need to instruct your agents how to better utilize this tool? Does it need a complete overhaul? It is not unusual (from my experience) to see wide variations in insurable values based on the inexact science of these tools.
• Insureds. Quit believing the awful advertising from discount insurers that anyone can save you money. The reality is that it is your property and your decision to properly insure it so that you do not suffer a significant shortfall when loss occurs. I've never found an insured who, after a loss, says, "Wow, I carried too much insurance for this loss!"

Homeowners Insurance Shopping Lessons Learned

Let me give you a few more thoughts based on my recent experience while "shopping" for my own homeowners coverage. Last year, we moved into a new home in Arizona when my wife and I left California in the rearview mirror and moved to the ever-sunny climes of the greater Tucson area. As I was not knowledgeable of any local insurance agents, I took the recommendation of my mortgage banker and used the insurance agent that she recommended; I had my hands full with selling a home, buying a home, and coordinating a move.

Our initial phone meeting rapidly left him with the impression that most of what was going to be required of him was to listen to the rants and desires of his customer … ME! I didn't hide from him what I do for a living nor what I needed from him. He rapidly understood that among the least important items for me was the old saw of "saving money." I was more interested in coverage options, availability of various endorsements, who the insurer was, etc. than in anything else. Yeah, I told him, I'm an outlier.

Now understand, I do have a bit of the consumer in me; I don't want to overpay either. However, I do know that price is one of the least important items when it comes to selecting insurance. It does have its place, but it is quite a bit lower in the selection process than coverage, insurer, claims handling, services provided, and other considerations.

So, this year, prior to renewal, I decided to look around. I was satisfied with my agent's level of service, but now I had time to consider some options. I included him in my shopping and also spoke with two other independent agents. Here's a brief overview of my experience.

• One of the agents I worked with didn't understand how the "extended replacement cost" coverage worked and, thus, would have left me underinsured had I chosen to move forward with them. I discovered this when they advised me why they suggested a particular limit of Coverage A for our home. Obviously, this agent was ruled out early in the process.
• I asked both my current agent and another to provide me with the "cost estimators" that their proposed insurers were using to come up with an insurance value for my home. When I reviewed the information that they provided and were using as a basis for our limit of insurance, I found significant discrepancies that would have led to some 20 percent or more underinsurance.
• Obviously, I then provided both of them with the corrected home information, and the subsequent limit was more in line with what my research indicated local rebuilding values were.

I wasn't happy with the existing limit of coverage anyway, so this did not surprise me. In fact, when I began looking around, I gave each agent the same basic information about my desired limits and other requirements. The remaining two that I worked with listened and understood what I wanted. I remained with my current agent because he was able to provide an excellent insurer with the coverages I needed and an increased deductible I was willing to take on, and he also handles our other coverages.

Here are some shopping lessons I've learned that I recommend.

• Price should be a low consideration in the decision-making process in regard to which insurer to select.
• Buy insurance today as though you will need to use it tomorrow.
• Take time to assess your own risk appetite and related buying concerns.

The Role of the Insurance Agent

I hate it when insureds do not have adequate insurance resources to pay for their losses. More often than not, I discover that they were underinsured. Based on my experience, it was often not an actual "decision" they made as to how much to buy or not—they just told their agent to "save them money," and their agent went along for the ride.

Courts back this role of the insurance agent. When it comes to an insurance agent's potential responsibility in an errors and omissions case, especially when insureds lack adequate limits of coverage, courts tend to consider the expected standard of care owed by agents to their clients as being "order takers." Essentially, this means that the agent is charged with following the insured's instructions or requests and has no obligation to advise the insured, provide them with options, or basically do anything to educate the insured as to the stupidity of their coverage decisions based solely on price.

Many agents hold themselves to a higher standard of care, but the law (in most jurisdictions) does not. That is a sad state of affairs; when the loss occurs and the insured does not have enough insurance coverage, they can expect little, if any, help from their insurers or the courts.

Agents in every state are required to pass an exam that authorizes them to sell or service insurance in the particular state where they practice. Literally every insured will innately believe that the insurance agent knows more about insurance than they do. This results in the insured consumer foregoing their own judgment and putting their financial futures in the hands of a party who typically has no obligation to provide them with even a modicum of information or judgment. After all, agents are only order takers from a very uninformed consumer.

A colleague of mine made this statement the other day, and it has stuck with me: "The order-taker status assumes that the insured knows what is included on the menu." Sadly, that is not the case. More often than not, the insured doesn't even know that there is a menu from which to choose.

As I stated earlier, we can all do better. I hope that you will join me in trying to do so.