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A couple of days ago I chanced on this following very detailed and very lengthy article from the SF Chronicle:
https://www.sfchronicle.com/california/article/underinsured-home-what-to-do-20250824.php
This is behind a paywall, but if you haven’t been to the newspaper website recently you can probably read it. I am going to try to summarize some of the content.
Let me begin by putting a personal spin on this topic. I spent 30 years in the property and casualty insurance world. But, like you I have to insure my own home. I have my home insurance with USAA as I am a former officer in the military and qualified to buy from them.
Even though I am retired, I still know folks in the business and try to understand what is going on in the industry. Through this process, I began to be concerned about whether or not I had enough coverage on my WA home. Two years ago, I heard reports that it was costing significantly more to rebuild than what insurance companies were recommending. I went on-line to the USAA site and went through their coverage estimator with the details on my home including square footage, the size of decks and porches, floor coverings, age of building, type of roof material and age, kitchen and bath quality and number of fixtures, and more. At the end of the process, I compared their recommendation to what I had heard about the cost per square foot to rebuild. The company was around $80/SF too low. On a 2500SF home, this is $200,000 too low!
At the time, I didn’t worry about the how and why of this was happening. I simply fixed my problem by increasing my coverage so that I was closer to what it might cost to rebuild the home. However, when I saw this article, some alarm bells began ringing in my mind. I had previously posted here about the under-insurance that is commonly found after catastrophic fires, attributing this to supply and demand turmoil after a big fire event. Now, this article explains what is going on. When I was working Marshal and Swift provided the software companies used to calculate reconstruction costs. However over the last 20+ years they have been replaced with other software. This newer software is more complicated but also allows for agents to low-ball the factors to produce a lower replacement cost and more competitive premium so that they can sell more policies. If you had to actually go through the details with an agent the interview might take 4 hours to complete. No doubt, this would be a sales killer. Who among us wants to discuss insurance on the phone for four hours?
The companies appear to know all about this issue. Insurance companies are like wildebeests, they travel in herds, so most of them use the same software. They correctly maintain, that it is up to the insured to make sure that they have enough coverage. As a homeowner, it is up to you. Especially, if you live in an area exposed to wild fires or other catastrophe, no matter that you think you are already paying way too much for your house insurance, you are most likely significantly under-insured. In a high cost of living area it might cost $300-500/SF to replace your home…….do the math, talk to your agent and ask for a realistic estimate to rebuild. Be honest about your home details. Bite the bullet, and buy the increase. Choose a higher deductible. If you wait until after the fire it will be too late….
All true, an easy way to estimate is go through the motions to put in a pre-fab home on your lot and then add an amount per sq ft for furnishings. That should give you a good working estimate of how much insurance you need.
Many people simply do not want to pay for homeowners insurance. Yes, if you have a lender they will require coverage up to the value of the mortgage. But a study by Lending Tree says that over 13% of owner occupied homes are uninsured. It amazes me since home equity is typically a substantial portion of net worth.
Posts like this are one of many reasons why I am a devoted HD reader. Home replacement value vs tax and resale value is a big blind spot for me and I just sent an email to our agent to look into this. Thank you.
If you disable Javascript, you can read the article linked above.
Very clever – Thanks!
Make sure you enable Javascript once you read the article. You will have a subpar experience on most websites if you keep it disabled.
i just disabled it for the specific URL above. I enabled Javascript now. xx
SteLea99:
Fellow HD reader/contributors…I can attest to the fact that truer words have never been spoken!
In my second career, I was a Nationwide Insurance and Financial Services Agency Owner. One of the biggest challenges I faced as an agent, was making clients understand the difference between Tax Value, Resale Value, and Replacement Value.
The aforementioned software from years ago, which I remember as the Boeck Replacement Value Calculator ) not positive of the spelling of Boeck) calculated the cost of replacement by estimating the cost of a lengthy list of considerations, starting with the number of corners on your roof, the number of rooms, number of bathrooms, square footage, age of home and appliances, quality of the construction materials (custom home of tract built, etc.) and on and on.
Bottomline was when you told a client the replacement cost was $X, they invariably would say, “There is no way my house is worth that much,” again…referring to Tax Value or Resale Value. Making someone understand that you insure your home from the stand point of rebuilding it, brick by brick, or wood by wood…after it has been totally destroyed…not for what the county appraiser or realtor tells you it is worth in resale..is truly a challenge.
As I use too say, “Mr & Mrs Sith, I am referring to the cost of replacing your home, and all it’s contents, on the day you come home to find firetrucks on your street, in front of the concrete slab, where your house use to sit.” In Texas, there I practiced, 99% of homes were built on slabs, not basements or piers.
The Tax Value of your home or the Resale Value have ZERO business being included in the discussion of replacement value.
Another consideration when envisioning replacement of your home is the manner in which the loss occurred. If a single person loses their home to a fire, and no other homes are affected, the replacement cost is going to be considerably less than if, as occurred in Western NC during Hurricane Helene, entire communities disappear. WHY? The cost of materials will sky rocket, due to the massive need for lumber, bricks, stone, shingles, etc. The same thing will be true in CA due to their wild fires. And yes…despite what state officials tell you, there will be price gouging like you have never seen before and then state will do nothing about it, other than make empty threats onTV, to make you think they care.
Bottomline…Insuring your, for what many people is their largest asset, is NOT the place to be cutting corners.
Some carriers, like State Farm and even Allstate and Nationwide, will allow you to refuse an increase for a single year, but if you try to decline the increase in coverage a second time, you will most likely face non-renewal. The reason for that is the courts. Ignorant judges, as they are wont to do, made rulings years ago, in favor of an idiot homeowner who had never increased the coverage on his home, over a decade or more. When the home was destroyed and he was offered the insured value, which was no where need the amount needed for replacement, he sued and said it was the insurance companies fault because no one told him he needed increase his coverage as his home replacement value increased.
Yes Virginia, there truly are judges that stupid in America. As a matter of fact, in a different arena, we are seeing evidence of judges’ stupidity on a daily basis, but I digress.
Here’s an idea to bring there point about replacement value home to you in terms easy to understand…call a reputable builder in your area and ask him/her what it would cost to build your house on your existing lot, today…and then make your decision on how much coverage you should have.
Personally, I have a Full Replacement Policy, which is sometimes called an HO5 (but not where I live). My premium will increase again this year, as it does most years, because the value of my home is increasing. As a matter of fact, we are in the process of enlarging and enclosing a covered back porch that was 10 X 38 sq ft. It will be what most people call a Sun Room or in Florida a Lanai. It will be 18 X 38, when completed, and have a new half bath. The remaining 32 X 10 covered porch will be converted into an 18 X 32 sq ft enclosed, screen porch as well. The Sun Room portion will be heated and cooled and increase the square footage of my home to 3,682 square feet. I am also adding a 30 X 25 Covered Car Port, made to match our home. Once completed I will be increase my Coverage A for Dwelling and Coverage B for Other Dwellings, since the car port will be detached.
Undoubtedly, I will be receiving an increase in my premium, reflecting the additional Replacement Value. The reason I mention this is because if you don’t tell you agent about the new additions, thinking you are “getting one over on the insurance company,” you will find your self woefully underinsured when that day comes, and “you come home to find a fire truck in front of your…” well you get the picture.
Find somewhere else to save on expenses, and don’t try to skimp on proper coverage for your home, car and umbrella liability insurance.
Happy Retirement!
Thanks for your article. This subject is something I have grappled with. As a homeowner in California, home insurance is always a matter of interest to discuss. I am not in a high fire danger area but as we have seen, even areas with moderate fire risk can end up with devastating fires.
I also have USAA for insurance and a few years ago I discovered a new form in my policy entitled the “Home Characteristic Form”. I later learned it was a new form required by the state of California.
To my surprise, the home described on the form was not my home. For instance, the home was listed as having only one sliding door when I have three. The form showed one HVAC system when I have two. The form showed all my countertops were standard laminate. I have all marble and granite. The form showed one fireplace when I have two. Additionally, since purchasing the home I had remodeled my backyard and the upgrades were not listed because I had never thought to update my policy with the remodel details.
I decided to call USAA and went through the document line by line. Like you, in the end, my policy increased, but I now believe my policy is now more realistic in regards to re-building cost.
I have always believed in over-insuring the house — rebuilding is certain to cost more than projected — and under-insuring the contents. When my longtime Safeco policy suddenly exploded in price last year, I went to an insurance agent recommended by my mortgage company. He came up with a policy at a very attractive price — and was startled when I insisted on adding 100K in extra home replacement coverage to it. The additional cost was pocket change, relatively speaking, and I sleep better.
I should add that my newly-built WA home is largely out of reach of natural disasters — no wildfires, floods, hurricanes or tornadoes here, and we don’t live on the beach anymore, so no worries about tsunamis. I guess an earthquake could get us, but that’s about it.
Depending on where in WA your home is located, your EQ exposure could be significant. Check out where you are relative to the Cascadia Subduction Zone. You can read about this on Wikipedia. There are a number of East-West running fault lines including the Seattle Fault, which runs beneath Seattle and Mercer Is., and the Whidbey Is. Fault. About a thousand years ago a Magnitude 8 quake on the Seattle fault produced places where there are fully grown Douglas Fir trees drowned at the bottom of Lake Washington.
Anyone who lives in EQ country needs to know that when rare giant events occur (above Mag. 7.5), there is the potential for much larger fire losses than the amount of damage from ground shaking. This has been extensively modeled. When the ground moves, gas and electric lines break. Water mains break. There are many possible ignition points, and between damage to streets and lack of water if the wind is blowing over 20mph, fire storms are possible even in areas away from forests. Fire Following EQ is a covered peril in all HO policies, so that even in you don’t have EQ coverage you still have fire insurance.
My policy says I’m insured for the full replacement cost without a specific limit. Am I missing some fine print? There’s a $35,000 deductible if damage is caused by a hurricane.
Sounds like you have a Form 5 which is better than a Form 3. 5 is not available in many states. Check to see if your policy says it will replace with “like kind and quality”. If it does, make sure you have an endorsement which provides coverage for changes in building codes. My home, for example was built in 1979 and has 2″x4″ wall studs. The current code requires, 2x6s and thicker insulation. Without the endorsement, I would be on the hook for the differences in cost. Building codes can affect plumbing, electrical and many other elements of a home.
Is the cost of land included in the estimate? My home in Florida is unsured for about $300k less than what it would sell for. I was always told. one does not insure land. Even in a total loss scenario, the foundation should be intact. Maybe I am taking a risk, but with the cost of insurance in Florida, it is one I have to live with. Great article though. Thanks
As many people have learned to their detriment, in a wind driven conflagration, temperatures can get so high that concrete burns. This was first noticed in the Oakland Hills Fire (Wikipedia) which destroyed several thousand houses. Hilly terrain winds have higher velocity.
Your HO policy does not cover your land.
But is a foundation considered land? I would think the land is unaffected and the foundation needs to be replaced, which in my mind is part of the house, and not land. Am I wrong?
I no longer own a house so I only carry renter’s insurance (plus auto and umbrella, of course). State Farm, which I had used for 40 years, went to the other extreme, giving me a quote that valued the contents at $300,000, without asking me. This was $100,000 higher than the value on my house insurance, which I also don’t remember authorizing. I am now with Erie.
I have the same question our vacation home has $600,000 on contents which is ridiculous given we keep nothing there but furniture and appliances. Nothing of real value.
when I asked about the amount I was told it’s some kind of standard formula they apply. Trying to lower it didn’t mean much in premium so I just dropped it
If you insure the building and contents, the contents are covered by a formula % of the amount of coverage on the structure. You can increase above the %, but not reduce it.
A formula may make sense for a house, although you should be able to adjust it, but hardly for renters insurance. And why would the amount covered go up? The State Farm quote for renters was nearly as high as for my house, which is why I looked at the details. Erie is only charging me $20.37/month for renters, auto went down a little, umbrella up a little. Excellent service when I made a claim.
I think you are in CA. SF General, which is the company SF uses to insure personal homes and contents in CA is financially impaired. Their losses have been so large that they are taking steps to reduce their exposure in the state. Increasing the minimum amount of contents they will cover is a clever way to raise the price and get you to buy from some other company.
I am in North Carolina, and this was pre-Helene. I regarded the elevated coverage as sharp practice. They gave me a quote for the lower amount but I was so annoyed I moved anyway.
Thanks for this. It’s always especially valuable to see articles written about a subject where the author has a long history “in the business”.