Hurricane Katrina was a huge warning to me about the problem of underinsured homes. We represented hundreds of “slabbed” homes—those where the only thing left was a concrete slab. Virtually all of them were severely underinsured. Some may suggest that this is the most widespread coverage gap.

Charles Miller wrote an excellent paper, Burned Out and Underinsured: A Look At Why California Homes Are Underinsured and the Litigation that Arises Out of that Underinsurance. Miller commented that the problem is widespread and has been going on for a long time with industry knowledge of the issue:

It is…recognized that underinsurance is a national problem. One study by Marshall & Swift/Boeckh found that, from 2002 to 2006, between 58% and 73% of homes in the United States were underinsured….

….

The problem of underinsurance has been recognized in the insurance industry since at least the 1930s

An academic friend reading Miller’s article said it raised many issues never published but often discussed, stating:

The maze of intersecting disincentives that prevents cures of this problem just keeps going on…and on. Competition for market share, contingent commissions, absence of uniform standards, outdated production of nomographs, redesigned outcomes for reported claims, and [Artificial Intelligence] latency all seem to require fixes to prevent seeing the public underserved. And your article is probably going to be followed by others with more ideas. Your efforts won’t receive the admiration they deserve because you will help future loss victims mainly. But it’s to your credit that you’re giving this so much thought. I hope there is more feedback.

Merlin Law Group raised has raised this issue a number of times. In a 2012 blog post, Is Your Home Underinsured? we tried to raise awareness of the underinsurance problem:

Imagine for a moment your home is severely damaged as a result of a hurricane or tornado. The damage is so bad, you think the damage merits the maximum coverage your insurance policy provides, and it turns out you’re right. Your insurance company pays you the maximum policy limits, and you’re sitting pretty with what looks like an amount sufficient to repair your home. However, you receive bad news when your contractor tells you he will need more than your insurer gave you to fix your home. Turns out you did not have sufficient insurance to protect your home, and according to a recent CNBC article, this problem is more common than you may think.

Part of the problem involves people’s failure to shop around for their insurance. In fact, 60% of respondents to a Deloitte survey indicated they rarely shopped around when their policy was up for renewal, even though 75% said price was very or extremely influential in decision-making. The article advises policyholders to shop around because there’s a good chance that you are under-insured when it comes to replacing your home.

Charles Miller provides a refreshingly honest discussion of this serious underinsurance problem that needs to be fixed. If we are being ethical rather than trying to hide from accountability from the problem, the question is how underwriters and those selling the insurance product fix their customers’ insurance to value problem rather than just pretending that the customer knows how to make construction calculations. Policyholders obviously are ignorant on the how to estimate replacement construction costs—-do they really expect all of us to be expert construction cost estimators? The insurance industry and its regulators should force a solution that serves, rather than harms, the insurance customer when it comes to the underinsurance dilemma.

Cheers to insurance expert Charles Miller for his work and thought-provoking views.

Though For The Day

Every human being is under construction from conception to death.
—Billy Graham