Some homeowners may find they don’t have enough coverage

USA TODAY

RANCHO BERNARDO, CA — When a wall of fire rushed toward Patty Thompson’s house last week, all she thought of was getting her husband and two sons out safely.

As embers the size of Coke cans rained down, the family took refuge at a relative’s house. That’s when Thompson’s thoughts turned to rebuilding. Her insurance agent told her years ago that she had enough coverage to replace her house if disaster struck. She’ll soon find out if that’s true.

“I think we’ll be fine,” Thompson says. “But it’s too early to tell.”

Most of the affected homeowners have yet to calculate the cost of rebuilding from the California wildfires. But regulators and consumer advocates worry that too many victims will lack adequate insurance to pay for the wreckage of the fire, which has destroyed about 2,200 homes. Whether homeowners have enough insurance is a “vital question” that will determine whether — and how quickly — they can rebuild, says Douglas Heller of the Foundation for Taxpayer & Consumer Rights.

Inadequate insurance coverage plagues homeowners across the USA: Nationally, 58% of homes were underinsured last year, by an average of 21%, according to Marshall & Swift/Boeckh, which supplies building-cost information to insurers and government agencies.

In California, many people lacked enough insurance to cover their losses after the 2003 fires burned 3,600 homes, regulators say. Some homeowners have since updated their policies. About 30% to 40% of homeowners in the state still lack sufficient insurance to rebuild after a disaster, says Insurance Commissioner Steve Poizner.

Why are so many homeowners underinsured?

For one thing, record-low interest rates triggered a boom in renovations and repairs in recent years; Americans spent $176 billion last year, compared with $153 billion in 2000, after adjusting for inflation. When people add on to their house, they often forget to update their policies.

Some homeowners also buy less insurance than needed because of financial constraints. “If you were in a situation where you had limited income, wouldn’t you do the same?” says Sen. Kent Conrad, D-N.D., who’s taken a role in an insurance dispute in his state.

But insurers and agents are another factor. Insurance rates are climbing nationally, even as insurers pare back on the types of damages they cover. Some homeowners have been forced to buy multiple policies — at higher overall prices — to fully cover their home.

Also, a rising number of insurers cap the amount they pay out on standard policies for repairs or rebuilding — typically up to 25% above the policy’s value. As a result, homeowners have had to dip into their own pockets to offset the rising costs of building materials and labor. In each of the past three years, the cost of building materials has climbed 6% to 6.5%, far above overall inflation. Prices of construction materials can rise even more after natural disasters.

Regulators and consumer groups also worry that agents are sometimes low-balling consumers on how much it costs to rebuild. The rationale, they say, is this: If an agent can offer an artificially low premium, it’ll keep a customer who might otherwise defect to another insurer.

Insurers have an “incentive” to “systematically set the maximum insured value at a lower number, so the premiums would be lower… due to the competitive pressures in the industry,” says California Lt. Gov. John Garamendi, who was state insurance commissioner during the wildfires of 1991 and 2003.

Industry’s point of view

Robert Hartwig, president of the Insurance Information Institute, an industry trade group, disputes this allegation as “absurd.”

“It’s in agents’ interest to write as much insurance as possible,” Hartwig says, “because they get their commissions from that.”

“The responsibility of the homeowner,” counters Poizner, the California insurance commissioner, “is to keep the insurer informed about the house. But once the consumer has fully updated the insurance company, it’s up to the insurer to calculate the proper level of insurance that a homeowner needs to carry.”

Poizner is prepared to take action, he says, if insurers don’t fairly compensate those affected by this year’s fires: “If the insurance company suggests a certain level of insurance (that turns out to be wrong), I will hold the insurer responsible to fully pay claims.”

Sam Sorich, president of the Association of California Insurance Companies, argues that while insurers and their agents “help” homeowners figure out their coverage, “the homeowner has the ultimate responsibility to make a decision” on how much to buy.

Across the USA, the problem of underinsurance simmers beneath the surface of cities and towns large and small, typically boiling over into a problem only after disaster strikes. In Northwood, N.D. (population nearly 1,000), many residents can’t afford to buy homeowners insurance that will cover the full costs of rebuilding their homes, Conrad says.

“The problem we found is that people were covered for the appraised value (of their house), but not for their replacement costs,” he says. “People in towns like this have very limited income, so it’s very difficult for them to buy replacement-cost insurance.”

Their insurance decisions came back to haunt many Northwood residents after one of the worst tornadoes in the state’s history pummeled 90% of the homes in August, damaged a hospital and destroyed the headquarters of one of the city’s largest employers.

The Federal Emergency Management Agency notified residents that because most homeowners had insurance, they probably wouldn’t receive individual grants and loans, Conrad says. Yet in letters to the agency, Conrad argued that people deserved aid because most of them didn’t have close to enough insurance to rebuild.

The aid came through more than two weeks after the tornado. The grants helped offset some rebuilding costs, Conrad says, but not enough.

Elsewhere, Ross Quigley blames his insurer for his lack of coverage to rebuild a rustic log cabin that burned down in a wildfire four years ago. The cabin, in Mount Lemmon, Ariz., was insured for about $160,000. After the fire, Quigley learned that it would cost nearly $500,000 to rebuild.

What really incensed Quigley, a retired real estate broker, is that he’d asked his agent for three times the coverage he had. The insurance agent, he says, denied him.

“He told me, ‘That’s all you need. You’re adequately insured, and that’s all you’re going to get,'” Quigley says. “I think they’re hedging their bets by purposely underinsuring,” so if the home is destroyed, they don’t have to pay the full amount of rebuilding.

Quigley sued the insurer for underestimating the amount of coverage he needed. The matter was settled out of court in 2005.

Inadequate insurance can lead to pitched battles between homeowners and insurers, as seen after Hurricane Katrina, says Louisiana Insurance Commissioner Jim Donelon. Failing to have adequate coverage for wind or flood losses, Donelon says, can lead to “irreconcilable differences between policyholders and the company.”

Homeowners often neglect to update insurers about renovations that raise the cost of rebuilding, but agents also “try to be conservative on behalf of the consumer, to keep his or her costs as affordable as possible,” Donelon adds.

Back in California, the images of the out-of-control fires leapfrogging toward his house last week are still fresh in Paul Marsden’s mind. Marsden, 40, his girlfriend and their three kids wound up at a diner where, to their horror, they watched on TV as flames enveloped their home.

In the fire’s immediate aftermath, he worried that he wouldn’t have enough insurance to rebuild his $580,000 house. But it’s not clear when Marsden will know whether this is the case. As the ashes clear from the wildfires, homeowners will be competing for contractors.

Prices of labor and supplies are likely to rise, which will pose a financial hardship for homeowners who don’t have policies that guarantee the rebuilding of the house, no matter the cost. Only about 10% of homeowners’ policies guaranteed payment of all rebuilding costs in 2005, compared with 50% a decade earlier, according to the Insurance Information Institute.

In San Diego, the mood at the community resource centers set up for fire victims is upbeat. In the mobile trailers of the insurance companies, staffers hand out cookies, bottled water, teddy bears and checks. Those $1,500 and $5,000 checks cover the cost of personal necessities, such as clothing and toiletries.

Many homeowners are grateful for the cash and hopeful they’ll be able to settle their insurance claims with little hassle. The unbridled optimism makes Karen Reimus, a volunteer at the Rancho Bernardino community center, cringe.

Homeowners “are in the honeymoon phase,” Reimus says, noting that people who lost homes last week can’t yet know whether they’re underinsured, because “They haven’t talked to builders. They haven’t looked at plans.”

Four years ago, when Reimus’ own home in the Scripps Ranch area of San Diego burned to the ground, she assumed her insurer would take care of her. The insurer brought her and her husband lunch, “and I remember thinking, ‘Oh, it’s going to be OK.'”

Disputing an insurer’s payout

Reimus thought her policy fully covered the costs of rebuilding the house, which she and her husband had bought and insured only four months before. But the payout the insurer offered, she says, fell at least $100,000 short. She disputed the payout and eventually reached a settlement with her insurer.

Candysse Miller, executive director of the Insurance Information Network of California, says the issue of underinsurance generated “a lot of headlines” but wasn’t a “sweeping problem” after the 2003 fires.

This time, despite uncertain payouts, some people are already drafting plans to erect larger houses.

Brian Arnold and his family, wife Errin, and their four children — ranging in age from 2 months to 11 years — ran from the fires in San Diego on Oct.22.

The fire destroyed their home. Their big-screen TV melted into a rectangular puddle. His wife’s china collection came crashing down from disintegrating shelves. And the washer and dryer are only vaguely recognizable from the scattered bits of metal.

Still, Arnold says, he updated his coverage a year ago at the behest of his agent, so he figures the damage will be “covered enough to rebuild bigger and better.” Unless he hears otherwise, that’s what he’ll plan to do.

“My wife always wanted a Tuscan-style house with a courtyard in the middle, and now she’ll get it.”
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Contributing writer: Chris Woodyard

Chu reported from New York, Weise from Rancho Bernardo, Calif.