Homeowners Come Up Short on Insurance
The New York Times
August 31, 2004
By JOSEPH B. TREASTER
EL CAJON, Calif. - Karla and Bruce Carroll remember the sheriff
on his bullhorn ordering residents to evacuate and, minutes later,
hearing the roar of monstrous flames arcing toward their modest
home here in the hills above San Diego.
Mrs. Carroll grabbed a family photo album as they ran to safety;
Mr. Carroll started to gather his fishing rods. But she hustled him along.
"Don't worry about those things,'' she recalls saying at the time. "We've got insurance."
But, the Carrolls say, the insurance they bought from State Farm,
the nation's largest property insurer, has left them at least $100,000
short of the cost of rebuilding their home. Today, nearly a year later,
they are still wrangling with their insurer and living in a 29-foot-long
house trailer on the land where their three-bedroom home once stood,
overlooking a spectacular sweep of ridges and canyons.
Their woeful shortfall in insurance coverage, experts say,
is a plight shared unknowingly by millions of American homeowners.
It has been fed largely by a shift in the way property insurance
has been sold in recent years.
In a move to cut costs from claims, insurance companies
began in the late 1990's to phase out coverage that guaranteed the replacement of a
destroyed home, regardless of the expense to the insurer.
In place of that unlimited coverage, which had become nearly universal, insurers
substituted a similar-sounding policy with a crucial difference:
it pays only the amount stated on the policy plus, typically, an additional 20
percent to 25 percent.
For their part, insurers insist that it is the consumer's
responsibility to acquire adequate coverage.
The old policy was called a guaranteed replacement policy.
The new one, which most Americans now have, is called an extended replacement
policy.
"People look at this and it says 'replacement' and they think,
'That's good, I get my house replaced,' " said John Garamendi, the insurance
commissioner in California. "But they don't get their house replaced.
They get money up to the set limits plus the extended 20 percent or 25
percent."
Marshall & Swift/Boeckh, a Los Angeles company that most insurers
rely on for help in calculating the value of houses, estimates that 64
percent of American homes are underinsured by an average of 27
percent, with some homes underinsured by 60 percent or more.
Another insurance industry company, AIR Worldwide in Boston,
estimates that many upper-income homes in New England are
underinsured by 30 percent to 40 percent.
"The underinsurance problem lies just beneath the surface all
across the country,'' said Robert P. Hartwig, the chief economist for the
Insurance Information Institute, a trade group in New York.
The insurance gap has been worsened by the nationwide housing
boom that has been rapidly driving up the cost of lumber, bricks, cement
and other construction materials, industry executives say. And in
Southern California, rebuilding costs soared even higher as the demand
for contractors and building supplies suddenly jumped after the
Carrolls' home and several thousand others were destroyed in wildfires over
a few days last October.
But such explanations do not satisfy the industry's critics, who
say insurers have shifted the burden of such mistakes onto homeowners.
"Most people go to their insurance agent to buy coverage and
figure they're fully covered," said J. Robert Hunter, the director for insurance
at the Consumer Federation of America. "But often they're not."
The issue of underinsurance has not attracted much attention
because, of the millions of insurance claims every year, fewer than 2 percent
are for the total loss of a house. But the wildfires here last fall came
as a jolt. They quickly incinerated more than 3,700 homes and, Mr.
Garamendi said, "a very large proportion" of them were underinsured.
Consumer advocates and industry executives expect similar problems
for the victims of Hurricane Charley in Florida as they begin working
through their claims.
"The problem is everywhere,'' Mr. Hartwig said. "The disasters simply expose it.''
George Kehrer, a lawyer and building contractor who founded
Community Assisting Recovery in Los Angeles more than a decade ago to help
people with insurance claims after disasters, said he had spoken
to 1,200 people who lost homes in the California fires.
"About a dozen of them,'' he said, "were adequately insured."
No single factor is entirely to blame for the underinsurance,
consumer advocates and industry executives say. Homeowners, they say, need
to recognize their own responsibility.
But under pressure to make sales, Mr. Garamendi and consumer
advocates explain, insurance companies and their agents often aim low in
valuing houses. The goal, they say, is to keep premiums down to keep
customers from going to competitors, and sometimes even a few
dollars can make a difference.
"If they quote a realistic replacement cost, the price of the policy
goes up," Mr. Garamendi said, "so they are motivated to keep the
replacement cost down."
Insurance industry executives argue that it would make no sense
to undervalue homes intentionally. The higher the insurance coverage, the
higher the premium, they point out.
But Mr. Garamendi disagrees. "You want the sale first," he said. "O.K.,
you can get a little more premium if you give full coverage. But you
lose the sale."
Mr. Hunter, the consumer advocate, said agents often lacked the
training to assess accurately the value of a home, usually done these days
with the help of a computer program. Rarely do the agents leave their
offices to assess a house personally, agents and industry executives
said.
Mr. Garamendi said some agents inadvertently undervalued homes by
using a computer shortcut to obtain what is known as a "quick quote."
Then, when a customer decides to buy coverage, the agent fails
to add details like designer cabinets and fixtures that tend to increase the
replacement estimate and the cost of the insurance.
While most insurance policies include a built-in escalator to keep
pace with general inflation, the costs of building supplies and paying for
construction crews have been rising at a faster pace, in many cases
widening the gap between the amount a house is insured for and what it
will cost to rebuild it.
Another factor in the insurance gap has been a failure by some
homeowners to increase coverage after the spurt in home improvements,
from new kitchens to extra bedrooms, as millions of Americans
have used cheap money from mortgage refinancings in recent years to
upgrade their homes.
Still, in dozens of interviews over several days this month, owners
of the homes in Southern California that were destroyed said repeatedly
that they had been led to believe they had bought enough coverage
to rebuild their homes and were stunned to find out they were wrong.
Mrs. Carroll said she first bought her insurance from State Farm in
1998 shortly after she and her husband acquired their home for
$172,500.
"I told them I wanted full coverage for my house," she said.
"I've lived in this area most of my life, and I knew there was a huge fire risk here. I
had been evacuated for fires three times as a child."
Two years later, she said, she checked back with the agent
to make sure she had enough coverage and increased the coverage for possible
additional costs as a result of changes in building codes.
"I said, 'Are you sure this is enough to replace the house?' and she said,
'Oh, that's plenty of coverage,' " Mrs. Carroll recalled. "She had me
convinced my house could burn or fall down in the canyon under
heavy rains and, yeah, it's covered."
At the time of the fire, the Carrolls' house was insured by State Farm
for $126,000, which, following standard practice, did not reflect the
value of the land. Their annual premium was $730.
With 20 percent in extended replacement coverage and other standard
features including a built-in adjustment for inflation and coverage on
their two-car garage, fences and driveway as well as an additional
25 percent for anticipated building code changes - upgraded by Mrs.
Carroll from the usual 10 percent - the Carrolls estimate their policy
will pay them about $222,000. But Mrs. Carroll said a contractor hired
by State Farm estimated that replacing their losses, not including
their clothing and other personal things, would cost nearly $400,000.
Bill Sirola, a spokesman for State Farm, said it was not clear whether
the Carrolls were underinsured. "We are working with that family," Mr.
Sirola said. "We are working with other builders on their behalf
to get other estimates of their rebuilding costs."
As the insurance companies see it, if people are underinsured it is primarily their own fault.
"It's the homeowner's responsibility to see that his home is properly
insured," said Mr. Hartwig of the Insurance Information Institute.
Insurers say the terms of coverage are clearly spelled out in their
policies. In California, insurers are also required to mail a statement
annually specifying the terms of coverage along with renewal notices.
But many homeowners burned out by last year's fires say they made
clear they wanted to be able to replace their homes. In interviews, they
said they had no way of knowing how much insurance they needed
and relied on the agent to set the proper value and charge the
appropriate price. Many say they would have been willing to pay
more to assure themselves that their losses would be fully covered.
"They're the experts," said Donald McCormick, a high school
math teacher, who lost his home in the Scripps Ranch section of San Diego. "I
don't go to the doctor and tell him how to do surgery."
Copyright 2004 The New York Times Company
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