Last week, someone sent me a link to this article:
Family that lost home in Marshall Fire grossly underinsured
According to the article, the Colorado couple bought their home for $580,000 but insured it for only $240,000. Now they realize they are grossly underinsured for their fire loss. The question is, how can this happen?
Yes, in some communities or neighborhoods, a big part of the purchase price of a home is market or land value. It is entirely possible that the replacement cost of a house can be less than half the market value of the property. However, that doesn’t appear to be the case here.
One would think that, among the parties involved in the insurance process – insureds, insurer, and if an agent was involved, the agent – someone would have questioned the large gap between purchase price and homeowners Coverage A limit.
If there was a mortgage, wouldn’t the mortgage holder have red-flagged this? Or did the couple pay case or, perhaps a large deposit such that the mortgage amount was $240,000 or less?
The insurer is identified in the story and my first thought was that the insurer needs to reimagine their “You only pay for what you need” sales pitch. Maybe, “We only pay for what you buy” or “You only pay for what you mistakenly bought.”
But, again, we don’t know WHY this home was underinsured since the article was more of a human interest story than any kind of investigative journalism.
If I learn more about the details, I’ll update this article. In the meantime, industry valuation experts have repeatedly cautioned that a large percentage of buildings, both personal and commercial lines, are underinsured, often by significant amounts. This is another cautionary tale.
Bill Wilson, CPCU, ARM, AIM, AAM
Founder at InsuranceCommentary.com
Mr. Wilson retired from the Independent Insurance Agents & Brokers of America in December 2016 where he served as Assoc. VP of Education and Research and was the founder and director of the Big “I” Virtual University for over 17 years.
He is the former Director of Education & Technical Affairs for the Insurers of Tennessee and, prior to that time, he was employed by Insurance Services Office, Inc. He is a graduate of the Illinois Institute of Technology with a B.S. degree in Fire Protection & Safety Engineering.
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