Being underinsured on your homeowner’s insurance policy is a growing concern for homeowners across the country. You might think your policy provides complete protection, but many homes have coverage gaps that only become apparent when it's too late.
Understanding if you have adequate insurance coverage could mean the difference between fully recovering from a disaster and facing significant financial hardship.
In this article, we’ll explain how to identify potential coverage gaps and ensure your home is always fully protected.
What Does It Mean to Be Underinsured?
Your home is considered underinsured when your homeowners insurance policy covers less than the actual cost to repair, rebuild, or replace your home and possessions after a covered loss. Unlike being completely uninsured (having no policy at all), underinsurance means you have insurance, just not enough of it.
Many homeowners mistakenly believe their policy will cover anything that happens to their home, up to the policy limits. However, several factors can create coverage gaps:
- Your policy limit hasn't kept pace with inflation and rising construction costs
- Your coverage is based on market value rather than replacement cost
- Your policy doesn't account for recent home improvements
- You haven't updated your personal property coverage after significant purchases
- Your policy contains exclusions or limitations you're unaware of
The most dangerous aspect of underinsurance is that it often remains hidden until you file a claim. By then, it's too late to increase your coverage for that particular event.
Is My Home Underinsured? Here’s How To Check
If you’re worried about your coverage, here are key indicators that should prompt a closer look at your policy:
You Haven't Updated Your Policy in Years
Insurance isn't a "set it and forget it" product. If you haven't reviewed your coverage since purchasing your policy, you could be under protected. Construction costs, building codes, and property values change over time. Your policy should evolve accordingly.
You've Made Home Improvements
That beautiful kitchen remodel or new master suite addition increased your home's value, but did you update your insurance? Underinsured homeowners often forget that improvements increase their home's replacement cost. Even smaller projects like finishing a basement or adding a deck require policy adjustments.
Your Personal Possessions Have Multiplied or Increased in Value
The personal property coverage in your policy is typically calculated as a percentage of your dwelling coverage. As you acquire more items or purchase valuable electronics, furniture, jewelry, or art, your needs change. Special collections or high-value items often require additional coverage beyond standard policy limits.
Your Area Has Experienced Significant Property Value Increases
While market value isn't the same as replacement cost, rapidly appreciating real estate markets often coincide with increased construction costs. If homes in your area are selling for significantly more than when you purchased your policy, it's time for a coverage review.
Your Policy Only Covers Actual Cash Value
If your policy pays actual cash value (depreciated value) rather than replacement cost for your dwelling or possessions, you're likely underinsured. The difference between these coverage types can amount to tens of thousands of dollars after a significant loss. At Wawanesa, we provide replacement cost coverage on all our homeowners policies.
If any of the above apply to you, a helpful Wawanesa agent is ready to answer your questions, review your policy details, and make sure you’re receiving full coverage without any gaps.
What Happens If My Home Is Underinsured?
It’s important to avoid being underinsured, as the consequences can be severe and long-lasting. Inadequate coverage can leave you vulnerable to significant financial hardship in the event of unexpected loss or damage, such as:
Significant Out-of-Pocket Expenses
The most immediate impact is financial. If your underinsured house suffers major damage, you'll need to cover the gap between your insurance payout and the actual repair costs. This difference can easily reach tens or even hundreds of thousands of dollars, especially after widespread disasters when construction costs spike.
Delayed or Incomplete Repairs
Without sufficient funds, you might be forced to postpone repairs, complete only partial restoration, or use lower-quality materials than you had before. This can affect your home's safety, functionality, and value.
Code Upgrade Limitations
Building codes change over time. Unless your policy includes ordinance or law coverage, you may be responsible for paying the difference between rebuilding to the original specifications and meeting current codes, which can be substantial for older homes.
Inadequate Additional Living Expenses
If your home becomes uninhabitable, your policy should cover temporary housing. However, if these limits are too low, you might exhaust them before repairs are complete, leaving you to cover additional living expenses out of pocket.
Financial and Emotional Distress
Dealing with property damage is stressful enough without the added burden of financial shortfalls. Underinsurance can turn a difficult situation into a financially devastating one, adding emotional strain during an already challenging time.
Common Causes of Underinsurance
Understanding why homes become underinsured in the first place will help you avoid these common pitfalls:
Inflation and Construction Cost Increases
Construction materials and labor costs have risen dramatically in recent years, with new tariffs on imported goods adding to the skyrocketing costs. Without regular policy adjustments, your coverage falls behind.
Focusing on Market Value Instead of Replacement Cost
Your home's market value includes the land value and reflects local real estate conditions. Replacement cost, on the other hand, represents what it would cost to rebuild your specific home with similar materials at current prices. These figures can differ significantly.
Setting Coverage Based Only on Mortgage Requirements
Lenders typically require insurance that covers your mortgage amount, but this figure might be considerably less than your home's full replacement cost, especially if you've been in your home for many years.
Underestimating Personal Property Value
Most people accumulate possessions gradually and don't realize how much they've amassed until they need to replace everything. Without a detailed inventory, it's easy to underestimate what you own.
How to Calculate the Right Amount of Coverage
Determining adequate coverage requires looking beyond simple formulas:
Focus on Replacement Cost
The cornerstone of proper home insurance is having sufficient dwelling coverage based on current rebuilding costs. This includes:
- Materials similar to what you currently have
- Labor at today's rates
- Architectural and engineering services
- Debris removal and cleanup
- Permits and inspection fees
Online replacement cost calculators can provide estimates, but they're just starting points. For accuracy, consider having a professional assessment.
Assess Your Personal Property Realistically
Take inventory of your possessions, noting high-value items that might exceed standard coverage limits. Video walkthroughs of your home can help document what you own. Remember that standard policies typically provide personal property coverage equal to 50-70% of your dwelling coverage.
Don't Overlook Liability Protection
Standard liability coverage often starts at $100,000, but this may be insufficient given today's legal climate. Consider increasing limits to at least $300,000, especially if you have significant assets to protect.
Review Additional Living Expenses Coverage
This coverage helps with costs like hotel stays or apartment rentals if your home becomes uninhabitable. Ensure it's sufficient for your area's housing costs for at least 12 months.
What to Do If You Think You're Underinsured
If you suspect your coverage has fallen behind your needs, take these steps:
Request a Coverage Review
Call us to talk to a Wawanesa agent, who will review your current coverage. We offer this service at no cost, and it can identify critical gaps before you need to file a claim.
Adjust Your Dwelling Coverage
If necessary, increase your dwelling coverage to reflect current rebuilding costs. This adjustment will typically also increase your personal property coverage, which is calculated as a percentage of dwelling coverage. Remember, dwelling coverage is not the same as your home warranty.
Consider Extended Replacement Cost Coverage
This endorsement provides additional coverage (typically 25-50 percent beyond your policy limits) if rebuilding costs exceed expectations. It provides valuable protection against inflation and post-disaster construction cost spikes.
Add Endorsements or Riders for Valuable Items
For high-value possessions like jewelry, art, collectibles, or expensive electronics, consider scheduled personal property endorsements that provide specific coverage beyond standard limits.
How to Avoid Being Underinsured in the Future
Maintaining the right coverage is a matter of ongoing maintenance, but it’s simple and straightforward. Here are a few things to add to your to-do list:
Schedule Annual Policy Reviews
Mark your calendar to review your insurance coverage annually. This simple habit can prevent coverage gaps from developing over time.
Communicate Major Changes
We encourage our members to let us know about home improvements, significant purchases, or other changes that might affect their coverage needs. Don't wait for your annual review if you make substantial changes.
Document Your Home and Possessions
It’s smart to keep an updated home inventory with photos, videos, and receipts for major purchases. Store this information in the cloud or another secure location outside your home for easy access after a loss.
Avoiding Underinsurance is Easy with Wawanesa US
While discovering coverage gaps before a loss requires proactive effort, this investment of time can save you from financial devastation when you need protection most.
Also, updating your policy doesn’t necessarily mean you’ll pay more. Wawanesa offers several types of discounts, including discounts for bundling your auto and home insurance.
Don't wait for a claim to discover you're under protected. The peace of mind that comes with the right coverage is well worth the effort, and we make it easy. Give us a call today, and we’ll make sure your policy is up to date and that you’re getting exactly the right coverage for your needs.
Advertisement: Get homeowners insurance for less than you'd expect. Click to see homeowners discounts.