As home insurance bills rise, owners' coverage decreases

Robert Shiver's homeowners insurance bill rose from $3,800 in 2022 to $8,000 in July. “I remember opening the bill and, honestly, laughing and saying, 'This isn't feasible,'” he said.

Mr. Shiver, 40, who lives about 20 miles (32 kilometers) east of Tampa, Florida, did not pay the bill. Instead, he worked with his insurance agent to shave off portions of his coverage, lowering the estimate of the amount the insurer would have to pay to potentially rebuild his home from about $710,000 to about $560,000.

Reducing coverage dropped his bill to just under $5,000, a huge relief, he said, because he would be able to make his monthly mortgage and insurance payments again.

In the insurance industry, Mr. Shiver could now be considered “underinsured,” meaning his policy may not be sufficient to cover rebuilding after catastrophic losses. Underinsurance is not a new problem, but it has become much more widespread and severe over the past three years as rising inflation and climate change have created a highly volatile and unreliable insurance market and increased costs for homeowners – sometimes in unexpected ways.

Insurers' losses due to natural disasters amounted to $100 billion for the fourth year in a row in 2023, and they will pass these costs on to property owners. High inflation has also forced insurers to increase rates to cover claims.

Some homeowners expand their own coverage by foregoing hurricane or storm protection; find ways to reduce the replacement value of their properties, as Mr. Shiver did; or increasing their deductible. Others discover that their policies will not fully cover the costs of rebuilding due to the sharp increase in material costs once the disaster has already struck.

Colorado Insurance Commissioner Michael Conway discovered the extent of the underinsurance problem after a wildfire near Boulder destroyed nearly a thousand homes in 2021. of Insurance investigated and found that only 8 percent of policies in the areas affected by the fire promised to cover rebuilding costs, no matter how high they were. It also found that between a third and two-thirds of all homes affected by the fire were underinsured for rebuilding costs within a normal range.

To try to solve the problem, Mr. Conway and his team late last year organized meetings with insurance companies, builders and other groups to brainstorm ideas to make things easier for homeowners, but so far no plans have emerged .

“We are very concerned about what these homeowners are experiencing with the affordability issues, and we are absolutely sympathetic to the pressure they are feeling to find a way to pay for their insurance coverage,” Mr. Conway said.

Julie Coffey didn't realize she was underinsured until she ran out of money while trying to rebuild her home near San Francisco after it burned to the ground in August 2020 in one of the many major wildfires that share that summer of California.

It took months before Ms. Coffey even knew what she would get from her insurer. By the time she started rebuilding her home in 2021, inflation was rising and building materials were scarce. Her new home lacks important amenities that she couldn't afford, such as a water softener and fencing.

“Within a month of living here, my sink is showing signs of rust,” Ms Coffey said. “It's crazy what you have to do to try to get close to where you were without worry or thought.”

Mark Friedlander, a spokesman for the Insurance Information Institute, a trade group, said home insurance premiums rose 32 percent cumulatively from 2019 to 2023, while rebuilding and replacement costs rose 55 percent. Analysts at the group estimate that in 2023, home insurers suffered their largest insurance loss – the difference between premiums collected and claims paid – since 2011. Behind the loss were massive storms that caused more than $50 billion in damages that insurers had to pay. for.

A survey last year by the institute and researchers at reinsurer Munich Re found that 88 percent of U.S. homeowners had property insurance, up from 95 percent in 2019. Only 4 percent had flood insurance, even though 90 percent of natural disasters in the country insured. cause flooding.

Once insurers increase premiums, many homeowners find that their lenders are willing to explore ways to make their payments more affordable. Banks that collect mortgage payments must ensure borrowers' coverage meets requirements set by government-backed housing agencies Fannie Mae and Freddie Mac, but are open to owners adjusting it within those requirements, says Pete Mills , the chief economist of the Mortgage Bankers Association. , the trade group for the mortgage industry.

Amy Bach, executive director of United Policyholders, a nonprofit that helps insurance consumers navigate tricky claims processes, said she now recommends a variety of strategies to keep policies affordable.

“For most consumers, the problem now is: What is the least worst option for me, given the price?” she said. She recommends reducing coverage for the contents of a home or reducing coverage for outbuildings such as garages, sheds, swimming pools or retaining walls.

“We said, 'Increase your deductible,' but what does that mean now?” said Mrs. Bach. “My parents' house on Long Island has a windfall deduction of $33,000,” meaning they would have to pay that amount out of pocket — a large part of the cost of a new roof — before getting any help from their insurer.

Not everyone thinks letting borrowers shave off parts of their coverage is a good thing. Brian Marino, an insurance agent in Fort Lauderdale, Florida, said he worried that if homeowners had enough coverage to satisfy their lenders, lenders would be able to recoup what they needed after a disaster, while borrowers wouldn't get full coverage. could afford to rebuild.

“The bank is happy,” Mr. Marino said, “but they are on the street.”

Mr. Friedlander, the trade group's spokesman, said bundling home and auto policies and making “deductible adjustments” were common ways to reduce insurance costs, adding that the institute recommended working with an agent work' to reduce the cost of your policy without lowering the levels. of coverage.”

Homeowners aren't the only ones reducing their coverage under pressure. The Peachtree Group, an Atlanta-based real estate investment trust that owns hotels, rental properties, office spaces and other properties across the country, expects deductibles on some of its properties to rise this year in response to rising insurance costs, said Charles Talbert, the company spokesperson. That would leave the country paying for more reconstruction costs.

Sue Savio, an insurance agent in Honolulu, said underinsurance has recently become widespread on Oahu. “We have a lot of apartments where the premiums would have doubled or tripled,” Ms. Savio said. But instead of paying those higher premiums, owners dropped coverage for hurricane damage because such storms don't hit Hawaii often.

“Our last hurricane was 32 years ago,” Ms. Savio said.

Those who own their homes or other properties outright have much more leeway in deciding whether or not to insure their properties. Some wealthy homeowners are willing to take the risk of being underinsured because they can afford to repair their properties themselves.

“I've talked to people who own their homes outright and choose to forego the wind damage. They stop flooding,” said Brian Gray, managing director of UBS, whose wealth management group serves some of Tampa's wealthiest residents.

One of Mr. Gray's clients agreed to a $1 million deductible.