Why Many Homeowners Are Underinsured—and How to Protect Yourself

After a natural disaster, many homeowners are shocked to discover their insurance policies don’t cover the full cost of repairs or rebuilding. According to Karen Collins, Vice President of the American Property Casualty Insurance Association (APCIA), this often happens because homeowners fail to update their policies to reflect rising construction costs and inflation.

Since 2020, the cost of building materials has surged by 35.4%, and labor costs have increased by 30%. Despite these spikes, only 30% of homeowners have adjusted their insurance policies to account for these higher costs, according to a 2022 Harris Poll conducted by the APCIA. Additionally, just 40% of homeowners who renovated their homes during the COVID-19 pandemic updated their insurance to reflect the increased value of their property. This leaves many homeowners at risk of being underinsured when disaster strikes.

The Impact of Demand Surge After Disasters

Following a major natural disaster, like Hurricane Idalia, the demand for materials and labor skyrockets, driving up rebuilding costs even further. This phenomenon, known as demand surge, can leave homeowners struggling to cover the gap between their insurance payout and the actual cost of repairs.

How to Protect Your Home and Finances

To avoid being underinsured, Collins recommends the following steps:

1. Consider Extended Replacement Cost Coverage. This type of coverage increases your policy limits, helping to absorb the higher costs caused by demand surges. The additional coverage can range from 20% to 100% above your policy’s base limit.
   

2. Add Ordinance and Law Coverage. Older homes may need to be rebuilt to meet current building codes, which can be significantly more expensive. Ordinance and law coverage helps cover these additional costs.
   

3. Increase Coverage for Additional Living Expenses.  After a disaster, rebuilding often takes longer than expected. Raising the coverage limit for temporary living expenses can help you stay afloat during the extended recovery period.
   

4. Conduct a Home Inventory.  Documenting your home’s contents with photos or videos can streamline the claims process and ensure you’re adequately compensated for lost or damaged items. Store these records in the cloud or a fireproof safe for safekeeping.
   

5. Review Your Policy Annually. The APCIA recommends reviewing your insurance policy every year to ensure your coverage keeps pace with rising costs and any changes to your home’s value.
   

The Rising Cost of Homeowners Insurance

Upgrading your policy will likely increase your premiums. Homeowners insurance costs have already risen by 11% from 2021 to 2022, according to S&P Global, and have increased another 2.8% so far in 2023. On average, a policy covering a 250,000 home costs 1,428 annually** nationwide, but in Florida, the average premium jumps to $1,981—if coverage is even available.

The Insurance Crisis in Florida

Florida’s insurance market is under significant strain. After Hurricane Ian, the costliest storm in the state’s history, several insurers, including Farmers Insurance, have exited the market. State-operated Citizens Property Insurance, which covers 1.3 million property owners who can’t find commercial coverage, is struggling to manage its losses. This has made it harder for homeowners to find affordable insurance.

The Role of Mitigation in Reducing Costs

Collins emphasizes that mitigation efforts—like installing reinforced roofs and impact-resistant windows—can help reduce losses during hurricanes and other disasters. These upgrades not only protect your home but may also lower your insurance premiums.

“Consumers have a tremendous role they can play in helping to bend down this loss curve,” Collins said. By taking proactive steps, homeowners can better protect their properties and finances in an era of increasing natural disasters.

The Bottom Line

Rising construction costs, inflation, and demand surges after disasters have left many homeowners underinsured. To safeguard your home and finances, review your policy regularly, consider additional coverage options, and invest in mitigation measures. Taking these steps now can save you from significant financial stress later.