Wildfire victims are largely underinsured

California’s massive wildfires over the past year have highlighted that many residents were underinsured – and an insurance expert believes several factors are to blame.

According to the latest figures, nearly 80% of the homes affected by the wildfires were underinsured – of which 60% were severely underinsured. Over 60% of affected homeowners also said that they plan to sue their insurance agents and/or brokers for being underinsured.

Underinsurance, however, is not a new issue, nor is it exclusive to California’s wildfire-prone regions.

Richard Masters, operator of Richard Masters Insurance Services and insurance litigation expert witness, told Ventura County Star that several factors are to blame for an issue that continues to haunt homeowners.

These factors include:

• Insurance buyers wrongly equate insurance limits to the selling price of their home.
• Building code upgrades easily add to the cost of a home – as much as 35% to 50%.
• Construction costs increase following a disaster; in California, building costs have increased by 30% to 35%.
• Insurance company programs that estimate replacement costs are inaccurate “nine times out of 10.”

One of the more notable factors Masters believes is contributing to underinsurance is the fact that agents and brokers are very much engaged in a downward spiral race to “be competitive.” He explained that as an expert witness, he has been involved in several cases where the agent/broker admitted under oath that in order to stay competitive, they reduced the insurance limits to reduce the premium.

Masters also noted that he has seen some agents admitting they reduce the dwelling limit by the replacement cost extension since the insured would not be able to use it anyway – a fallacious claim, since the policy requires the client to be insured for 100% of the cost.

“When you talk to your clients, family, friends and neighbors, tell them they are most likely underinsured,” Masters advised. “Get them to stop thinking about replacing the old house and start thinking about rebuilding the home with new regulations, new materials, higher labor costs, costly architectural plans, required demolition and debris removal, contractors’ overhead and profit, etc.”