As expected, now that the smoke has dispersed in the media’s eyes on the southern California wildfires themselves, attention now turns to the mysteries of Coverage A amounts on homeowners policies. As seen in the New York Times:
“I have about $1.5 million coverage for dwelling only,” Mr. Okonsky said, or the equivalent of about $230 per square foot of construction. “For custom-home construction I am getting prices like $350 up to $500 per square foot.”[...]
Guaranteed home-replacement policies have become increasingly rare in California since the 1990s, when a series of catastrophic earthquakes and wildfires sent insurers’ profits plummeting. Most California policies have limits on construction, although some include inflation riders or extension policies to create buffers beyond the estimated replacement price.[...]
Insurance industry officials say many homeowners contribute to the problem of insufficient coverage. In seeking to keep premiums low, the officials said, homeowners often do not inform their insurers about renovations, opt out of adequate coverage or fail to update their policies.[...]
But John Garamendi, the California lieutenant governor who served two terms as the state’s insurance commissioner, has placed much of the blame on the insurance companies. At a news conference earlier this year, Mr. Garamendi said that “lack of clarity in the language” of policies was a main reason that homeowners had insufficient insurance. He also said that, in some cases, insurance agents and insurance companies “were giving bad information to the consumers.”
There’s a reason why I asked my homeowners insurer to include a provision to automatically increase my Coverage A amount every year, in approximate proportion to the perceived increase in values and construction costs in my corner of the world. It’s not fun having an automagical guaranteed increase in the premium paid over/above pure trend…but it does help spare some of the pain that my wife and I would feel if disaster struck and we hadn’t had any increase to our limits.
I’m a little disappointed in the NYT’s subtle bias by not exploring the demise of guaranteed replacement cost provisions, which went away or were capped after a few years where the industry paid claims that were double or triple the policy limits, and folks who did keep their policy limits up-to-date ended up subsidizing the folks who had just let it ride.
But, after Katrina, the long-overdue acknowledgement that homeowners insurance shouldn’t be a loss-leader for the industry, and certain insurers seeing the light when it comes to the risk posed by aggregation of risk in certain areas…it’s perhaps understandable that a few of us are very sensitive to advocacy bias coming from the media and elected regulators.