This year, he looked at the issue of underinsurance. Through his experience working with several national mortgage lenders, he noticed that it appeared that many homeowners were experiencing underinsurance losses when they faced total property losses to their homes. In reviewing the statistics, it becomes rather alarming to see just how much American homes are underinsured.

Marshall Swift estimates that 64% of US homes are insured for less than replacement cost. The average dollar amount of underinsurance is $27,000. Here in California, upwards of 50% of the homes are underinsured, but the large value of the average home in California increases the “gap” of underinsurance. There are more than 1 million homes over $500,000 in value in California. Since half of these are probably underinsured, the total value of underinsurance in California is mind-boggling.

The amount of underinsurance becomes more amplified when the total loss is the result of a catastrophe because Catastrophes drive up the cost of losses because of the pressure it puts on limited resources. In the Oakland Hills fire in 1991 in Northern California, replacement cost per square foot of home shot up from $125 to $225. Ordinance changes required after Hurricane Andrew in Florida in 1992 increased building costs by at least $20,000 per home. In individual cases, fires in California showed the following: Fallbrook, CA-Replacement cost $805,000; insurance settlement $723,000. Atherton, CA-Replacement cost $822,000; insurance amount $406,000. And in the recent Southern California fires many homeowners are finding that their insurance is running thousands of dollars less than the cost to replace their homes.

Most people are not aware that they have a contractual obligation to insure their homes for the proper replacement cost. Most mortgage companies are required by their investors-usually Fannie Mae and Freddie Mac-to insure for the replacement cost of the home, even though this may exceed their loan amount. If a homeowner does not buy the proper coverage, the lender has the legal right to buy it for them. A typical HO-3 policy provides the right types of coverage, but the proper amount is critical as well. Due to many factors including inflation, law and ordinance changes, location of the structure, special features of the dwelling, demolition and debris removal considerations and the occurrence of a catastrophic loss, the replacement cost of a particular home can vary widely.

Courts have ruled that it is up to the homeowner to purchase the proper amount of coverage, and it is their responsibility to do so.

How can you protect yourself to make sure you are fully insured? There are several things you can do including: