Inadequate Home Insurance Could Devalue Entire Regions

May 6, 2019

The rising cost of building materials are leaving many homeowners in disaster-prone areas underinsured, warns a new study from CoreLogic. The increased costs are not being factored into insurance coverage, which means homeowners could be left with devastating losses and a huge cleanup bill.

The costs of labor and materials have increased significantly over the past two years, the study notes. Further, the risks from natural disasters including floods, wildfires, and hurricanes are also increasing. In 2018, there were 14 natural disasters in the U.S., from record-setting wildfires in California to costly hurricanes in Florida, that totaled $91 billion in reconstruction, according to the National Oceanic and Atmospheric Administration. “The financial impact of not updating reconstruction costs for two years is significant,” according to CoreLogic’s report. “If a catastrophic event were to affect only 5% of homes and cause just 30% storm surge damage to those 5% of properties, the reconstruction cost undervaluation is approximately $205 million.”

Insurers are rushing to recalculate coverage on homes that may be impacted by natural disasters, CNBC reports. In one study, CoreLogic researchers identified 110,000 Southern California properties that were in “very high” to “extreme” risk of wildfires. Costs are “significantly higher”—5.6% more--than they were two years ago because of higher labor and building material costs. Given the higher reconstruction costs, if just 1% of the homes at risk were completely destroyed in a wildfire, the undervaluation would be $25 million from insurance coverage not being current, the CoreLogic study shows.

CoreLogic’s study identified about 1.1 million properties at “very high” to “extreme” risk of loss from a storm surge in coastal hurricane-prone areas along the Northeast Atlantic and Gulf Coast regions. Factoring in recent building costs, reconstruction of at-risk properties in Florida is estimated at $240 billion.

Many inland metros at risk of floods and tornadoes face insurance obstacles, too. For example, Oklahoma averages about 56 tornadoes per year. About 1.3 million properties with $257 billion in reconstruction costs are at “very high” or “extreme” risk of damage. “If insurance on these homes is not valued at current cost levels, which have increased 6.6% over the past two years, homeowners could be left with huge losses,” CNBC reports. “If one tornado caused 20% damage to just 1% of the homes deemed at very high risk, the reconstruction coverage would fall short by approximately $34 million.”

In the event of a disaster, homeowners who lack adequate coverage are more likely to default on their mortgages, researchers note. If that becomes a wide-scale issue, some regions could see home values plummet as many homeowners fall underwater on their loans. “Underinsurance issues can cause financial devastation for property owners, artificially low coverage limits for insurance carriers, and increased loan delinquencies,” Amy Gromowski, senior analytics leader at CoreLogic, told CNBC. “Homeowners who experience natural hazard events, such as the California wildfires, are often struck by personal and financial devastation, and many aren’t able to rebuild their homes, which prolongs the region’s recovery and often causes homeowners to default on their mortgages.”