WILDFIRES are threatening homes in California, while East Coast residents of the United States brace for the hurricane season.
Judging by recent catastrophes, people should review their homeowners' coverage to make sure dollar amounts keep pace with construction expenses, Bloomberg News reported.
About two-thirds of US homes were underinsured in 2007 by an average 18 percent, according to data compiled by Los Angeles-based Marshall & Swift/Boeckh, which provides building cost data for the insurance industry.
Owners often confuse the estimated resale value of their homes, which includes the value of the land, with what it costs to rebuild. The rebuilding cost is determined by market prices for contractors and building materials, not the local housing market.
"Most policies used to be guaranteed replacement cost," said Robert Hunter, insurance director at the Consumer Federation of America in Washington. "That isn't true any more. It puts people in a rather fragile situation."
Insurance agents may provide a figure for coverage, but it's the responsibility of homeowners to make sure that's enough. Insurers generally pay up to a set amount.
And some homeowners mistakenly think they're covered for floods, earthquakes, mold, termites and waterline breaks, according to a 2007 survey by the National Association of Insurance Commissioners in Kansas City.
"Companies are always looking at different aspects of homeowners' policies that they may exclude," said Marta Arrington, consumer services director at Florida's Department of Financial Services. "Mold is a good example."
While Hurricane Katrina added to pressures on insurers, it was Hurricane Andrew in 1992, which followed wildfires and quakes in California, that led to an overhaul of the way the industry wrote home owners' policies, according to Hunter, who was the Texas insurance commissioner in 1993 and 1994.
Companies turned to consulting firms such as McKinsey & Co and computer programs with names like Colossus to pinpoint where they were losing money. Results were dramatic, Hunter told Congress last October. Even after record-setting amounts of damage by hurricanes, the insurance industry made US$38.5 billion in 2004 and US$44.2 billion in 2005, he said.