Wes Danskin is going to Florida to lend a helping hand. He doesn't know much about hurricanes, but in the past year he's become an expert on homeowners insurance and how most people don't have enough of it.
When a California wildfire raged through his northern San Diego community on Oct. 26 destroying 312 homes, Danskin remembers that he and some of his homeless neighbors shared one small consolation.
"A lot of people thought they were well-insured the day of the fire," says Danskin, a government hydrologist. He lived in a 2,100-square-foot home with his partner Linda Scott and their three teenagers in the Scripps Ranch neighborhood, where homes are valued at $600,000 and up. Some fire victims even turned away offers of merchant gifts or discounts and asked that they be given to the less fortunate in other fire-struck communities.
"Then reality set in," recalls Danskin.
The reality? Even in a neighborhood of middle- and upper-middle-class residents who dutifully protect their biggest assets -- their homes -- with insurance, the vast majority were not adequately insured against catastrophic loss. Danskin, a community leader who personally talked with 200 of the burned-out homeowners seeking to rebuild, estimates that 90% are underinsured as much as $50,000 to $200,000. At least 100 are suing their insurers, he says.
As part of his negotiated settlement with his insurer, Danskin is not allowed to say what he is receiving to rebuild his home. But he will say this: "The insurance was far more stressful than the fire for me."
The insurance industry itself agrees that underinsurance is a problem, as it braces for billions of dollars in claims from hurricanes Charley, Frances and Ivan.
"This is a problem we see everywhere," says Pete Moraga, spokesman for the Insurance Industry Network of California, a nonprofit, nonlobbying media-relations group for the property-casualty insurance industry. Public interest in the subject "surges after a catastrophe."
(Although the hurricanes are a wake-up call to homeowners throughout the country, Florida is a special case because of state laws that limit insurers' liabilities due to hurricanes. For homeowner tips on dealing with insurance claims, see below.)
A 2003 building cost survey found that nearly two-thirds of U.S. homes were underinsured by an average of 27%.
The studies were done by Marshall & Swift/Boeckh, a division of the British Columbia company MacDonald, Dettwiler and Associates, which provides building-cost information software to the insurance industry and has been tracking valuation vs. policy limits since the early 1990s.
Why aren't more homeowners fully insured? The reasons are many.
One that has gone unnoticed by many homeowners is a change in the type of coverage now offered by most insurance companies to limit corporate losses from major disasters.
Rather than provide what is known as a "guaranteed replacement policy," in the late 1990s insurers began substituting something called an "extended replacement policy." They sound similar, but the first essentially guarantees replacement of a destroyed home, while the second pays the amount stated on the policy (Part A), plus an additional 20% to 25%.
Insurers say it is now up to homeowners to follow up on their annual policy notices to make sure they have enough coverage to replace their homes. "We can't force people to update their policies," says Moraga.
He notes that many people don't know what kind of policy they have and have never read it. The cost to replace a home varies from city to city, neighborhood to neighborhood. "Ultimately, the choice and the responsibility is the consumer's," he says.
While insurance policies tend to go up a bit every year, that doesn't mean the policy is keeping up with the 6% to 8% annual increase in construction costs due to the nation's building boom of the past several years.
"People are buying homes and can barely afford them," he says. "Insurance is an afterthought."
Other homeowners don't think to keep their agents updated on improvements they've made, says Jeanne Salvatore, vice president of consumer affairs for the Insurance Information Network in New York, a nonprofit insurance group.
"Many, many people have taken advantage of low interest rates to remodel," she says. "If you have put $20,000 into a new bathroom, you'd better have your insurance updated."
Homeowners who fail to insure for that room addition might find themselves a room short if a disaster forces them to rebuild.
A major lifestyle change could also be a time to consider reviewing a homeowners policy, notes Salvatore. If an elderly parent who owns antiques and valuable jewelry moves in, or a grown child with computers or expensive musical equipment returns to the nest, she says, "that could be tens of thousands of dollars of stuff." That could also mean a rider to the personal property portion of an insurance policy would be a good idea.
Consumer advocates and those who lost homes in the recent California fires tend to put more of the blame for underinsure on the insurance companies themselves.
Danskin, the Scripps Ranch resident, says homeowners have a hard enough time understanding insurance, much less have the skills to know how to estimate the cost to rebuild their homes. Insurers, on the other hand, have sophisticated computer programs, such as that produced by Marshall Swift, to help them calculate with a fair degree of accuracy.
The main reason that insurance agents don't share rebuilding-cost estimates with their clients, he says, is that the insurance cost would go up and they don't want to lose their business. California Insurance Commissioner John Garamendi has also cited this as a reason.
"They're in the business of selling policies," says Danskin. "One criterion for sales is not to get underbid. There's a tremendous incentive on behalf of the agent not to get underbid."
Danskin says he expects some of the problems homeowners encountered in California to be replayed in Florida with the hurricane damage, though there are some major differences.
In Florida, most people will not suffer complete loss of their homes. Most insurers in the state have a hurricane deductible of 2% to 5% of the insured value. Also, homeowner policies do not cover damage floods.
Flood damage is considered damage that's due to water coming from the ground up, from water surges or flooded streets. Many people, even in Florida, do not purchase separate flood insurance. Homeowners insurance covers water damage due to water entering the home through a damaged area, such as a roof or wall.
Nonetheless, Danskin believes the lessons learned in dealing with insurers during the fires would benefit hurricane victims. He and others are planning to fly to Florida to speak to homeowners: "There's no reason these difficult lessons should be lost. I've got Southwest tickets. I'll show up."
Before joining TheStreet.com, Ann Perry was the personal finance columnist for The San Diego Union-Tribune. She is the author of "The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance" (Broadway Books, 2003). She has a B.A. in English and Communications from Stanford University and a master's degree from the Columbia University School of Journalism. She can be reached at