Homeowners Face a Tricky Property Insurance Market

Much as the risk of tornadoes, hurricanes, wild fires and other destructive weather forces vary from state to state, so does property insurance for homeowners. With costs and coverage levels as inconsistent as the weather itself, consumers must navigate a complex market to pick the right policies.

Don Klumpp | Iconica | Getty Images

“Given the variability, it is worthwhile to do comparison shopping from time to time to make sure the premium you are paying and the coverages provided are appropriate,” says Don Griffin, vice president of Property Casualty Insurers Association of America, or PCI.

Indeed, average homeowner insurance premiums range anywhere from $400 to $1,400 a year, according to the PCI. For instance, homeowners in Idaho pay an average of $401 per year, whereas those in Florida pay $1,399.

A state-regulated industry, there is no national “norm,” and the top-ten most expensive states for homeowners insurance are literally all over the map.

Note that these rates do not include separate charges for states susceptible to hurricanes and earthquakes. Hurricane or "windstorm" coverage averages $2,769 per year, whereas separate earthquake insurance (offered only in California), ranges from $800 to $1600, depending on location.

Insurers Inherit the Wind

If you are in a hurricane-prone state, additional insurance is a must. What's more, insurers’ decision to drop storm-related coverage, most commonly hurricane-related, has created an entire secondary insurance pool.

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This market called “windstorm insurance” exists to supplement “normal” homeowner insurance, and is currently offered in Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina and Texas. (See slideshow.)

“We call it the market of last resort because it’s for property losses that the insurance industry is not willing to absorb themselves,” says Griffin of PCI.

Considered “high-risk,” homeowners in these states often cannot secure hurricane, hail, tornado, or flood insurance for their property. Hence their only option is to buy windstorm, with its own separate premium and deductible.

Allstate, State farm, and Travelers Insurance all exclude wind. So homeowners in a wind zone pay for two separate policies — one for standard risks like fire, theft, and explosions, and a separate policy for wind damage,” says Jeff Schulze, principal agent of Owens Insurance in South Carolina.

Earthquakes are Extra

Also separate from standard insurance, are earthquake policies. Due to their high cost, 90 percent of homes in California do not have earthquake insurance, according to the California Earthquake Authority, or CEA. A non-profit insurance company, the CEA insures only 821,000 homes in the entire state.

CEA Chief Executive Glenn Pomeroy explains: “We struggle to make our coverage as affordable as possible. Our rates are adjusted for high-severity, low-frequency risk. But it all depends on where the home is located. If we take an average $400,000 home with an average risk profile, that’s an $800 per year premium. But place that same home near a seismic area and you could double that to $1,600.”

Looking to cover more Californians, Pomeroy filed with the state for an overall 12 percent reduction in rates. While he waits for an outcome, the solution is less clear for other “high-risk” states, where no such rate regulation is being considered.

Tornado States Get No Special Treatment

Given the amount of confirmed tornadoes hitting U.S. soil this year — 152 according to the National Climactic Data Center — one might expect a separate insurance pool to follow suit. Yet, this is not the case.

“There’s been a lot of tornado activity this year," says Griffin. "But there are not too many [carriers] that will not insure tornado activity. Most states’ windstorm coverage is considered part of the [standard] policy and you can’t exclude it. It’s only in the coastal states where it is an issue.”

There’s the rub. Included in the seven storm states that provide secondary windstorm insurance are the states hit hardest this year. Alabama, followed by Texas, now holds the record for the most EF–5 tornadoes, the strongest category, with winds of 200 miles per hour or greater according to the National Weather Service. Thus, even within windstorm insurance, which is designed to cover the states facing the highest risk, tornado coverage may be excluded.

Flash Floods Are For The Feds

An Allstate logo is shown in Slidell, La., Wednesday, Aug. 30, 2006, (AP Photo/LM Otero)
Lm Otero
An Allstate logo is shown in Slidell, La., Wednesday, Aug. 30, 2006, (AP Photo/LM Otero)

Lastly, the natural disaster affecting the most homeowners — flooding — is not covered by any private insurer. Offered exclusively by the federal government under the National Flood Insurance Program, its policies average $600 per year. While the government runs the program, private insurers State Farm, All State or Nationwide administer the policies, regardless of risk profile.

While taxpayers subsidize the Federal Flood program, some 5,569,900 American homeowners currently have policies.

Rebuilding: Devil In The Details

Having the right coverage is one thing, knowing what to expect if you need it is another.

The biggest factor in predicting premiums is, of course, the value of your home. But don’t mistake market value for the brick-and-mortar value of the dwelling (a.k.a. its replacement value).

“Your policy covers the cost of repairing and rebuilding your home, not its market value. Even as home prices have slumped, the cost of most materials need to repair and rebuild have continued to rise,” says Bob Hartwig, president of the Insurance Information Institute.

However, many of the victims of recent storm activity have found themselves underinsured after disaster strikes, according to PropertyCasualty360.com. The main reason is that homeowners are reticent to insure the full replacement cost, especially when it exceeds the home's market value. Why pay high-priced insurance on a low-price home?

Stormy Weather - A CNBC Special Report
Stormy Weather - A CNBC Special Report

Yet, the relationship between market value and replacement value is much more tenuous than you’d expect. “When you look at the proportion of replacement cost to the market value, each [carrier] will designate percentages acceptable to them. The carrier has discretion to set their own proportion of what they are willing to accept. The market value could be well above or well below replacement value. It does work in both directions, depending on the location,” says Chris Hackett, PCI's director of personal lines Policy.

The safest way to prevent underinsurance is to pay extra.

Guaranteed Replacement Cost covers the entire cost of rebuilding your home, with no particular limit. This, however, is the most expensive product, and by insurers’ admission, the hardest to find.

Enhanced Replacement Cost is more common in the marketplace and it is designed to insure your property for up to 125 percent of the replacement cost. So for example, if you’re raw estimate replacement cost is $300,000, it would give you up to $375,000 in coverage.

(Check with your insurer to assess which if any of these optional, add-on products are right for you.)