Article:

1.     What Is Property Hazard Insurance?

Property hazard insurance is not just a line item on a balance sheet—it’s a critical safeguard against financial ruin. Insurance companies pool premiums to cover accidental damage, but their business model is simple: collect more, pay less. That’s why understanding your policy is not optional; it’s essential.

Real property insurance spans residential, commercial, and personal categories. Covered perils include fire, windstorms, hail, theft, and vandalism. But beware: gradual damage from neglect, wear and tear, or poor maintenance is not covered. Only sudden, accidental events qualify.

Additional risks, such as floods and earthquakes, require separate riders or endorsements. Without them, you’re exposed. A knowledgeable insurance broker is not a luxury—it’s your first line of defense.

2.     The Danger of Underinsurance

Here’s the harsh truth: underinsurance is a silent epidemic. It’s the speed trap no one sees coming until it’s too late. Inflation has driven up the cost of building materials, labor, and regulatory compliance. Yet, many borrowers respond by raising deductibles or slashing coverage—often without understanding the consequences.

Imagine suffering a significant loss only to discover your policy covers half of what you need. The insurance company isn’t liable for your oversight. You are. And when the finger-pointing begins, the legal community is ready to pounce.

3.     The Illusion of Savings

Some borrowers argue they can rebuild for less. “I’m a contractor,” they say. “I can do it cheaper.” But lenders and insurers don’t operate on hypotheticals. They rely on market data rather than personal estimates. Replacement costs for entry-level homes range from $400 to $500 per square foot. Custom homes? $1,000–$2,000 or more.

Cutting coverage to save on premiums is like canceling your fire alarm to save on batteries. It’s short-sighted and dangerous.

4.     The Lender’s Responsibility

Lenders must take a proactive role. Auditing loan portfolios for adequate coverage isn’t just prudent—it’s essential. Tools like Marshall & Swift provide reliable cost data across hundreds of locations. Use them. Discuss them. Integrate them into your underwriting process.

To the borrower who insists on underinsuring: we understand your desire to save money. But we must decline. Your coverage must meet or exceed the loan amount and reflect the actual replacement cost of your property. Anything less is a gamble we cannot afford to take.

5. The Rising Cost of Property Insurance

• Homeowners insurance premiums increased by an average of 24% between 2021 and 2024, outpacing inflation and adding $21 billion in costs for American homeowners 

·        In 2024 alone, the average annual premium reached $3,303, up from $2,656 in 2021 

·        In high-risk states like Florida and Louisiana, premiums can exceed $5,000 annually, creating affordability crises

 6. The Underinsurance Crisis

• 64% of U.S. homeowners are underinsured, meaning they lack sufficient coverage to rebuild after a disaster
• The average underinsurance gap is 27%, but some homes are underinsured by 60% or more
• One in thirteen homeowners (7.4%) has no insurance at all, leaving $1.6 trillion in property value exposed to risk 

 7. Replacement Cost Realities

• The national average cost to rebuild a home is approximately $195 per square foot, including contractor fees 
• In high-cost states like California, Hawaii, and New Jersey, replacement costs can range from $215 to $450 per square foot 
• Many borrowers mistakenly estimate replacement costs at $200 per square foot, whereas actual market rates are often double that amount.
• In high-end neighborhoods, $1,000 to $2,000 per square foot is common

8. Financial Consequences

• In many regions, insurance and property taxes now exceed mortgage payments, making homeownership unsustainable for many 
• Rising premiums and underinsurance are contributing to mortgage delinquencies, especially in disaster-prone areas 
• Properties in high-risk zones are becoming uninsurable, which can render them un-mortgageable and devalue entire

9. Key Recommendations

To mitigate the growing risks associated with underinsurance and rising property insurance costs, the following actions are strongly recommended:

10. For Lenders and Mortgage Companies:

• Audit Loan Portfolios: Regularly review insurance coverage across your portfolio to ensure it aligns with current replacement cost estimates.
• Utilize Reliable Cost Estimation Tools: Leverage industry-standard resources, such as Marshall & Swift, to calculate accurate replacement values.
• Require Full Replacement Coverage: Enforce insurance requirements that match or exceed the loan amount and reflect realistic rebuilding costs.
• Educate Borrowers: Offer clear guidance on the financial risks associated with underinsurance and the importance of maintaining adequate coverage.

11. For Insurance Brokers and Agents:

• Conduct Annual Policy Reviews: Encourage clients to reassess coverage annually, especially in high-inflation or disaster-prone areas.
• Promote Rider Awareness: Ensure clients understand the need for additional coverage for non-standard perils, such as floods and earthquakes.
• Clarify Deductible Impacts: Help clients balance premium savings with the financial exposure of high deductibles.

12. For Property Owners and Borrowers:

• Read Your Policy: Understand what is and isn’t covered to avoid surprises during a claim.
• Avoid Cutting Corners: Resist the temptation to underinsure based on personal estimates or cost-saving assumptions.
• Consult Experts: Collaborate with qualified insurance professionals to determine the most suitable coverage levels and policy enhancements.
• Raise your deductible to the maximum possible.