The 5 Most Common Homeowners Insurance Coverage Gaps

Kelly Anonson is the Chief Distribution Officer for Recoop Disaster Insurance.

Disasters can happen anywhere, and a significant portion of the U.S. population (90% of U.S. counties) were affected by a federally declared disaster between 2011 and 2021.

It’s important to be prepared and have great homeowners insurance coverage to mitigate the financial risks from these events, considering that natural disasters in 2022 resulted in an estimated $165.1 billion in damages across the United States.

But even with a homeowners insurance policy, there are often overlooked gaps in coverage that are “financial blind spots,” leaving homeowners burdened with covering expenses that exceed their insurance coverage following a natural disaster.

If you take the time to carefully review your policy, going through it with a fine-tooth comb, you’ll gain a better understanding of any coverage gaps and be more financially prepared for when disaster strikes.

Here are the five common gaps to look for in homeowners or renters insurance policies.

1. Underinsurance

Most policies go by the market value of your house, not its replacement value. That’s why many homes are underinsured, meaning the coverage they have is insufficient to fully replace or repair their property in the event of a disaster. The average home is underinsured by 22%, with some underinsured by 60% or more, leaving homeowners with high replacement costs even when their home is covered.

And don’t be fooled by “guaranteed replacement” policies, either, which often have limits based on the insured value of the home. It’s important to regularly reassess the value of your home and ensure your insurance coverage reflects its current worth.

2. High Deductibles

Disaster deductibles can be steep, and they’re not always consistent, ranging anywhere from 1% to a whopping 25% of your home’s insured value, depending on the disaster type and insurance company.

For those living in high-risk areas where hurricanes or tornadoes strike, the deductibles are often costly, especially when it comes to wind-related damages. For a $400,000 home with a 5% hurricane deductible, you could be left paying $20,000—before your policy kicks in. That’s why you should review and understand your policy’s deductible and make sure it aligns with your financial capabilities.

3. Depreciation Of Home Parts

Over time, certain parts of a home may depreciate in value, such as roofs, appliances or HVAC systems. Standard homeowners insurance policies may not fully cover the replacement cost of these items if they are damaged or destroyed.

4. Limited Coverage For Common Disasters

Typical home insurance policies may not cover all types of disasters. For example, storm surge (caused by hurricanes) and earthquakes often require separate insurance policies.

There’s also the issue of anti-concurrent causation—a fancy way of saying that if two disasters strike at the same time, your insurance may only cover one of them. If you’re unlucky enough to face multiple severe weather events at once, you could be left with the responsibility of handling the damage from the other disaster. Assess the risks specific to your area, and consider additional coverage if necessary.

5. Delays In Claim Processing

Even when you have insurance coverage, the claims process can sometimes be slow, leading to delays in receiving compensation for damages. Examine your policy to understand your insurance provider’s claims process, and be prepared for potential delays.

Know Your Policy

Rather than leaving it up to chance and hoping for the best from Mother Nature, take the proactive approach by delving into the details of your current homeowners policy. Explore what it covers and, equally important, what it doesn’t. Start by looking out for key terms such as “limits of coverage,” “eligibility” and “exclusions.” By doing so, you can pinpoint the areas where your current plan may leave you vulnerable and gain a clearer understanding of whether an additional disaster insurance policy would fit your needs.

By taking the time to assess your coverage, you will not only protect your financial security but also enjoy peace of mind. Review your insurance policies regularly, understand the terms and coverage limits and consult with an insurance professional to assess your specific needs if necessary. It’s all about ensuring you’re well-prepared for whatever weather disaster may come your way.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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