Zornio: Marshall fire insurance analysis proves every homeowner needs to check their policy

With the cost of real estate soaring, breaking into Colorado’s housing market can feel like a dream come true. But if disaster strikes, owning a home can quickly turn into a financial nightmare.

In Boulder County, many residents are learning this the hard way. 

After the most destructive blaze in the state’s history, hundreds of impacted homeowners quickly feared they might be underinsured. Four months later, these fears are being realized. 

According to an initial analysis of the Marshall fire released by Colorado’s Division of Insurance, over $1 billion in total losses have been submitted for home insurance claims so far. Among the 951 claims included for review — which excluded smoke and ash damage as well as renter’s policies — only 8% of homeowners were found to hold “guaranteed replacement coverage.” 

“Guaranteed replacement coverage” refers to a type of insurance policy that covers the replacement cost of a lost home at similar quality without a cap. This means the policy effectively guarantees that you won’t be underinsured in rebuilding your home to your original standard of living — even if building or construction costs increase.

Unfortunately, the remaining 92% of homeowners hold a more limited policy. Eighty-three percent had paid for “extended benefits coverage,” meaning the policy provides partial coverage if costs increase beyond the limit. The remaining 9% held no extended benefits at all, limiting payouts for total losses to policy limits — even if the actual cost of rebuilding is substantially higher.

The exact amount such homeowners would be left to pay depends on the exact amount of rebuilding cost increases — a matter particularly of concern in a period of inflation and supply chain shortages. For example, during the pandemic lumber prices increased by more than 300%, adding potentially tens of thousands to the expense of rebuilding a home.

Although some price increases have come down in recent months, estimates still suggest rebuilding now could be anywhere from 10% to 60% more expensive than pre-pandemic rebuilding. This leaves anyone who hasn’t updated their homeowner’s insurance policy lately — including the 92% of homeowners in the Marshall fire — at increased risk of being underinsured.

Based on the individual policy reviews for the Marshall fire, the analysis concluded between 36% and 67% of homeowners are likely to be significantly underinsured depending on the range of price per square foot. At the lowest end this translates to 344 homeowners with policies that will leave them about $100,000 short. At the high end, 639 policy holders could be as much as a quarter million in the hole.

It’s easy to suggest the solution is for homeowners to simply be more informed about the policies they purchase — and to some extent that’s fair. We do need to do a better job at educating the public about these matters, and I genuinely encourage every homeowner (and renter) who reads this to immediately contact your insurance company for a policy review and update. 

Still, given the overwhelming majority of homeowners are likely underinsured in some way, the argument that homeowners should be solely responsible clearly falls short. Insurance companies are experts in rebuild estimates. If they can’t be held responsible for appropriately setting policy limits — and I suspect more than 8% of people want full home coverage — how can the average homeowner be expected to set appropriate limits? 

This raises a critical question: Are home insurance companies deliberately and negligently leading policy holders into underinsured coverage so as to pay out less in the event of total loss? If such malfeasance can be proved, these companies should absolutely be held financially liable — including for the up to $180 million for underinsured homeowners in Boulder County from the Marshall fire.

Moving forward, it seems clear there should be increased oversight for insurance companies that requires them to better facilitate individual policy reviews and updates. Without this, homeowners could wind up footing a bill they never expected to see — and can’t afford to pay.

Trish Zornio is a scientist, lecturer and writer who has worked at some of the nation’s top universities and hospitals. She’s an avid rock climber and was a 2020 candidate for the U.S. Senate in Colorado.