114 KS Klein
p. 3). All of this suggests that amongst natural disaster hazards, fire risk
to owner-occupied dwellings perhaps is unique in that fire ubiquitously is
insured both voluntarily and involuntarily.
This conclusion is bolstered by voluntary take-up rates of fire insurance for renters, which starkly contrasts with take-up rates for fire insurance of the dwelling. A renter, by definition, has no ownership interest in
the structure, and so only insures their personal property – the contents of
the dwelling – for fire. In Australia, three-quarters of renters do not have
personal property insurance (Quantum Market Research 2014, p. 11). In the
United States, the take-up rates of renters insurance steadily rose from 29%
in 2011 to 57% in 2020 (III 2017, p. 4; 2020, p. 11). For some portion of renters
in both Nations, landlords require renter’s insurance. At this time, there is
no data on what percentage of landlords that is. But whatever the percentage, it means that in both Nations, voluntary take-up of renters insurance
for fire loss still materially lags the voluntary take-up rates of homeowners
for dwelling loss.
All available evidence suggests that homeowners – and uniquely homeowners – want to insure their dwellings for fire, want to fully insure their
dwellings for fire, and think they have fully insured their homes for fire. But
they haven’t.
The high frequency of inadequate insurance of dwellings
for fire in Australia and in the United States
Aspirations aside, while it is hard to know with specificity, it appears
that most homeowners are underinsured for a total fire loss, probably
profoundly so.
Any discussion of underinsurance begins by discussing how it is even possible. There was a time in the United States when ‘Guaranteed Replacement
Coverage’ (GRC) – what in Australia is called ‘Total Replacement’ – was
ubiquitous. The standard in the United States today is ‘Full Replacement
Coverage’ (FRC) – what in Australia is called ‘Sum Certain.’ Under GRC,
if a covered causal event results in a total loss, then the cost to rebuild is
covered, regardless of the cost. Under FRC, by contrast, there is a stated
coverage limit, which can be increased through the purchase of ‘Extended
Replacement Coverage,’ but either under FRC or under FRC plus an extension, there is a hard cap. If there is a hard cap, then there is the possibility of
underinsurance, meaning the amount of insurance proceeds is inadequate
to rebuild the lost home in the event of a total loss.
Work done in Australia illustrates the challenge in answering the simple question: What percentage of homeowners have inadequate insurance
to rebuild their homes? In 2005, in the wake of the 2003 Canberra fires,
when summarising the Australian research, the Australian Securities &
Investment Commission (ASIC) decided to investigate the causes of underinsurance and reported that the percentage of homeowners underinsured
p. 3). All of this suggests that amongst natural disaster hazards, fire risk
to owner-occupied dwellings perhaps is unique in that fire ubiquitously is
insured both voluntarily and involuntarily.
This conclusion is bolstered by voluntary take-up rates of fire insurance for renters, which starkly contrasts with take-up rates for fire insurance of the dwelling. A renter, by definition, has no ownership interest in
the structure, and so only insures their personal property – the contents of
the dwelling – for fire. In Australia, three-quarters of renters do not have
personal property insurance (Quantum Market Research 2014, p. 11). In the
United States, the take-up rates of renters insurance steadily rose from 29%
in 2011 to 57% in 2020 (III 2017, p. 4; 2020, p. 11). For some portion of renters
in both Nations, landlords require renter’s insurance. At this time, there is
no data on what percentage of landlords that is. But whatever the percentage, it means that in both Nations, voluntary take-up of renters insurance
for fire loss still materially lags the voluntary take-up rates of homeowners
for dwelling loss.
All available evidence suggests that homeowners – and uniquely homeowners – want to insure their dwellings for fire, want to fully insure their
dwellings for fire, and think they have fully insured their homes for fire. But
they haven’t.
The high frequency of inadequate insurance of dwellings
for fire in Australia and in the United States
Aspirations aside, while it is hard to know with specificity, it appears
that most homeowners are underinsured for a total fire loss, probably
profoundly so.
Any discussion of underinsurance begins by discussing how it is even possible. There was a time in the United States when ‘Guaranteed Replacement
Coverage’ (GRC) – what in Australia is called ‘Total Replacement’ – was
ubiquitous. The standard in the United States today is ‘Full Replacement
Coverage’ (FRC) – what in Australia is called ‘Sum Certain.’ Under GRC,
if a covered causal event results in a total loss, then the cost to rebuild is
covered, regardless of the cost. Under FRC, by contrast, there is a stated
coverage limit, which can be increased through the purchase of ‘Extended
Replacement Coverage,’ but either under FRC or under FRC plus an extension, there is a hard cap. If there is a hard cap, then there is the possibility of
underinsurance, meaning the amount of insurance proceeds is inadequate
to rebuild the lost home in the event of a total loss.
Work done in Australia illustrates the challenge in answering the simple question: What percentage of homeowners have inadequate insurance
to rebuild their homes? In 2005, in the wake of the 2003 Canberra fires,
when summarising the Australian research, the Australian Securities &
Investment Commission (ASIC) decided to investigate the causes of underinsurance and reported that the percentage of homeowners underinsured