Up to two-thirds of homes destroyed Marshall fire could be underinsured

The gap between insurance coverage and cost of rebuilding in the Marshall fire could be as much as $179 million for the 1,084 homes lost, according to estimates.

The Colorado Division of Insurance has collected data from insurance companies with claims from the Marshall fire to look at underinsurance for people who lost their homes. Underinsurance is when the amount of money a homeowner will receive from their insurance company is not enough to repair or replace the home.

“Before diving into solutions that tackle underinsurance, we needed to determine the potential size and scope of the problem,” Colorado Insurance Commissioner Michael Conway said in a release. “This is our initial analysis, but we will continue to analyze the claims data as it comes in from the insurance companies. However the challenge now and going forward will be nailing down reliable rebuilding costs."

The Division of Insurance collected data from 27 insurance groups representing 61 insurance companies — for example, Allstate has six individual companies and Liberty Mutual has five. These 61 companies represent 97% of the market share of all companies selling homeowners insurance in Colorado.

Boulder County has identified 1,084 total losses, while the data collected from insurers captured 983 total loss claims. The division explained that this discrepancy comes from a number of factors, as things like rental properties being covered by commercial policies were not included in the data, nor were high-dollar homes in the surplus lines market.

Additionally, 32 of the 983 total loss claims reported by insurance companies were either incomplete or did not represent traditional homeowner insurance policies. This brings the number of loss claims used by the Division of Insurance for analysis to 951 homes.

Over $1 billion in claims have been incurred so far for these homes, according to the analysis.

Of those 951 claims, 76 homes had guaranteed replacement coverage, meaning the insurance policy provides coverage for replacement of the home with similar quality and square footage without a cap — so underinsurance is not a problem for 8% of the homes in the analysis.

The majority of policies, 83%, provide some additional coverage if rebuilding exceeds policy limits while the remaining 9% have no such extended coverage.

Determining the extent of underinsurance is dependent on the anticipated rebuilding costs. At $250 per square foot, the analysis found that 36% of policies are underinsured. The average amount of underinsurance per policy is estimated at just under $100,000 with that rebuilding cost.

At $300 per square foot, 55% of policies are underinsured for an average of roughly $165,000 per policy.

At $350 per square foot, two-thirds of policies are underinsured at an average of $242,670 per policy.

The estimated total amount of underinsurance is estimated at $34 million, $86 million and $155 million for $250, $300 and $350 per square foot respectively.

Applying the same basic assumptions for calculating the total amount of underinsurance for all 1,084 losses, the overall amount of underinsurance is estimated at $39 million, $100 million and $179 million depending on the cost per square foot to rebuild.

As of the end of March, the U.S. Small Business Administration approved $91.2 million in disaster loans for homeowners impacted by the Marshall fire. The Division of Insurance expects much of that to be used toward closing the gap between insurance and the cost of rebuilding.