Property insurance is a big and growing cost across the country. Claims from hurricanes, fires, floods, and tornadoes have resulted in huge premium increases.
However, property insurance is not an option for most property owners. Regardless of cost, they have to pay for property insurance.
That’s because mortgage agreements require coverage that’s acceptable to the lender. The cost of such coverage, whether it’s rising or falling, must be paid by property owners.
Owners likely want property insurance even if they don’t have a mortgage. That’s because a home is a major asset.
In the event of a major claim, property insurance can cover the cost of major repairs, sometimes tens of thousands of dollars and even more.
According to the 2023 Policygenius Home Insurance Pricing Report, premiums rose 21% between May 2022 and May 2023. The National Association of Insurance Commissioners said that in 2022 insurers paid out $90 billion for natural disaster claims alone and lost $5.5 on homeowner policies.
This is not just a private insurance problem. The National Flood Insurance Program (NFIP) has been bailed out by the federal government and now owes the Treasury $20.5 billion.
As of September, the program was paying $1.7 million a day in interest.
New Property Insurance Options
The current home insurance system is in trouble, and that brings us to a new and very different form of property insurance that has been suggested in the Florida legislature. The proposal – found in HB 809 and SB 1070 – would require if passed that insurance companies offer policies where coverage is limited to the outstanding mortgage balance.
Traditional homeowner policies would still be available, and property owners could choose the type of coverage they want.
What might be called “unpaid-balance” policies could attract homeowners because of their likely lower cost. However, such coverage also creates risk – and not just for property owners.
How it works
Imagine that a home was bought twenty years ago for $150,000 and today the property is worth $450,000. It was purchased with 10% down and the balance of the original $135,000 mortgage at 5.75% has been reduced to $71,800.
If the property is hit with a $120,000 claim because of major damage, with an unpaid-balance insurance policy the owners would get roughly $71,800 – the unpaid mortgage balance. That’s enough to pay off the mortgage but leaves nothing for $120,000 in repairs.
Many owners in this situation may need to drain retirement or other accounts – if they have accounts with sufficient cash after any penalties and taxes. Or, owners might seek new financing at today’s rates – if they qualify.
Virtually all residential mortgage loans today are self-amortizing, meaning the loan balance goes down with each monthly payment. That also means the coverage provided by unpaid-balance insurance policies declines every month.
Meanwhile, repair costs are likely to rise over time if only as a result of inflation and toughened building codes.
“The proposed bill that would only cover a mortgage balance is something we have never seen in the insurance industry,” said Mark Friedlander, Director of Corporate Communications for the Insurance Information Institute. “By only covering the mortgage balance, this would make a homeowner very vulnerable to a substantial financial loss in the event of a catastrophe such as a hurricane, tornado or fire. Not only would property insurers be reluctant to offer this type of limited policy, but it is doubtful a lender would allow their customers to purchase a type of insurance policy that encourages gaps in coverage.”
Homeowner associations might not accept unpaid-balance policies because of concerns regarding whether enough money would be available for needed repairs. Many consumers would likely reject such coverage, simply because it represents too much risk.
The Florida proposal itself requires insurers to provide a special risk disclaimer when offering such policies.
“You are electing to purchase coverage at a limit that is equal to only the unpaid principal balance of the mortgage loans on your home,” says the proposed disclaimer. “Accordingly, in the event of the total loss of your home or a loss for which the cost to repair your home exceeds the unpaid balance on your mortgage loan, you will incur significant financial losses, including the potential loss of some of your home’s equity.”
How to Lower Property Insurance Premiums
Homeowners and property buyers can take several steps to cut property insurance costs.
First, see if you can get a copy of the property’s C.L.U.E. (Comprehensive Loss Underwriting Exchange) report. This is a history of insurance claims for the property during the past seven years, according to the insurance companies that participate in the program.
However, not all insurance companies contribute to the system, so there can be gaps.
According to Wisconsin’s Office of the Commissioner of Insurance, “Under the federal Fair Credit Reporting Act, C.L.U.E. reports can be accessed only by the owner, insurer, or lender of the property. However, you can ask the current owner of the property to order a C.L.U.E. report.”
As an owner, you can request a report copy at https://consumer.risk.lexisnexis.com/.
Second, ask insurance agents if a professional home inspection or a four-point inspection might result in lower premiums. (A four-point inspection involves an examination of the property’s electrical system, HVAC, plumbing, and roof.)
Third, shop for property insurance. You may find lower costs with different agents.
Fourth, speak with an insurance agent regarding the pros and cons of bigger deductions.
Fifth, consider a state-operated home insurance program. An insurance agent can help you compare with commercial policies.