Over 40% of Homeowners Haven’t Reviewed Their Insurance Policy in a Year—but Is Now the Right Time To Audit?

Your homeowners insurance policy probably renews every year without much fanfare. You get an email, your premium may go up, and unless something looks wildly different, you move on.

But your coverage may not be keeping up as your policy renews (if your policy renews at all).

A new VIU by HUB survey found that 41% of home and auto policyholders haven't changed their coverage in more than a year. Another 20% haven't made a change since purchasing their policy.

That might not seem like a big deal … until you need to file a claim. Among policyholders who had filed one, one in three said their coverage fell short of expectations. Fourteen percent said none of their claim was covered.

So, if it's been a while since you've looked beyond the premium on your renewal notice, now may be a good time to see what you're actually paying for.

Your policy can look fine and still have dangerous gaps

One reason homeowners insurance is easy to “set and forget” is that coverage limits may automatically increase over time.

“Most modern policies have an inflation guard that increases coverage—typically 4% to 8% per year—to account for the rising coverage necessary to keep up,” says William Lemmon, a licensed insurance broker and owner of Broadway Insurance Services in Los Angeles.

But those automatic increases aren't foolproof. Your house may have changed since you bought the policy. Maybe you remodeled the kitchen, finished the basement, replaced builder-grade finishes with higher-end materials, or added a deck.

And dwelling coverage isn't the only number worth checking.

“The biggest mistake is looking only at the declarations page,” says Chip Merlin, founder and CEO of Merlin Law Group, a national insurance recovery law firm. “A homeowner can have hundreds of thousands of dollars in stated coverage and still discover after a catastrophe that important parts of the loss are not adequately insured.”

For example, your policy might pay actual cash value rather than replacement cost for your roof or belongings, meaning depreciation gets deducted from your payout. You could also have a separate wind or hurricane deductible that's much higher than your regular deductible.

The number to check first: What would your home cost to rebuild today?

Here's where homeowners insurance gets confusing: Your dwelling coverage isn't supposed to match your home's market value.

“Forget market value, the mortgage balance and what you paid for the house,” Merlin says. “The question is: What would it cost to rebuild this particular house, in this community, at today's labor and material prices?”

That's especially important after several years of higher construction costs or if you've made substantial improvements since buying your policy.

Ask your agent to rerun your home's replacement-cost estimate and walk you through it. Check the square footage, roofing material, number of bathrooms, finishes, construction quality, and other details for accuracy. Make sure renovations are included, too.

Then ask what happens if that estimate turns out to be too low. Some policies include extended replacement-cost coverage, which can provide additional money above your dwelling limit when rebuilding costs exceed expectations.

As Merlin puts it: “A $500,000 insurance limit is not $500,000 worth of protection if it takes $700,000 to rebuild the house.”

How to audit your homeowners insurance

You don't need to become an insurance expert to give your policy a once-over. Pull out your policy and latest declarations page, then work through these five areas:

1. Recheck your dwelling limit

Ask your agent to rerun the replacement-cost estimate and verify the information used to calculate it.

2. Look at how claims are paid.

Check whether your home, roof, and belongings are insured for replacement cost or depreciated actual cash value. Also look for extended replacement-cost protection.

3. Check your deductibles and exclusions

Your wind, hail, or hurricane deductible may differ from your standard deductible. Also look for exclusions or limitations involving flooding, water backup, earthquakes, and other risks relevant to where you live.

4. Review the less-obvious coverage

Look at ordinance or law coverage, which can help pay for code-required upgrades during rebuilding, as well as additional living expense coverage if you're temporarily displaced.

5. Think about what's changed

Renovations, expensive purchases, additions, and even changes in how you use the property may warrant a conversation with your agent.

A home inventory can also help you estimate whether your personal property coverage still makes sense. Plus, it can help you document what you own before a disaster happens.

How to close gaps without blowing up your premium

Finding a coverage gap doesn't necessarily mean saying yes to every possible policy upgrade.

Ask your agent or broker to price changes individually so you can see what each one costs. Merlin recommends prioritizing protection against losses that could financially devastate you, rather than simply choosing the cheapest possible policy.

If higher limits push the premium beyond your budget, ask what happens if you raise your deductible instead. Taking on a larger deductible could lower your premium, but only consider one you could realistically pay from savings after an emergency.

“Insurance should protect you against the losses you cannot afford to absorb yourself,” Merlin says. “The cheapest policy is only a bargain until you have the claim it does not adequately cover.”

Don't assume your insurer will catch the problem

Perhaps one of the most telling findings from the VIU by HUB survey is that 88% of policyholders want their insurance provider to alert them when their coverage no longer fits their life.

Yet 56% said their provider hasn't proactively contacted them in more than a year (or they aren't sure it ever has).

Until that changes, homeowners may want to put their own annual insurance audit on the calendar. Because finding out you're underinsured while sitting safely at your kitchen table is one thing. But finding out after that kitchen has been destroyed is another.