Kenneth S. Klein

Abstract

This article presents a novel data set describing the frequency of materially inadequate homeowner insurance in the event of a total loss. For decades, after a natural disaster, large percentages of homeowners who have lost their homes report suffering a second devastating loss- that, entirely to their surprise, they are vastly underinsured. These reports provocatively suggest that a large majority of all insured homes in the United States-not just homes destroyed by a natural disaster-might be profoundly, unknowingly, and unintentionally underinsured. Insurance companies reject this possibility. Insurers posit that underinsurance is rare, that other than after natural disasters it may be almost unheard of, and that no matter when it occurs, homeowners are at best complicit. Until now, there has not been robust data that could resolve insurers’ and insureds’ competing narratives. The novel data set presented in this article may end the ambiguity of data on the frequency of and predominant cause of underinsurance. The new data describes that the point-of-sale algorithms insurers ubiquitously use to estimate how much it would cost to rebuild the insured home, and homeowners then almost inevitably rely upon to identify adequate policy coverage, persistently understate costs. By clarifying the cause of underinsurance, the novel data set also explains why underinsurance persists despite the collective desire of homeowners, insurers, and regulators that homes be fully insured. The data exposing the algorithm error rate heretofore only has been visible to insurers. This heretofore has left insurers with an untenable choice. An insurer who unilaterally corrects for the error also must unilaterally raise coverage and premiums, and so will be at a competitive disadvantage. But antitrust laws put insurers in legal peril if they act collectively. This article, after presenting the data and its implications, ends by proposing a new jurisprudential paradigm allowing insurers to profitably and successfully compete while resolving the ubiquity of homeowners being unwittingly underinsured.

Michael J. Brandi

Domenico Zaino Jr.

Heather L. Wilson

Seth J. Chandler

Robert R. Googins

James M. Fischer

Peter Molk

Abstract

Floridians have seen dramatically rising homeowners’ insurance premium increases over the past several years, with year-over-year increases of forty percent or more over multiple years. The problem grew so severe that the State legislature convened a special session in 2022 to address the problem, ultimately passing several efforts designed to moderate rates. This Article reviews the evidence of Florida’s experience to interrogate why the State has suffered disparately high homeowners’ insurance premium increases. In light of this interrogation, I critically assess the prospects for the recent legislative efforts and other suggestions to address the underlying problems. Reform efforts predominantly address a perceived problem of excess litigation and insurance fraud, but I show how the available evidence suggests the bulk of recent rate increases may be due to other causes. Finding that recent legislative efforts offer only incomplete solutions as premiums continue to remain high, I provide additional possibilities for reform that target both potentially excessive litigation as well as other possible causes. Florida’s successes and challenges with tackling increasing premiums is informative not just for Floridians, but also for other states that may have similar systems in place that may result in similar future premium increases unless preventative action is taken.

Lars Powell, R. J. Lehmann & Ian Adams

Mallory Stone