Damage in fires that swept the suburbs between Denver and Boulder is expected to reach $1 billion
Most homeowners in burned-out neighborhoods are considered by insurers to have adequate coverage for most reconstruction costs. This is in contrast to last month’s rural areas of Kentucky hit by tornadoes, where some working-class homeowners had no insurance.
In both places, labor shortages and the magnitude of the damage will make it more difficult to rebuild, said Erin Collins, senior vice president of the National Association of Mutual Insurance Companies, a trade group. “Both affected areas have individuals who are either uninsured or do not have adequate coverage to cover their losses,” she said.
According to surveys by United Policyholders, a California-based national non-profit consumer-advocacy group, some two-thirds of fire victims generally have less insurance. A survey of people affected by wildfires in 2020 in Colorado’s Grand and Larimer counties revealed that shortfalls often amount to hundreds of thousands of dollars.
A major reason is the difficulty for homeowners to determine how much coverage they need, said Daniel Schwarcz, a professor at the University of Minnesota Law School who has studied homeowners insurance. Part of the problem is that consumers have a wide variety of choices, and many opt for cheaper policies to cap their annual premiums.
For buyers, there is “incredibly limited transparency” in figuring out what a limit should be, he said. He said many consumers believe that an agent or insurer has a financial incentive to sell more coverage than they need. But some agents promote cheaper policies because they don’t want to lose a sale to a competitor.
In some disaster-prone areas, insurers are trying to limit their potential losses, said Amy Bach, executive director of United Policyholders. “We know of many situations where consumers ask for higher limits and are turned down,” she said.
Last week’s fire was the most devastating wildfire in Colorado history in terms of the number of structures destroyed, according to disaster-modeling firm Karen Clark & Company. Its estimated damages of $1 billion include homes in areas of Louisville and Superior and unincorporated Boulder counties. As well as a large commercial area with a destroyed shopping center and hotel.
Colorado Insurance Commissioner Michael Conway said that “there is likely to be a problem regarding underinsurance,” stemming from both insufficient coverage amounts to begin with and the continuation of inflation. That said, over the next two years as construction goes on, “there will be so much flux about inflation, building costs, labor costs that when we get to the point that we’re going to rebuild these homes, there’s going to be a lot of money.” The world will probably look very different.”
He noted that the Federal Emergency Management Agency does provide some financial assistance for underinsured, although the agency typically does not act on a consumer’s request until the carrier has wrapped up their total payment.
Insurers acknowledge that the income from their policies will not always be enough to cover damages, but they say their agents have faced other high-profile disasters in recent years, purchasing policies with the most generous Worked hard to promote Conditions.
Like many cities across the country, the Denver-area housing market has been red-hot over the past year. Low mortgage rates fueled strong home buying demand which largely outpaced the number of properties for sale, driving up housing prices.
Builders increased activity in response, according to housing-market research firm Zonda, with housing in the Denver metro area opening up 30% in the third quarter from a year ago. But they have been slowed down by labor shortages and supply-chain issues. Nationally, home-building material costs rose 21% in November from a year earlier, while residential construction wages rose 8.1% in October from a year earlier, according to an analysis of government data from the National Association of Home Builders.
Because of limited land supplies and high regulatory costs, Boulder County is the most difficult and costly area to build new homes in the Denver metro area, said John Cowart, principal of advisory at Zonda. As homes become more expensive in downtown Boulder, demand has increased in neighboring suburbs, including Louisville and Superior, he said.
Construction costs in the current market are particularly volatile due to supply-chain disruptions, said David Sinki, chief executive of Boulder Creek Neighborhood, a builder based in Louisville.
“Prediction around cost is almost impossible right now,” he said. “I think what’s starting to get a lot of people going is that insurance coverage is going to be much less than the current cost of construction.”
Underinsurance could delay reconstruction, and some people whose homes were destroyed in the 2020 Boulder-area wildfires are yet to be rebuilt. “My wounds opened back last Thursday, and I relived every moment of trauma” as the fires lit up his Boulder house in October 2020, said Kevin Mott, a dermatologist who for now Living in a recreational vehicle.
His insurance plummeted, and his reconstruction was delayed while he financed. They had a limit of $900,000 for housing, as well as a limit of $700,000 for materials. He said his new home would cost about $2 million, including upgrades to meet the new local building regulations.
With the exception of insurers selling to wealthy homeowners, most carriers have eliminated the once common and relatively generous guarantee to pay the full cost of the reconstruction. Instead, in the event of a shortage, some policies offer to pay a certain amount, such as 20%, above the insured value of a dwelling.
Many insurance companies, including State Farm and USAA, also include some form of inflation protection. But they still rely on homeowners to update their policies for remodeling or expansion.