Failure to account for increases in reconstruction costs can cause a property to be underinsured if it is damaged or destroyed, according to a recent report by the real estate data company CoreLogic. The report says this possibility is more pronounced in areas that are at greater risk for natural disasters that wreak widespread destruction.

The 2019 Insurance Coverage Adequacy Report looked at risks related to hurricanes in Florida and Texas, wildfires in California, and tornadoes in Oklahoma. Analysts assessed changes in the cost to reconstruct a home in the affected area between 2016 and 2018.

"Underinsurance issues can cause financial devastation for property owners, artificially low coverage limits for insurance carriers, and increased loan delinquencies," said Amy Gromowski, senior leader of analytics at CoreLogic. "Homeowners who experience natural hazard events, such as the California wildfires, are often struck by personal and financial devastation and many aren't able to rebuild their homes, which prolongs the region's recovery and often causes homeowners to default on their mortgages."

CoreLogic says prolonged undervaluing of homes, especially in high-risk areas, can quickly exhaust coverage limits even if a disaster causes only partial losses. The company said that in extreme circumstances, claims after a disaster have surged by 30 percent or more. Other issues may include inaccurate claims estimates, artificially low coverage limits, and damage to an insurer's reputation if they are unable to provide adequate coverage after a disaster.

The report identified approximately 1.12 million properties in Florida that are at extreme risk of loss due to storm surges accompanying a hurricane. CoreLogic determined that reconstruction costs in Florida rose by about 5.6 percent between 2016 and 2018. The report also said that if 5 percent of these homes were destroyed, the gap between the insurance coverage and reconstruction cost would be about $205 million.

Houston, Texas, had the greatest increase in reconstruction costs, which rose 7.6 percent between 2016 and 2018. The report says that hurricane-driven inland flooding in metro areas such as Houston typically causes less costly damage than storm surges – about 5.4 percent of the cost for complete reconstruction. CoreLogic concluded that if coverage isn't current, insurance coverage in Houston would fall about $49 million short.

In southern California, CoreLogic looked at more than 110,000 residences in areas considered to have be at very high or extreme risk of destruction by wildfire. The analysis found that reconstruction costs in the region increased by 5.6 percent between 2016 and 2018, and that insurance coverage would be $25 million short if just 1 percent of the homes in this region were damaged or destroyed by fire.

The report also looks at tornado risk in Oklahoma. CoreLogic said that while a large swath of the Midwest is vulnerable to these storms, tornadoes are more common in the Sooner State with an estimated 56 occurring each year on average. The analysis identified 1.3 million properties in Oklahoma considered to be at very high or extreme risk of being damaged or destroyed by a tornado.

CoreLogic found that reconstruction costs in the state rose by 6.6 percent between 2016 and 2018. Analysts concluded that if tornadoes caused damage equivalent to one-fifth of a home's value to just 1 percent of the properties considered high-risk, insurance coverage would be $34 million short if not up to date.

Frank Nothaft, chief economist at CoreLogic, said a natural disaster can significantly disrupt a homeowner's finances by inhibiting their regular income and substantially reducing the value of their property. He said this can increase the risk that homeowners will default on their mortgage, especially if their insurance coverage is not sufficient to allow them to rebuild.

The report said this trend was noticeable in delinquency rates after several disasters in 2017, including a trio of Gulf Coast hurricanes. Delinquencies on home mortgages quadrupled in San Juan, Puerto Rico, after the island was devastated by Hurricane Maria. Delinquencies tripled in Houston as well as Cape Coral, Fla., after these cities were affected by Hurricane Harvey and Hurricane Irma, respectively.

Delinquencies rose by 50 percent in Santa Rosa, Calif. after the Tubbs wildfire in 2017. The number of mortgages that went delinquent in Chico, Calif. more than doubled in December 2018, one month after the Camp fire destroyed thousands of homes.

CoreLogic says the report shows the need for insurance carriers to reevaluate how properties are insured. It says this will help ensure that homeowners are properly insured for the risks they are likely to face and carry adequate coverage to rebuild the home if the property is destroyed.