When Enough is Not Enough: Correcting Market Inefficiencies in the Purchase and Sale of Residential Property Insurance

Abstract

Each year at least hundreds, and often thousands of Americans lose their homes to natural disasters striking populated areas, and tens of thousands lose their homes to single-instance fires, floods, or other catastrophes. A recurring storyline is that the majority of these homeowners are underinsured, meaning they have less insurance than it will cost to rebuild their homes. This Article analyzes whether that is indicative of correctible inefficiencies in the residential property insurance markets. The Article identifies two inefficiencies – (1) Inadequate information, which is impairing informed pricing decisions by purchasers; and (2) Dispute costs (such as litigation) in the instances of loss exceeding coverage. The Article proposes addressing these inefficiencies by adopting a mandatory disclosure, provided at time of purchase or renewal of insurance, based on the EnergyGuide program labeling appliances for energy consumption, and coupling the adoption of that disclosure with a litigation bar on adequacy of coverage.