Insufficient funds hinder reconstruction efforts

In the world of Canadian home insurance, a troubling trend has emerged: underinsurance. According to various reports and investigations, a significant portion of homes in Canada are underinsured, with the Insurance Bureau of Canada estimating that the property portfolio is underinsured by approximately 40%.

The San Francisco Chronicle's April investigation concluded that the main factor for underestimated reconstruction costs is the dependence of insurance companies on a fundamentally flawed system for predicting reconstruction costs. This system, used by insurers to quickly determine the amount required to rebuild a home, is based on erroneous data.

Kenneth S. Klein, a law professor at California Western School of Law, analyzed 7220 claims submitted to dozens of American insurers and found that cost reconstruction estimates are incorrect in 77% of cases for isolated losses. When a natural disaster is involved, the proportion jumps to 90%.

This issue is not a new phenomenon. According to a survey by Marshall & Swift/Boeckh, more than three-quarters of Canadian residents are underinsured, in many cases by up to 27%. The expert believes the issue of underestimated reconstruction costs is likely similar in Canada as in the United States.

One example of this issue's impact is the case of the triplex of Geneviève Laurendeau and Vincent Goineau, whose collapsed home revealed a significantly insufficient reconstruction cost in their home insurance policy.

Renovating your kitchen or bathroom in the last few years without notifying your insurer may exacerbate the underinsurance problem. When a neighborhood is leveled, as in Gatineau (tornado in 2018), Alberta (Jasper fires in 2023 and Fox Lake in 2024), Saguenay (1996 flood), or British Columbia (Lytton fires in 2021 and Kelowna in 2023), the shortage of labor and expertise drives prices up, further highlighting the issue of underinsurance.

Caroline Schweppe, representative of e2Value, a software publisher for home reconstruction cost evaluation in Canada, agrees with this assessment. She claims that Canadian insurers are aware of the underestimation issue. However, there are no specific publicly available details indicating which Canadian insurance companies currently use software for assessing home rebuilding costs with an accuracy error margin of up to ±2.5%.

During a meeting on the issue of underestimating reconstruction costs at the National Insurance Conference of Canada in 2008, all participants raised their hands when asked if the ratio of insurance to replacement value at nine posed a problem. Despite this, the Canadian Insurance Bureau and Insurance Bureau of Canada have no data on underinsurance issues.

While insurers like Desjardins and Beneva in Quebec use software from Marshall & Swift/Boeckh (now known by a different name) for evaluating the cost of reconstruction, it remains unclear how many other Canadian insurers are aware of the underestimation issue and taking steps to address it. Thousands of North Americans have experienced similar issues, being short hundreds of thousands of dollars to rebuild their homes, and it seems that Canada is not immune to this problem.