Flooding after a severe thunderstorm in Toronto in 2020. As affordability woes mount, underinsurance becomes a growing risk for Canadians.Carlos Osorio/The Canadian Press
One of the costliest mistakes you can make when it comes to insurance is not having the proper protection to pay for a major financial loss.
In industry parlance, not having enough – or not having the right kind of – insurance coverage is known as underinsurance.
A recent insurance claim I reviewed revealed just such a situation. A mother of two in Toronto’s east end was hit with a $54,000 repair bill after her home was flooded. The inundation was the result of heavy rain after a snowmelt and required mould remediation and a complete refinishing of her basement.
While she had home insurance, she had declined coverage for the specific type of water damage her home had incurred, known as overland flooding. Her basic water coverage only applied to damage resulting from events such as burst pipes or an appliance failure.
“I wanted to save some money – it didn’t seem like a real risk,” she told me. Ultimately, the homeowner could not afford the full repair bill, and chose to keep the basement unfinished after mould remediation.
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Underinsurance has always existed in the industry, across areas such as home, life and auto. It’s becoming more prevalent as Canadians struggle with higher inflation and affordability. Examples include not having enough life insurance for your family after your death, or to cover the damage to your home after a flooding or other incident.
“Insurance is a complicated product,” said Jeff Desbiens, vice-president of broker and customer support at Definity Financial Corp. “Without the right advice, it’s tough to know what your limits are, what the exclusions are, those types of things.”
While insurance brokers and agents give advice during the buying process, consumers may decline coverage for a number of reasons.
Sometimes, it’s simply skepticism. A person can believe that the likelihood of dying early or a flood in their home is so low, that they just can’t justify the cost of buying insurance. Affordability is another challenge, especially as the Canadian economy has shown signs of slowing recently.
“It’s very difficult for consumers to think long-term in our current economy,” said Michelle Laidlaw, associate vice-president at Co-operators insurance. “The appeal of saving money on a premium can be very high and understandable in today’s financial landscape.”
But the savings tend to be relatively minor compared to the financial cost of having an uncovered claim.
“When a loss happens, only then do they realize how financially devastating that can be,” said Mr. Desbiens.
He recently reviewed a hail damage claim in Alberta. Hail has become an increasing challenge for homeowners in the province, with a major storm in Calgary in 2024 damaging cars and homes and leading to $2.8-billion in insurance payouts.
For the claim Mr. Desbiens reviewed, the total hail damage came out to $18,000. But the homeowner had previously declined coverage, and so paid out of pocket for repairs.
So, how do you avoid finding yourself in a situation where you’re underinsured?
First, start by remembering the basic reason you have insurance. It’s to help you cover the cost of a major incident, such as your house burning down or your car being totalled.
Understand the costs involved in these scenarios. A good insurance agent or broker can help walk you through those. Next, review the appropriate coverage that protects you in such scenarios. Ask what your deductible will be (the amount you pay out of pocket), and if there is a maximum coverage amount.
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Most importantly, review your insurance every year. If you’ve recently renovated, the value of your house may have increased as a result. In which case, you should make sure your replacement cost in your policy reflects the value of your house.
Climate change is adding a new dimension to underinsurance, as claims for weather events become more frequent and more damaging.
Look out for new comprehensive insurance packages. Insurers are reacting by trying to simplify products and offering various endorsements (another word for an additional specific coverage in insurance) in one offering. Both Co-operators and Definity have begun to offer new comprehensive water packages that cover all water damage, for example.
“We’ve seen a significant increase in climate-related events,” said Ms. Laidlaw of Co-operators. “Both in the severity of those events and the frequency at which those are happening across Canada.”
Both Mr. Desbiens and Ms. Laidlaw say that the industry is trying to raise awareness of the growing risks of underinsurance right now, especially as affordability is pushing more and more Canadians to be underinsured.
The goal is to make sure that others don’t find themselves in a situation where they’re making a $54,000 mistake.
John Shmuel is the content director at Surex, an insurance brokerage based in Magrath, Alta. He is also a writer and financial commentator focusing on insurance.
