The aftermath of a loss is the worst possible time to find out aproperty is underinsured, yet many homeowners are in thispredicament following the record-breaking 2011 severe thunderstormseason.

Many factors can lead to an underinsured home, but in the end,homeowners are responsible for having adequate insurance coverage.Typically, insurance agents will help homeowners by estimatingreplacement costs for their homes. In some areas, it has becomeincreasingly common for those replacement costs to exceed a home'smarket value, often challenging the agent to explain the importanceof insuring a home to its full replacement value.

For most homeowners, the risk of not insuring the property toits full replacement value is too great. Here are three strategiesagents can use to help ensure that a homeowner's insurance coveragereflects real replacement costs independent of the home's marketvalue.

Tip No. 1: Help homeowners understand the differencebetween market value and replacement cost.

Many property owners don't understand that market value andreplacement costs are independent values. While both pertain to theowned property, each applies to different uses.

Market value is the current price atwhich a property can be bought or sold in a real estatetransaction. Market value includes the land on which a house standsand all related structures, such as landscaping, fencing, detachedgarages, sheds, or swimming pools. Market value for real estate ina local area varies based on supply and demand.

The replacement-cost estimate is theapproximate cost to rebuild a structure on the original site withmaterials of like kind and quality. A replacement-cost estimatedoes not include the value of the land or any detached structureson the property. The estimate will vary based on cost fluctuationsfor local building materials, labor, and equipment used inreconstruction.

While both values fluctuate, they don't necessarily change atthe same time or in the same amount. The current housing downturnillustrates this perfectly because market values in many areas havefallen at a much faster pace than reconstruction costs.

Tip No. 2: Show clients they are not alone.

For the past year, Xactware has tracked the differences betweenmarket value and replacement-cost estimates in several metropolitanareas by comparing median home sale prices reported by the National Association of Realtors withthe median replacement cost estimate as calculated using 360Value,Xactware's replacement-costestimation tool.

The results revealed large disparities between the two values inmany markets. The most extreme example is Ft. Myers, Fla., wherethe median replacement-cost estimate was 160 percent higher thanthe median home sale price in the first quarter of 2011.

Tip No. 3: Demonstrate the consequences ofunderinsurance.

Homeowners need to understand the potential impact of notinsuring their property to full replacement value. Insurance agentscan cite examples to demonstrate the consequences ofunderinsurance. Some recent examples have been documented in newsstories that show the pain homeowners endure after a loss whentheir property is underinsured. These stories have been plentifulin the wake of the record-breaking storms and othercatastrophes of 2011.

An underinsured property can also have an effect in the event ofa partial loss, which means it's important homeowners understandtheir specific policy language regarding insured limits andcoinsurance clauses.

Be an advocate for the client

Cost is almost always a primary factor in insurance purchasingdecisions. But agents should help homeowners make certain thatsaving money on a policy doesn't come at the expense of adequateinsurance coverage.

Helping homeowners understand the difference between marketvalue and replacement-cost estimates—and the consequences of notinsuring the property to value—may help them avoid financialcatastrophe after a natural catastrophe.