Protecting The Nest
What You Can Do To Make Sure You Have Enough Homeowner Insurance

San Diego Union-Tribune, May 16, 2004
By R.J. Ignelzi, Staff Writer

For most of us, our home is our most prized possession. We repair it, maintain it, and decorate it to suit our needs and taste. And, we insure it to preserve and protect it if damaged or destroyed. At least, that's the plan.

However, according to national building cost data, about 64 percent of U.S. homes were underinsured by an average of 27 percent last year, a fact that many homeowners who were victims of San Diego County's wildfires last fall found out too late.

Although blame is being cast, fingers are being pointed and lawsuits are being filed, the fact remains that the majority of all homeowners don't have enough insurance to protect their homes in a catastrophic event.

As a new fire season begins, what can you do to make sure you have sufficient insurance coverage? That's what we asked insurance companies, independent agents, industry groups, consumer advocates and a California Department of Insurance deputy commissioner. Here's what they had to say:

Q. To make sure my home is adequately insured, what's the No. 1 thing to consider?

A. Be sure your policy offers enough coverage to completely rebuild your home and replace your contents if it's destroyed.

While it's the insurance agent's responsibility to calculate your home's replacement value, it's your responsibility to make sure his calculations are updated and that he knows all the details of your home, including any remodeling or upgrades.

Q. Isn't it the insurance company's job to keep current on my policy coverage?

A. What planet are you from? It's up to you to contact your insurer every year (usually at renewal time) to review your policy. It's also up to you to read it. Concentrate on your policy limits which typically appear on the declarations page under "Section 1, Coverage A, Dwelling."

If you have any questions or concerns, call your agent. Part of his job is to make sure you're satisfied with your insurance coverage.

What things should I discuss with my insurer to make sure I have adequate coverage?

Your agent needs to know about all the details of your home. In addition to the square footage, you should discuss: style of construction (tract, custom, two story, stucco, frame, brick, etc.); number of fireplaces, bathrooms, bedrooms; type of flooring, roof, countertops; and if you have an attached garage, crown molding, cathedral ceilings, built-in appliances, central air conditioning, French doors, plantation shutters, exposed beams or any other custom features that would add value to the house.

Make sure you answer all your insurer's questions about your home truthfully so the calculations will be accurate. Don't understate the size and amenities of your home in order to get a lower premium.

Obviously, more insurance coverage will cost more money. However, there are some things you can do to keep your fees manageable.

Increase your policy deductible amount. That means you pay for the small losses and call on your insurers to pay only on the larger ones. By raising your $500 deductible to $1,000 you can often save from 10 percent to 20 percent on your policy premiums. Increase the deductible from $500 to $2,500 and you can save nearly 40 percent.

Lower your risk. Change your shake shingle roof to a fire-safe tile roof. Replace your steel piping with non-corrosive copper piping. Plant fire-resistant landscaping.

Shop around. Once you know how much coverage you need, compare premium prices since different companies can charge different fees for the same amount of coverage.

Take advantage of multi-coverage discounts. Some companies offer premium discounts if they insure both your vehicles and home.

My home's market value has skyrocketed. Do I have to insure it for this increased amount?

Your house's real estate value and the replacement value are two separate things. The real estate value includes your land which you're not insuring since it will still be there if your house burns down. Insure your house based only on how much it would cost to rebuild it.

After discussing my home with an agent, how does he calculate the replacement value and the coverage I need?

Most insurers use insurance-to-value computer programs which take into account your home's size, location, construction style and details of your house to arrive at a rebuilding cost.

Make sure your insurer is estimating your home's replacement value based on reconstruction costs instead of new construction costs. Reconstruction is usually more expensive than new construction since it must include expenses for debris removal, specialized workers and the lack of any bulk discounts.

Is there a way to verify that my insurer's replacement value calculations are correct?

Double-check your insurer's estimate by contacting reputable local contractors and ask what it would cost to rebuild your house. Keep in mind that they will give you a base estimate which won't include the cost of customized or upgraded details in your home.

Ask neighbors with similar houses how much coverage they have.

Get at least two other policy bids from other insurers to make sure the coverages match up.

A more expensive option ($300 to $400) is to hire an independent appraiser or an expert in repairing building damage to review all the details of your house and come up with an estimated cost for replacement.

What type of insurance policy will assure me the best coverage if my home is destroyed?

Guaranteed-replacement-cost policies offer the best coverage. Unfortunately, because insurers almost went broke paying on those policies after the 1991 Oakland Hills fires, they're very difficult and expensive to get today. They provide owners with as much money as necessary to rebuild, regardless of the policy's face value.

For most people today, an extended-replacement-cost policy is the best bet. It insures the home for a specific value based on the replacement cost estimates, and usually adds a 20 percent to 25 percent cushion – or extended limit – if reconstruction costs run over. A replacement-cost policy will pay for the repair or replacement of damaged property with new materials of similar kind and quality and won't deduct for depreciation.

Since it's rare for houses to burn to the ground, do I really need to get 100 percent coverage?

Only if you don't mind the stress and financial strain of being underinsured in a catastrophic event.

Some insurers routinely recommend a structure be covered at a minimum of 80 percent of the cost to rebuild, promising to kick in 20 percent upon paying the policy limit. But, don't bet on their goodwill.

For peace of mind, ask your insurer for 100 percent coverage.

What additions to my policy, or endorsements, should I seriously consider to make sure I'm protected?

It's imperative to get building code upgrade coverage. If your home is severely damaged, you may have to rebuild it to comply with the new building code standards (tile roof instead of wood shingles, new plumbing, etc.) and that may cost more. Some insurance policies will cover up to 25 percent more for code updates. Or you may need to take out an endorsement for this.

Make sure you have an inflation guard to cover the increasing cost of building materials. Although many insurers incorporate some kind of inflation protection into their policies, you may need to get an endorsement.

Consider endorsements or floaters on precious possessions, including jewelry, computers, heirlooms, coin collections, firearms and musical instruments. This will allow you to insure these expensive items for higher amounts than you can under a standard policy.

If my home is destroyed, how can I be sure I'll have enough insurance to cover my expenses until it's rebuilt?

Pay close attention to the dollar and time limits on your additional living expenses (ALE) coverage. Most policies allow you 12 months living allowance while you rebuild. However, most victims of a major catastrophe are not able to get it done in that period.

Look for a policy that allows living expenses for at least 24 months.

To figure out if your ALE dollar coverage is adequate, do the math. Try to get a sense of monthly rent and utility costs in your area and multiply by the number of months you'd be out of your home.

How can I be sure I'll have enough insurance to cover my home's contents?

You've got to figure out how much you have before you can calculate how much coverage you need. Conduct a room-by-room inventory, writing down, taking pictures or a video of everything in your house.

When possible, try to write down when the item was purchased and how much you paid. Attach receipts when possible. Estimate the value of your possessions at current prices. Don't forget obvious, but often overlooked items like carpeting, draperies, and linens.

Most policies set contents limits at 50 percent or 70 percent of the dwelling limit. So, if your house is insured for $200,000, at 50 percent you will have $100,000 coverage for your home's contents. If, after looking over your contents inventory, you feel that is not adequate coverage, ask for endorsements for more coverage.

Update your home inventory each year and let your agent know of any significant changes. Keep the inventory somewhere off the premises.

What kind of policy will assure me the best coverage for my personal possessions?

You'll get more protection for your home's contents with a replacement-cost policy rather than an actual-cash-value policy.

A replacement-cost policy covers the cost to replace damaged items with new ones of similar kind and quality without deducting for depreciation.

An actual-cash-value policy, on the other hand, pays the amount needed to replace the item, minus depreciation. So, if you have a fire and your 9-year-old refrigerator is destroyed, a replacement-cost policy will pay for a new one. However, an actual-cash-value policy will pay only a percentage of the cost of a new refrigerator since it was used for nine years. In that case, you can either buy a used refrigerator or pay the difference between the amount your insurer paid and the cost of a new one.

What should I do if my longtime insurer refuses to sell me the amount of coverage I think I need?

Shop around and don't be afraid to switch companies.

© Copyright 2004 Union-Tribune Publishing Co.

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