Homeowner's Insurance

Unfortunately it’s not until disaster strikes that a homeowner discovers they are seriously underinsured.  In the event of a fire, flood or any type of catastrophic loss you discover you do not have sufficient coverage on your home.  If your damage requires significant reconstruction of your home, you may discover that due to inflation and building code changes there simply is not enough coverage to rebuild.  Regardless of the location of the property, the most frequent mistake people make regarding their homeowner’s insurance policy is to underestimate the value of their home and its contents.  It is estimated that some 60% of homeowners are not properly insured to cover the full replacement cost value of their home.

Insurance companies have operated their homeowner’s insurance divisions unprofitably for over a decade, to operate these divisions at a profit is a rarity.  More than 300 insurers have declined to renew up to 6% of their policyholders, double the historic rate.  A high number of catastrophes within a brief time frame, increasing costs of home repairs and excessive jury awards due to the exploding number of mold claims have all pushed the cost of homeowner’s insurance to record levels.  Premium increases and non-renewals have become more common in recent years. Approximately 40% of all homeowner’s have experienced a rate increase in the past several years and the national insurance survey estimates that more than 2.5 million homeowner’s have lost their homeowner’s insurance coverage.  

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The most overriding change in the industry has been the phasing out of guaranteed replacement cost coverage as very few insurance carriers offer it today.  Unlike the past decade, most insurance companies will no longer guarantee replacement of your home if you don’t carry enough coverage, in fact they will generally agree to pay out a maximum of 120-125% of the policy’s face amount.  For example if your policy was written for a home that cost $400,000 and would cost $600,000 to replace, your claim would likely be capped at $500,000.  There are still insurers offering coverage that is not capped and you could receive full payment on the claim even if it exceeds the amount of your coverage, but these insurers are more difficult to find.

As a substitute for guaranteed replacement cost coverage most insurance companies have replaced it with “extended replacement cost”, “extra replacement cost” and “insured to value” coverage. These policies provide replacement cost plus 20-25% coverage.  Previously a policy that kept pace with the rate of inflation was a serviceable policy for homeowners however some of the disasters that have struck in the past few years have hit areas where homes have appreciated far faster than the rate of inflation and many effected homeowners have been stuck paying the difference.  A guaranteed policy can offer superior coverage to a policy with 100% coverage and a rider for inflation.  In the absence of guaranteed replacement, you may want to opt for replacement cost coverage as it will at least cover the stated policy amount however the policy must be reviewed frequently to assure it is keeping pace with changes in value. A so called “law and order” policy is a variation on the guaranteed policy in that upgrades to current building codes are included, something that was not always the case with the guaranteed replacement policy.  Another form of coverage is “actual value” which is a policy that will pay out on the value of the property today after deducting for any depreciation.  In the end, regardless of the policy you choose, you must check the costs associated with the policy each year to verify any changes or increases are reflective of any changes to or increases in the value of the home.

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 Questions You Should Have Answers to Regarding Your Homeowner’s Coverage:

Which Disasters are Covered?

Policies typically exclude damage from floods, quakes, nuclear accidents and wars.  For flood and quake coverage you must typically purchase a separate policy.  Flood insurance is usually offered only by the government.  All policies cover loss from fire, smoke, lightening, explosion, theft, vandalism and objects colliding into your home (including vehicles and aircraft). Many policies also have the added protection of freezing and water pipe damage.  But you want to be certain what is and is not covered with regard to the potential list of hazards common for your geographic area.

What Amount of Coverage Do You Have?

As far as the actual dwelling is concerned, you want it insured for a minimum of 80% of its value, excluding land.  If you have additional detached structures on the property, verify whether or not they are included in your coverage.  Most standard policies contain a provision to cover the added expenses involved in moving out of your home while it is being repaired or rebuilt if needed. Personal property should be insured to an amount equaling roughly half of the home’s value.  You should request added coverage if you have exceedingly valuable items and furnishings in your home, typically this requires an added floater or endorsement to your policy.

What Type of Coverage Do You Have?

For example a replacement cost policy will cover the expenses involved in repairing and/or replacing any damage.  However a policy covering actual cash value will generally deduct a depreciable amount off what is to be replaced on the home, based on its age.  Sometimes your replacement cost policy will cover only the actual cash value of the personal property within your home.   Many policies are capped at the stated policy limit, while others will go to 20-25% above the stated limit if needed.  If you do not already have a policy with replacement coverage, ask your agent what the additional cost involved in getting one would be.

What is the Amount of the Deductible on the Policy?

The premium and the deductible on your policy are inversely related, which means you can reduce the amount of your premium payments by increasing the amount of your deductible.  For instance quake insurance almost always has a 10% deductible and can contain separate deductibles for personal property as well as additional dwellings on the property. Most homeowner’s policies contain deductibles in the range of $500 to $1,000 for most claims.  Keep your premium payments more manageable by increasing your deductible.  If you know you would not file a claim for $1,000 in damage (with the tradeoff being higher premiums down the line) then go ahead and increase your deductible to $1,500 or $2,000. 

What are the Liability Limits on the Policy?

If someone is hurt or injured on your property how much would your policy pay?  A standard policy provides personal liability coverage of up to $100,000.  Would you need additional protection from a potential judgment if you were sued?  You may want to consider adding umbrella liability coverage of $1MM, which is a relatively small incremental increase in policy cost, that will cover some extras not included in a standard homeowner’s policy.  Note that many insurance companies will only offer umbrella policies to those clients who have both home and auto coverage provided by them as well.

Tips on Maintaining a Homeowner’s Policy:

It is estimated that some 60% of U.S. households are underinsured. One of the most common mistakes a homeowner makes is to grossly undervalue their home along with its contents.   Check the tips below and review your own policy carefully:

• Update your policy frequently; it should be reviewed at least annually.  Be sure you are keeping any replacement cost figures in line with the property’s value and have the property inspected or appraised if you can.

• Be conservative when estimating the replacement value of your property.  It is far better to pay for more coverage than you need than to end up short if disaster struck. 

• Be certain you have the added endorsements to your policy required to rebuild your property based on the current building codes and ordinances in effect today that may not have been a factor at the time the property was originally constructed.

• If you have been a good customer of a particular insurance company for 3 or more years, discounts of 5-10% are frequently available.  If you have a home that was constructed more recently, say within the last 5 years, you may be offered an additional 5% discount.  Smoke detectors and home security systems may further reduce premiums by 2-10%.

• Don’t delegate to or rely upon anyone else’s judgment when determining the amount of your insurance coverage needs.  Don’t allow your real estate agent or mortgage lender to make this important decision for you.

Contents (AKA Renter’s) Insurance

As a homeowner, you are advised to insure your personal property for approximately half the face value of your homeowner’s policy.  However if you are a renter or condominium owner, you should insure your personal property for its full face value.

Renter’s

It is estimated that over 30% of U.S. households consist of renters rather than owners.  Shockingly almost 67% of households which are renting lack insurance protection for their contents and personal belongings within the unit they are renting.  Approximately 25% of renters have never heard of renter’s insurance and are unaware that they may even need it.  Unknowingly these households are leaving themselves exposed to potential loss and liability.  Regardless of where you live, you need to have some type of insurance to cover your personal property.  Contents insurance, commonly know as renter’s insurance, is available through most insurance agents nationwide.  The premium you’ll pay on a renter’s insurance policy could be made on a monthly, annual or semi-annual basis and, just as with a homeowner’s insurance policy, is based upon where you live and the risk associated with your area.  Also factoring into your premium payment is whether you have taken out any other insurance policies with a particular company or insurer.

Condo Owner’s

It is important to note that the owner of a condominium technically owns only the airspace located within their unit between the common walls which are owned jointly by the homeowner’s association as common area and are covered and insured by the development’s or association’s master insurance policy.  Condominium owners therefore also require a policy similar to that of renter’s insurance.  This separate policy will cover any damage to the personal property within a condo owner’s individual unit and will protect any part of the structure a condo owner is responsible for.  An all-risk policy is optimal, show your insurer your condominium CC&R’s which indicate what you are responsible for. Typically you will only have to insure the changes and improvements made to the unit by all owners since the development was constructed and the condominium will be insured by the master policy as it was when it was originally constructed.  So if you have renovated or remodeled your unit, consider boosting this part of your policy.  Some condominium developments will require that you insure everything from the bare walls out.  But the building itself, the common areas and the total unit owner’s common liability, should be covered by the development’s master insurance policy.  In these policies the building or structure of the property is covered for 10% of its contents, essentially the items which are defined as fixtures.  Clarify with your insurance agent what is and is not covered.

Ways to Save Money on Your Homeowner’s Insurance

• Pick one insurance company to service all your insurance needs.  Obtaining all of your policies from one insurance carrier (i.e. homeowner’s, auto, contents, umbrella) will help create as many opportunities for discounts as possible.

• Increase the amount of your deductible.  If you know you would not file a claim for less than $1,000-$2,000, then by all means increase your deductible accordingly.  The trade off of a higher deductible is always lower premium payments.  With a $1,000 deductible, you could save as much as 15% on your premiums.

• Be sure to get a replacement cost policy as this type of coverage could save you big money in the event you need to file a claim.  If you have an “actual value” policy, which covers the value of a lost item less depreciation, you will likely come up short on funds paid through your claim when replacing the lost item with an identical or similar one.

• Make your premium payments annually rather than selecting any other payment plan as you will probably be given the option of paying your premium monthly, quarterly or semi-annually.  However if you select the annual payment option, you will save on your yearly premiums overall.  This likely has to do with the additional costs involved by the insurance company in having to process multiple payments.

• Have a clear understanding of special added coverage and exceptions that may be included in your policy.  Seemingly minor additions to coverage (i.e. coverage for credit card losses and the like) could hit you hard in the pocketbook and prove to be quite costly for the minor amount of incremental coverage added.

• Document or inventory your property and its contents.  Create a file with a series of photographs or better yet a video of your entire property and all of your belongings.  This file should be kept in a fire proof safe or safety deposit box.  By doing this you will serve the dual purpose of creating a photographic inventory to help jog your memory in the event a disaster strikes and you will have actual tangible evidence for your insurance company to show what you’ve lost and assist you in both filing and getting paid on your claim.  

• Do all that you can yourself to protect your own property.  A minimum of one smoke detector well positioned within your home is a must for your own safety as well as the protection of your property, you should also have a fire extinguisher on hand (the kitchen is a good choice of location).   Security alarms and investing in quality locks and deadbolts for your doors, windows and gates will also help keep your home safe.

Insurance Related Websites Worth Checking Out:

• A.M. Best Company – Offers buying guides for consumers and reports on the condition of insurance companies.   www.ambest.com

• Coalition Against Insurance Fraud – A non-profit organization devoted to fighting insurance fraud.  www.insurancefraud.org

• E.F. Moody – A comprehensive financial site designed for consumer knowledge and protection. www.efmoody.com

• Federal Emergency Management Agency (FEMA) – The agency of the U.S. government assigned with the task of disaster preparedness, response and recovery. www.fema.gov

• Fitch Ratings – Provides ratings and research on insurance and insurance related companies worldwide.  www.fitchratings.com

• Insurance Information Institute – Provides public understanding of insurance, what it does and how it works.  www.iii.org 

• Insure.com – Provides instant online insurance quotes and policy information.  www.insure.com

• Insweb.com – An online marketplace for consumers to compare the rates of various insurance companies.  www.insweb.com

• National Association of Insurance Commissioners – An organization that assists state regulators in serving the public’s insurance interests and needs.  www.naic.org