Are You 100% Covered?

Don't wait for disaster to strike.

By Pat Mertz Esswein, Associate Editor

From Kiplinger's Personal Finance magazine, November 2004

Many Southern Californians were slammed twice when their houses were reduced to ashes in last year's wildfires: first, when they lost their homes, and again, when they learned the insurance policies that promised (or so they thought) to replace their homes wouldn't cover the cost of rebuilding from the ground up. The typical homeowner was underinsured by $100,000, estimates Amy Bach, executive director of United Policyholders, a nonprofit consumer organization in San Francisco.

"Many of those homeowners have testified that they thought replacement value meant replacement, and it didn't," says Gary Gartner, deputy press secretary for John Garamendi, California's commissioner of insurance. Sounds reasonable enough, but the replacement value is capped at a dollar amount set in your policy. If that figure is outdated or just plain wrong, you could, in the event of a total loss, wind up with far less money than you need to rebuild.

As many as two-thirds of U.S. homes are underinsured -- by an average of 27%, according to Marshall & Swift/Boeckh, a firm that compiles building-cost data and sells software to insurers to estimate replacement value.

Keep in mind that replacement value is not the same as market value because you don't insure the value of your land. Bach offers this test for underinsurance: Call a local builder and ask for a ballpark per-square-foot cost to rebuild. Then, divide the limit in your policy by the square footage of your home (exclude an unfinished basement). If the result is less than the builder's figure, call your insurance agent.

Don't assume that your agent will try to unjustly push you to a higher limit -- and the higher premium that goes along with it. In fact, insurers may estimate on the low side, by looking at the cost of new construction versus rebuilding, perhaps, or out of concern that a premium hike might compel you to shop for a lower-price policy.

When it comes to calculating how much it would cost to replace your house, the more specific information you provide, the better. Granite countertops? Top-of-the line fixtures? You get the picture. It's a good idea -- and essential if your home has custom, unique or historic features -- for a representative of the insurer to visit your home. You may even want to hire your own independent appraiser.

The secrets we keep

You're especially likely to be underinsured if you have remodeled and failed to inform your insurer, which about 60% of homeowners do, according to Dan McCabe, a vice-president of Chubb Personal Insurance. Consider the case of a Virginia family who built a $65,000 addition on to their home. Before the job, the replacement value of the house was $196,000. If they had failed to report the remodeling work to their insurer, they'd be covered for only 75% of the real, $261,000 replacement value.

Even industry professionals fall down on this one, concedes Sara Phelps, 48, who works in corporate communications for Nationwide Insurance in Columbus, Ohio. This past winter, Phelps spent about $10,000 to upgrade her circa-1954 kitchen. Although the project had been completed for months, Phelps only recently called her agent to bump up her replacement value from $191,000 to $200,000. That would have added $52 to her annual premium, but Phelps saved much more by boosting her deductible from $250 to $1,000.

Most insurers offer an annual inflation adjustment, either built in to the policy or as extra-cost endorsements. Purchase it only if the adjustment is tied to regional building costs, rather than national costs. If your insurer offers "extended coverage" -- which provides a buffer of 20% or more above replacement value (Fireman's Fund offers as much as 100%) -- buy it. It will provide a safety net if nasty surprises arise during rebuilding or if builders hike prices after a disaster.

--Research: Joan Goldwasser

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