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Are You Sure You Have Enough Insurance?
One firm involved with estimating rebuilding costs says more than 50% of U.S. homes are underinsured.
October 2005
THE HEARTBREAKING PHOTOS of underwater
neighborhoods in New Orleans pose a
wrenching question for every homeowner in
America. If your house were destroyed,
would your insurance pay enough to rebuild it? Never
mind the thorny issue of flood insurance. This question
is more basic: Is your home simply underinsured?
The odds are good that it is. Marshall &
Swift/Boeckh (MS/B), a firm that provides rebuilding
cost estimates that insurers use when writing policies,
says 61% of American homes are underinsured—by an
average of 25%.
Don’t assume the problem is because of the recent
boom in housing prices. You don’t insure your house
for what it would cost to buy it. The proper amount of
insurance is the amount it would cost to rebuild. That,
of course, depends on the cost of building materials and
labor where you live.
Not long ago, many insurers offered “guaranteed
replacement” policies, meaning they would pay whatever
necessary to rebuild your house. Now, the best
your policy is likely to offer is a promise to add a 20%
to 30% kicker to the dollar amount written into the
policy—if needed to cover your loss. If your home is
insured for $250,000, for example, a 20% add-on
would permit a payment as high as $300,000.
It’s likely that you adequately insured your home
when you bought it. And if that was recently, you may
be okay. But as the years pass, it’s more and more likely
that things get out of whack. Sure, policies often
include inflation guards to increase the coverage annually
in an attempt to keep up with rising building
costs. But, as MS/B official Arun Baheti notes, inflation
protection is far from perfect because all building materials
do not increase in price at the same rate, nor do
labor costs rise uniformly across the nation. The price
of lumber has risen much more rapidly in recent years
than has the price of brick, he reports. So, applying the
identical inflation factor might leave the owner of a
wood home underinsured.
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