BOSTON (CBS.MW) -- While most homeowners have
homeowner's insurance policies, many homeowners are not adequately
protecting their homes. According to Marshall & Swift /Boeckh,
publisher of the Residential Cost Handbook and a supplier of local
building-cost information to the property and casualty insurance
industry, 64 percent of homes in America are underinsured by an
average of 27 percent. Robert Hartwig, chief economist for the
Insurance Information Institute, agrees that the underinsurance
problem exists all across the country.|
And this underinsurance problem is painfully exposed when
homeowners face a total and unexpected loss as have many in California
and in Florida. According to John Garamendi, the California Insurance
Commissioner, a large proportion of the more than 3,700 homeowners who
suffered a total loss due to the wildfires there last year are finding
out that the money their insurance is providing is falling far short
of what they need to rebuild.
In an industry that prides itself on customer service and providing
security to its customers, it's difficult to believe that
property-insurance companies would knowingly allow their customers to
underinsure their homes. After all, buying the right amount and right
type of insurance means larger policy premiums and profits for the
Add to that the fact that among the millions of insurance claims
totaling approximately $26 billion a year; fewer than two percent are
for the total loss of a house.
So why is this happening? Insurance companies are quick to point
out that homeowners all too often do not step up to the responsibility
of buying adequate coverage for their homes. When homeowners remodel
and improve their homes, they often forget to follow through with a
call to their insurance agent to update their coverage.
Another contributor is the surging price of lumber, steel and other
building materials and the rising costs due to new building codes.
Escalating labor costs also contribute to higher construction bills.
Consumer groups such as the Consumer Federation of America,
however, paint a much different picture. They say that homeowners
depend on their insurance agents to properly assess replacement values
and to sell them the right type and amount of coverage.
They say that many agents today lack the training to properly asses
the value of the homes they insure and often rely on over-the-phone
interviews and computer-program estimates to provide quick quotes to
close a deal in the competitive world of selling homeowners insurance.
The result is that consumers often buy cheaply priced coverage that
they falsely believe will replace their home in the event of a full
A need to know
Every homeowner needs to know that the old-fashioned
"guaranteed replacement coverage" that provided homeowners
peace of mind that their home would be replaced regardless of the
rebuilding costs is quickly becoming a thing of the past. Most
homeowners policies sold today are called "extended replacement
coverage" or "specified additional amount of
insurance," which only provides coverage up to the dwelling
limits specified in the policy plus an additional amount of up to 20
to 30 percent -- and not a penny more.
And if you have an existing policy with "guaranteed
replacement coverage" expect a notice from your insurance company
upon the policy anniversary that your current coverage will replaced
with this new and more limited form of coverage.
This development places more responsibility on homeowners to ensure
that they have adequate coverage.
Some insurance companies say they have been forced to limit
replacement coverage as homeowners have been slow to increase their
coverage limits as home values appreciated and rebuilding costs have
surged. But some insurance company representatives fear that as this
new coverage is rolled out to existing policy holders, homeowners will
do nothing and as a result will be underinsured -- and ignorant about
Assessing replacement value
To protect against underinsuring their homes, homeowners should
insist on a through analysis of replacement value, including an
inventory of the number of rooms and bathrooms and specification of
the quality level of the existing construction as well as any special
Many insurance companies are now using Marshal & Swifts
Residential Component Technology home-valuation program to calculate
replacement values and suggesting this as the proper coverage limits
to set in your policy. If this valuation is incomplete, and the
homeowner does not buy enough coverage, the homeowner will bear the
Ideally, the insurance agent should also visit the home to asses
its replacement value and take into account the specific risks to the
home, local market conditions and current building codes that would
contribute to the costs of replacing the home.
Homeowners also need to know the difference between HO-3 and
HO-5 form of homeowner's coverage -- these are the two most
common policies offered. While both forms of coverage insure
damages caused by all risks to a home's physical structure, the
fundamental difference is that only the HO-5 policies fully
cover damages and loss of the home's contents due to all risks.
Having a guarantee that your personal belongings will be
covered no matter what kind of disaster strikes is particularly
important if you have a larger home, many furnishings, expensive
jewelry, art or a home office.
Homeowners with outdated policies may find that their current
policy dwelling limits only insures a percentage of their homes'
current replacement value.
It is important to note that as long as your dwelling limits
in your policy are 80 percent of more of the replacement cost of
the dwelling, you are fully covered for a partial loss. But if
you have a full loss of your home, and you do not have the full
amount of the dwelling replacement value covered, you will only
be paid for part of the replacement costs -- and chances are
this gap in coverage will amount to a lot of money.
Also, many homeowners have upgraded their homes and these
improvements boost the home's replacement value, meaning
insurance limits should be increased accordingly. Finally, not
only have home values gone up, the price of materials and labor
has also increased. Homes lost in disaster areas typically have
to be rebuilt to conform to new building codes, to protect
against wind damage or earthquakes for example, adding to the
costs to rebuild the home.
Many insurance companies offer a feature that automatically
increases the value for which the home is insured each year. Ask
your insurance company about this coverage escalator. The cost
of this rider and coverage increase is then automatically built
into your premium each year.
If the home is located in a flood plain, no policy will cover
flood damage. The federal government provides flood insurance
through the Federal Emergency Management Agency, and claims are
often serviced by your insurance company.
Some owners of high-risk properties may have to resort to
obtaining coverage through Fair Access to Insurance
Requirements, or FAIR Plans, which are state mandated insurer
organizations that cover high-risk properties in 36 states.
One thing most homeowner's policies do cover is "loss of
use." Many Florida residents have been forced to evacuate
their homes as the recent hurricanes descended on their area.
What these homeowners need to know is that their costs to
stay in a hotel and other related living costs are generally
covered at an amount that is typically about 30 percent of the
overall policy dwelling coverage. If your home is insured for
$200,000, for instance, you may be entitled to up to $60,000 in
reimbursement for your expenses associated with your loss of
Keep in mind that if you do want to increase the amount of
coverage on your home, you can't do so when the peril is upon
you. Insurance companies generally place a moratorium on
coverage changes in areas in the path of a storm, typically
several days before the expected peril is forecast to strike.
Certified Financial Planner Ray Martin writes
on personal finance for CBS.MarketWatch.com and also appears on
the "The Early Show" on CBS. He is co-author of
"The Rookie's Guide to Money Management."