Don't cut back insurance if value of home drops Replacement cost is crucial figure

February 21, 1993|By Diana Shaman | Diana Shaman,New York Times News Service

Many homeowners who have seen the value of their houses fall have the mistaken idea that they can reduce their home insurance coverage.

Insurance agents say that even their most sophisticated customers tend to confuse market value, which is the amount a buyer is willing to pay for a house, and replacement value, which is the amount the owner would need to rebuild that house on the same site.

"Although the resale value of your home is down, that does not alter the fact that you must insure reasonably fully, if not fully, the replacement cost, which has not dropped but is going up," said William Sarant, a Massapequa, N.Y., insurance agent.

Nationwide, construction that cost $100,000 in 1989 rose to $112,000 by last year, while the median price of a single-family home prices in the New York metropolitan area fell from $183,200 in 1989 to $172,600 in 1992.

And the need for adequate insurance is even greater as home prices rise.

Nationwide, the median price of a single-family home rose from $93,100 to about $103,000 during the same period, according to the National Association of Realtors. In the Baltimore area, prices rose from $96,300 to $113,400.

Homeowners' policies require that a house be insured for at least 80 percent of its replacement value for any partial loss to be covered in full. If only 70 percent of replacement cost is covered, for example, the insurance company would be obligated to pay only seven-eighths of a claim.

To calculate replacement cost, insurance agents either inspect a house or base their appraisal on information provided by the homeowner.

One way to get total protection in case of a loss that might exceed coverage is to add an endorsement that guarantees 100 percent replacement. If you insure for the full estimated replacement cost, most companies will add the endorsement at no charge or for a nominal fee, sometimes as little as $1, Mr. Sarant said.

A replacement cost endorsement also eliminates the worry of annually updating insurance because the company will automatically adjust coverage to increases in construction costs.

When the homeowner makes substantial improvements to a house -- usually those costing $5,000 or more -- they must be reported to the company to increase the coverage.

A comprehensive policy, the most widely used coverage, protects against most perils except flood, war and nuclear accidents.

Insurance rates differ from area to area, but comprehensive homeowners' insurance on a frame house in Nassau County, N.Y., insured for $150,000, with a $250 deductible and $300,000 in liability coverage, typically costs $535 annually, including a replacement cost endorsement.


A brochure, "Insurance for Your House and Personal Possessions," explaining the differences in coverage, is available from the Insurance Information Institute, 110 William Street, New York, 10038. Send a stamped, self-addressed envelope.

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