Make certain your insurance can weather every storm

Your Money

October 03, 2004|By EILEEN AMBROSE

LAST YEAR, Tropical Storm Isabel sent trees crashing onto Maryland rooftops. This year, four hurricanes in Florida have upended houses and lives.

All drive home the importance of homeowners reviewing their insurance policies to make sure there's enough coverage to rebuild homes and replace contents should disaster strike.

Unfortunately, many consumers don't know what coverage they have, and sometimes they discover too late that it's too little. The Consumer Federation of America figures that about 20 percent of policyholders are underinsured.

Many homeowners fail to increase their policy limits after they make pricey upgrades or add a room or two, experts say. Sometimes policy limits don't keep up with construction inflation. Or a homeowner's belongings might be worth far more than what a standard policy covers.

Insurance experts say homeowners shouldn't assume that whatever limit that appears on the policy is sufficient. Ideally, homeowners should review their policies each year.

The first step is to read the policy.

"They are very boring to read, but that would generate questions on what coverage they have and when that coverage would apply," said Cindy Houdeshell, operations underwriting superintendent with State Farm Fire and Casualty Co. in Frederick. "It behooves people to know what they are paying for."

Policies differ from state to state, carrier to carrier. But here are terms you'll likely encounter and items to consider:

Coverage limits. Years ago, insurers routinely offered "guaranteed" replacement coverage, meaning the company would pay whatever it took to rebuild a house, even if the price tag was much higher than the policy limit.

"Hurricane Andrew in '92 sent insurers scurrying back to the drawing board. They were caught by surprise at the extent of the losses," said Carolyn Gorman, a spokeswoman for the Insurance Information Institute, an association for property and casualty insurers. "They had to find ways to rein in their exposure and get a handle on what in the world they were insuring."

Today, a few insurers still sell "guaranteed" replacement coverage, although it's more expensive than "extended replacement coverage," which is the most common today, experts said. Basically, under extended coverage, the insurer will pay to rebuild your house up to the policy limit and extend coverage by another 20 percent to 25 percent if construction costs spike upward after a natural disaster or for some other reason, experts said.

Insurers won't offer that extension of coverage, however, if the homeowner doesn't purchase a certain level of insurance to rebuild the home, experts said.

Robin Olson, a senior research analyst with the International Risk Management Institute in Dallas, said extended replacement coverage should provide enough protection as long as homeowners make sure the insurer does a thorough job of determining the cost of replacing the house and keeps policy limits up to date with rising building costs.

Keeping up with change. Many insurers include an inflation guard in a policy, which automatically adjusts the coverage limit to reflect construction inflation. Homeowners should double-check to make sure their policy offers this, experts said.

Homeowners can also add, for a price, "ordinance or law" coverage, in which the insurer will pay the extra costs to meet building codes that were adopted after a house was built.

House contents. The contents of a house are generally covered up to 50 percent of the policy limit on the home. A house insured for $200,000 would provide $100,000 worth of coverage for its contents, for example.

For some, that's enough. Others with, say, a state-of-the art home theater system or high-end furnishings might need to buy more coverage for contents.

Homeowners can also choose to have their belongings replaced based on "actual cash value" or "replacement cost." Actual cash value will replace items after deducting depreciation, which can leave homeowners underinsured, Olson said. He advises paying a little more for replacement cost coverage, which will pay what it takes to replace your belongings.

Also, expensive items, such as jewelry, furs and artwork, usually are covered only up to a certain limit under a homeowners policy. So if those are diamonds and not cubic zirconia in your jewelry box, consider covering these special items under what's often called a "personal articles floater."

Deductible. This is the amount that a homeowner shells out before the insurer pays anything. Often it's $500.

The higher the deductible, the lower the premium. But there's another reason to choose a larger deductible.

If you make a certain number of claims, even small ones, your insurer might not renew your policy and you might have difficulty finding coverage with another company, said Randi Johnson, associate commissioner of property and casualty for the Maryland Insurance Administration.

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