Preparing For The Worst

Homeowners can lose out if insurance isn't kept current

June 01, 2008|By Paul Adams | Paul Adams,Sun reporter

For many homeowners, the first and last time they talk to their insurance carrier is just before they buy a house. Once they move in, most people stuff their policy in a drawer and never look at it again.But consumer groups and industry experts say that approach is risky - especially considering the rising cost of construction and other goods. Some may find the cost of rebuilding after a catastrophic fire or storm is a lot more today than when they first took out their policy.

That's especially true for the millions of consumers who remodeled kitchens or finished basements using money borrowed against the rising value of their homes during the real estate boom.

Experts advise homeowners to revisit policies every year or two to make sure they have the right coverage, at the right price. And with hurricane season just around the corner, they say, now is the perfect time.

"Good [insurance] carriers will every couple of years send out a survey to you asking about this stuff, and it's important for consumers to fill those out," said Randi Johnson, an associate commissioner with the Maryland Insurance Administration, the state agency that oversees the industry. "It's not a trick by the insurer to try to charge you more. It's to make sure you're insured properly."

But increasing your coverage is likely to cost more, and consumers already face higher insurance premiums, which have been on the rise nationwide in recent years as the industry has been hit with big losses from major hurricanes and other factors. Some carriers have stopped writing policies altogether in certain coastal states, such as Florida and Louisiana, where storms have caused devastating damage in recent years. In Maryland, Allstate Insurance stopped writing new policies last year in all or parts of 11 counties to reduce its exposure.

Though most carriers continue to write policies in Maryland, premiums have been rising faster here than in the rest of the nation. From 1999 to 2005, the average premium in Maryland increased from $372 to $696, an increase of 87 percent, according to the National Association of Insurance Commissioners. The state ranks 23rd in the nation for insurance costs, up from 42nd in 1999.

While cost is an important consideration, Johnson said that the first thing you should do when buying insurance is make certain you are "insured to value," which means you have enough insurance to rebuild your home, minus the cost of the land.

Experts caution that a home's replacement cost is not the same as its market value. For example, a small 1960s rancher in an area with high property values might have a market value of $400,000. But rebuilding after a fire might cost $200,000 in materials and labor. The lower number is the one a homeowner should consider when buying insurance.

Often, insurers will figure your replacement cost by evaluating the square footage and basic features of the house, and comparing that with similar homes in the area. But that doesn't necessarily take into consideration features unique to your house, such as hardwood floors, granite counters, spa tubs or stainless-steel appliances. All cost more to replace than standard materials, which is why homeowners need to keep their carrier informed.

Another thing to consider is how rising prices for everything from lumber to electrical wiring may affect the cost to replace your home.

Many policies automatically adjust each year to account for inflation, but experts caution that might not be enough. Part of the problem is that building costs sometimes rise faster than the overall rate of inflation.

Basic materials - such as steel, copper and oriented strand board - have experienced price spikes in recent years. Copper used in plumbing jumped 61 percent in 2006 alone, according to government data and analysis by the National Association of Home Builders. Oriented strand board soared 88 percent in 2003 and 30 percent in 2004 before prices eased again. Steel has risen steadily for six years, with prices jumping as much as 34 percent in 2004.

Industry experts suggest that homeowners do their homework, rather than assume an insurance carrier has up-to-date information on what it will cost to rebuild. It's best to check with builders in your area to get an accurate estimate, said Eric Goldberg, associate general counsel for the American Insurance Association in Washington.

"The cost to replace your home tends to increase every year regardless of what's happening with the ups and downs in the housing market," Goldberg said.

One way to avoid problems is to buy a policy with guaranteed replacement coverage, which covers the loss regardless of cost. But such policies either don't exist today or come with very high premiums, said Tobie Stanger, a senior editor at Consumer Reports. She said the next best thing is something called extended replacement cost, which provides another 20 percent or more of coverage if the damage exceeds your policy's limit.

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