Is your home underinsured?
An important article in this weekend’s Wall Street Journal, titled “Housing Boom’s Dark Side.” The online version is unfortunately behind their subscription wall, so I’ll quote from the areas I find important. So what is the dark side?
So how, besides rising building costs, is this happening? Start with one part coverage scale back—insurers are cutting what they cover. Allstate cut earthquake damage coverage in many states. Farmers is scaling back on wind damage in certain coastal regions. But “one of the biggest shifts by insurers in recent years has been virtual disappearance of ‘guaranteed replacement cost’ coverage, which promised to rebuild a home exactly the way it was, no matter the cost.” So what replaced that clause? Look for “extended replacement cost,” which will offer a fixed additional percentage to the face value of your policy if rebuilding costs skyrocket.
So what should you do? Read every year’s policy—compare the previous year’s version to the current year and see what has changed. The change of just a word or two can mean a significant change in coverage.
Assuming you don’t have historical or custom-built homes with unique features (specialty insurers are the route to go if you do), here are the key questions they recommend to ask an insurer when looking at your policy:
1) Do I have enough insurance to rebuild my home as it is, AND replace all my personal possessions? Don’t forget to read your policy regarding special collections, or art/jewelry. Most homeowners policies only cover up to a set amount, and you’ll probably need an additional rider for complete coverage. Also, see the quote above about ‘extended replacement cost’ and see if there is a cap.
2) How much coverage is included for bodily injury or damage to others? Umbrella liability policies in $1 million increments are available and not too bad price-wise. We have $1 million coverage that costs $215 a year and it definitely gives some peace of mind.
3) What happens if I have to live elsewhere while repairs to the house are made? Am I covered? Many policies are capped at around 20% of the home’s insured value, which may or may not be enough for your area. Also, think of the last time you had work done to your house—how long was the overrun? Can you afford to pay for hotels, restaurants, etc. for several months?
The premise of the article is somewhat undermined by a graph showing that the percentage of homes undervalued, as well as the undervaluation amount, has decreased over the last five years. (If underinsurance percentages are going down, it doesn't sound like rising home values/construction costs are the culprit but that this has been a widespread problem for the industry all along.) Insurers are starting to estimate rebuilding costs better, according to the survey mentioned above.
Regardless, if you find yourself in the 58% with not enough coverage, it matters little that the overall trends are improving while you have to take out loans to cover what your insurance should have.
According to a survey to be released soon by Marshall & Swift/Boeckh LLC, a firm that supplies building-cost data to insurers, 58% of houses are undervalued for insurance purposes. Of those, the average homeowner has enough insurance to rebuild only 80% of his or her house, according to the survey.
So how, besides rising building costs, is this happening? Start with one part coverage scale back—insurers are cutting what they cover. Allstate cut earthquake damage coverage in many states. Farmers is scaling back on wind damage in certain coastal regions. But “one of the biggest shifts by insurers in recent years has been virtual disappearance of ‘guaranteed replacement cost’ coverage, which promised to rebuild a home exactly the way it was, no matter the cost.” So what replaced that clause? Look for “extended replacement cost,” which will offer a fixed additional percentage to the face value of your policy if rebuilding costs skyrocket.
So what should you do? Read every year’s policy—compare the previous year’s version to the current year and see what has changed. The change of just a word or two can mean a significant change in coverage.
Assuming you don’t have historical or custom-built homes with unique features (specialty insurers are the route to go if you do), here are the key questions they recommend to ask an insurer when looking at your policy:
1) Do I have enough insurance to rebuild my home as it is, AND replace all my personal possessions? Don’t forget to read your policy regarding special collections, or art/jewelry. Most homeowners policies only cover up to a set amount, and you’ll probably need an additional rider for complete coverage. Also, see the quote above about ‘extended replacement cost’ and see if there is a cap.
2) How much coverage is included for bodily injury or damage to others? Umbrella liability policies in $1 million increments are available and not too bad price-wise. We have $1 million coverage that costs $215 a year and it definitely gives some peace of mind.
3) What happens if I have to live elsewhere while repairs to the house are made? Am I covered? Many policies are capped at around 20% of the home’s insured value, which may or may not be enough for your area. Also, think of the last time you had work done to your house—how long was the overrun? Can you afford to pay for hotels, restaurants, etc. for several months?
The premise of the article is somewhat undermined by a graph showing that the percentage of homes undervalued, as well as the undervaluation amount, has decreased over the last five years. (If underinsurance percentages are going down, it doesn't sound like rising home values/construction costs are the culprit but that this has been a widespread problem for the industry all along.) Insurers are starting to estimate rebuilding costs better, according to the survey mentioned above.
Regardless, if you find yourself in the 58% with not enough coverage, it matters little that the overall trends are improving while you have to take out loans to cover what your insurance should have.
posted by Dwight at
3:08 PM
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