Most Homeowners Are Underinsured

Lessons Learned From Hurricane Katrina

(CBS)  Disappearing Act

Today, most standard homeowner's insurance policies no longer provide "guaranteed replacement cost" coverage — a provision in policies that had provided homeowners peace of mind that their home would be replaced regardless of the coverage limits in their policies.

Insurance companies have included a "notice of change of coverage" in the annual policy updates they send to their existing customers explaining this change — it's doubtful that most homeowners fully grasped the importance of this change, or even read the notice.

Most homeowner's policies today include only "extended replacement cost" coverage or "specified additional amount of insurance" — this only provides coverage up to the dwelling limits specified in the policy plus an additional amount of up to 20 percent to 30 percent, and NOT a penny more.

This places more responsibility on homeowners to ensure that they have adequate dwelling coverage limits in their homeowner's insurance policies. The concern in the industry is that many homeowners have not updated their dwelling coverage limits and as a result are underinsured in the event that they have a full loss.


How Do I Set the Right Amount of Coverage?

To protect against underinsuring their home, homeowners should ask their insurance company to perform an analysis of their homes replacement cost, based on an inventory of the number and type of rooms, the quality level of the existing construction and the homes special features.

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.

Many insurance companies use MSB's computer program that calculates a home's replacement cost. You can also use a similar program offered by MSB at accucoverage.com.

On this site you can input information on your home and, for $7.95, receive an AccuCoverage report that will include an estimate of the insurable replacement cost of your home based on the same reconstruction cost data for your local area that is used by much of the insurance industry.

If you do not update your coverage and you have inadequate coverage limits in your policy, you may find that your current policy only insures a percentage of your homes current replacement value. Here is how it works: If you have a FULL LOSS of your home, and the dwelling limits of the policy are only a percentage of the full replacement cost of the home, you will only be paid the percentage of the replacement costs and not more than the limits in your policy. Chances are this gap in coverage will amount to a lot of money.


Do I have the Right Type of Coverage?

The two most common types of policies offered are HO-3 and HO-5 form of homeowner's coverage. Homeowners need to know the difference between the two. Only the HO-5 policies provide replacement cost coverage for contents damaged or lost due to all risks.

Having a guarantee that your home contents will be covered no matter what the reason for the loss is particularly important if you have a larger home, many furnishings, jewelry, art or a home office.

As more people buy vacation homes and second homes, they need to be sure to properly insure these homes, too. When buying or updating homeowners coverage on a second home, be sure to disclose to the insurance company that the home is a vacation home, the amount of time you occupy it and if you also offer it for rent when you are not using it.

Coverage for vacation/second homes should include additional liability coverage, loss of use and loss of rental income benefits.