Home Insurance And Hurricanes
In the wake of Hurricane Katrina, many homeowners in Louisiana and the Gulf region are finding out the hard way that their homes are underinsured and often covered by the wrong kind of policies. Financial adviser Ray Martin takes on a painful topic in his regular appearance on The Early Show Thursday.
While most homeowners have homeowner's insurance policies, many homeowners are not adequately protecting their homes. According to Marshall & Swift/Boeckh, an expert source of building cost information to the property and casualty insurance industry, about two out of every three homes in America are underinsured by an average of 27 percent.
And this underinsurance problem is painfully exposed when homeowners face a total and unexpected loss as did many homeowners in Louisiana and the Gulf region who were affected by Hurricane Katrina.
Much of the damage from that hurricane would be covered by private insurance or government funds. But if recent history is any guide, many people will find that their cost of rebuilding will outstrip the benefits provided by their insurance.
For example, more than 3,700 homeowners in California suffered total loss in the wildfires two years ago. According to John Garamendi, the state's insurance commissioner, a large proportion of those homeowners found out that the money their insurance provided fell far short of what they needed to rebuild the homes that they lost.
Pointing Fingers
Buying the right amount and right type of insurance means larger insurance policy premiums for the insurers. And insurance companies say that homeowners, all too often, do not step up to the responsibility of buying adequate coverage for their homes. When homeowners remodel and improve their homes, they sometimes fail to follow through with a call to their insurance agent to update their coverage.
Another contributor is the surging price of lumber, steel and other building materials and the rising costs due to new building codes and escalating energy and labor costs.
Consumer groups say that the problem lies in the way that homeowner's insurance is sold. In the competitive marketplace of selling homeowner's insurance, the last thing an agent wants is for the customer to run down the street to a competitor because they got a quote for $50 a year less. They say many agents provide quick quotes to close a sale, lack the training to properly assess the value of the homes they insure and often rely on over-the-phone interviews and computer programs to estimate the value of the dwelling to insure.
The result is that consumers buy cheaply priced coverage that they mistakenly believe will replace their home in the event of a full loss.
The insurance industry's position is that the insured has the duty to select the proper policy coverage limits, a position that is supported by laws in many states. However, if you repeatedly ask your insurance company, agent or broker to provide the proper coverage limits in your policy so that your coverage is sufficient to fully cover the cost to replace or rebuild your home and you are advised that your coverage is sufficient, then the insurance company, agent or broker has assumed a special duty of care and you may have a right to seek full coverage of your loss.
A Need To Know
Every homeowner needs to know that most homeowner's insurance policies no longer provide "guaranteed replacement coverage," which had provided homeowners with peace of mind that their home would be replaced regardless of the rebuilding costs.
Most homeowner's policies sold today are a form of coverage called "extended replacement coverage" or "specified additional amount of insurance" which 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 make sure 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.
Many insurance companies are now using Marshal & Swifts Residential Component Technology (RCT), a home valuation computer program that calculates your home's replacement value and suggests the proper coverage limits to set in your policy.
But if the assessment is incomplete, and the homeowner does not buy enough coverage, the homeowner will bear the consequence.
Ideally, the insurance agent should also visit the home to assess 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.
The difference is that only the HO-5 policies fully cover damages and loss of the home's contents due to all risks. Having a guarantee that your home's contents will be covered, no matter what the reason for the loss, is particularly important if you have a larger home, many furnishings, expensive jewelry, art or a home office.
Homeowners with outdated policies may find that their current policy dwelling limits only insures a percentage of their homes' current replacement value. It is important to note that as long as your dwelling limits in your policy are 80 percent or more of the replacement cost of the dwelling, you are fully covered for a partial loss. But if you have a full loss of your home, and the dwelling limits of the policy are only a portion of the full cost to replace the home, you will only be paid for part of the replacement costs. Chances are, this gap in coverage will amount to a lot of money.
Many homeowners have made home improvements. These improvements will increase the home's replacement value, and the dwelling limits in the homeowner's insurance policy should be increased accordingly.
Finally, not only have home values gone up, but the price of materials and labor also has increased. Homes lost in disaster areas typically have to be rebuilt to conform to new building codes, to protect against wind damage or earthquakes for example, adding to the costs to rebuild the home.
As more people buy vacation homes and second homes, they need to be careful to properly insure these homes, too. When buying or updating homeowner's 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 whether 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.
Many insurance companies offer a dwelling coverage escalator, which is a feature that automatically increases the dwelling limits in the policy each year. Ask your insurance company about this feature, which can cost an additional $50 or so per year — not much to pay for additional peace of mind.
It is important to know that no private insurance will cover flood damage. The federal government provides flood insurance under the National Flood Insurance Program through the Federal Emergency Management Agency, and claims are often serviced by your insurance company. Some owners of high-risk properties may have to resort to obtaining coverage through Fair Access to Insurance Requirements (FAIR) Plans, which are state-mandated insurer organizations that cover high-risk properties in about 36 states.
One thing most homeowner's policies do cover is "loss of use." Many of the homeowners in New Orleans who have been forced to evacuate their homes need to know that their costs to stay in a hotel and other related living costs are generally covered at an amount that is typically about 30 percent of the overall policy dwelling coverage. So for instance, if your home is insured for $200,000, you may be entitled for up to $60,000 in reimbursement for your expenses associated with your loss of use.
Keep in mind that if you do want to increase the amount of coverage on your home, you can't do so when the peril is upon you. Insurance companies generally place a moratorium on coverage changes in areas in the path of a storm, typically several days before the expected peril is forecast to strike.
Written by Ray Martin