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Group: Majority of Homes Are Underinsured

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  • Group: Majority of Homes Are Underinsured

    NEW YORK (AP) -- The home is generally a family's most
    valuable asset, more so given the meteoric rise in property values
    over the past few years.
    But that asset could be at risk if you haven't updated your
    homeowners insurance policy. Changes in insurers' underwriting
    practices, rising construction costs and record levels of
    home-improvement projects could mean that your insurance coverage
    hasn't kept pace.
    About 64 percent of U.S. homes were underinsured by an
    average of 27 percent in 2003, due, in part, to construction costs
    that have risen about 5 percent to 6 percent last year, said Bob
    Crine, president of Marshall & Swift/Boeckh, a New Berlin, Wis.,
    company that tracks rebuilding costs for insurers.
    That's why it's important to carefully review
    homeowners-insurance renewal notices and take steps to ensure you're
    properly insured. Remember that your insurance is based on the cost
    to rebuild your home if it's destroyed, not on the amount you think
    you could get by selling it.
    Of course, most insurers do offer inflation-guard clauses
    that account for rising costs and boost coverage accordingly. Plus,
    insurers are becoming more aggressive about implementing
    insurance-to-value programs that can more accurately estimate a
    home's replacement value, said Bob Hunter, director of insurance for
    the Consumer Federation of America.
    Not only have insurers changed to systems that can provide
    better estimates, but the industry is also starting to base
    estimates on reconstruction costs (instead of new construction
    costs) which take into account additional expenses for debris
    removal, specialized workers and the lack of any bulk discounts,
    Crine said.
    But automatic annual adjustments typically exclude home
    renovations. "Major alterations and big-ticket purchases should
    trigger a call to your insurance agent," said Jeanne Salvatore,
    spokeswoman for the Insurance Information Institute, an industry
    trade group in New York.
    In 2003, homeowners spent a record $130.4 billion on home
    improvements, up 7.3 percent from 2002, according to the Joint
    Center for Housing Studies at Harvard University.
    Meanwhile, changes in insurers' underwriting practices could
    mean that you have less coverage than you think. Many have moved to
    stem rising claim costs by limiting payouts to the estimated value
    of a home, plus a certain percentage, instead of the actual cost of
    In 1999, State Farm Insurance, for example, started
    replacing its guaranteed-replacement coverage with a policy that
    covers the home's estimated replacement costs, plus a cushion of 20
    percent if costs outstrip the insured value, said Kip Diggs, a
    spokesman for the Bloomington, Ill., company. "We found that there
    were many customers who instead of purchasing the proper amount of
    insurance for their house, would simply rely on guaranteed
    replacement" to make up any difference, he said.
    That's why experts say some homeowners may be better off
    with replacement-guarantee coverage instead of cash-value policies.
    Policies offered through Chubb Group Insurance Companies, for
    example, will pay the full cost to rebuild a home, even if the cost
    is greater than the amount of your coverage.
    Although such policies are more expensive, homeowners can
    reduce the higher premiums by increasing the deductible.
    If you own an older home, make sure your policy covers the
    costs to rebuild a home to follow current, more stringent building
    costs for things like plumbing or electrical wiring. "Most
    insurance-company policies won't provide the extra coverage," said
    Patti Clement, director at Hub International Ltd., an insurance
    brokerage firm. Those with custom-designed homes that include
    special architectural details and interior features will need extra
    For a quick estimate of the amount of insurance you need,
    multiply the total square footage of your home by local building
    costs per square foot, which you can get from a local real estate
    agent, insurance agent or builders association.