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
rebuilding.
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
coverage.
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.