- The Washington Times - Tuesday, January 20, 2004

The home is generally a family’s most valuable asset, and even more so today 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 coverage hasn’t kept pace.

About 64 percent of U.S. homes were underinsured by an average of 27 percent in 2003, in part because of construction costs that rose 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 is important to carefully review homeowners-insurance renewal notices and take steps to ensure you are 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, Mr. 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.


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