- The Washington Times - Friday, March 14, 2008

Consumers frequently re-evaluate their auto insurance, always looking for a way to save money while continuing to have adequate coverage. Few regularly re-evaluate homeowners insurance, though, assuming, instead, that the policy purchased when they bought their home continues to serve their needs.

The Insurance Information Institute (www.iii.org) quotes a 2006 Insurance Research Council poll that found 96 percent of homeowners had homeowners insurance, while 43 percent of renters had renters insurance.

Homeowners are required to purchase insurance coverage by their mortgage companies and often accept the basic policy without reviewing their options.

“Mortgage companies are looking for primary coverage for the home, but customers should also look for ways to customize their policy with water and sewer backup coverage and coverage for personal property including jewelry, furs and fine arts,” says Ken Lines Jr., an insurance agent with Nationwide Insurance and president of Ken Lines Insurance Co. in Laurel.

The standard homeowners insurance policy is meant to cover the rebuilding of the dwelling if it is damaged or destroyed.

“Insurance companies are not concerned about land value, they just want to make sure the dwelling itself can be rebuilt,” says Jonathan Porwick, an insurance agent with State Farm in Chevy Chase. “For example, a $500,000 property may have a home valued at $300,000 and the land valued at $200,000. The insurance coverage in this case would be for the $300,000 home.”

Insurance companies evaluate homes to determine the level of coverage needed, and homeowners themselves can also review the appraisal of their home, which separates the value of the land from the residence.

“It’s not an exact science to determine the required level of homeowners insurance,” Mr. Porwick says. “Homeowners should go with what they are comfortable with in terms of coverage. The key is to make sure the policy will replace the home.”

Mr. Porwick says State Farm adds a 20 percent cushion on top of the value of the home so owners have extra money in case construction costs have risen or some other problem causes the replacement price of the home to rise.

On the $300,000 insurance policy, the home is actually insured up to $360,000.

Nationwide also adds 20 percent to the value of the home to be certain the coverage is adequate if a home is destroyed, Mr. Lines says.

“An important distinction in coverage is whether the phrase is ‘similar construction’ versus ‘common construction,’ ” Mr. Porwick says. “That’s something you find in the fine print of the policy. As far as I would guess, 99 percent of insurance companies do ‘similar construction,’ but it is still wise to check on this.”

Similar construction means that the home will be repaired or rebuilt the way it was, or at least as close to the actual construction as possible. A common construction policy means any materials could be used to rebuild a home.

“In this area, where there are many older homes, it is particularly important to have a similar construction policy so that things like plaster walls are rebuilt of plaster,” Mr. Porwick says.

As home prices rise and fall, homeowners should re-evaluate their policies.

“Some people may have overinsured their homes if they were caught up in escalating home prices,” Mr. Lines says. “The insurance company will look at a replacement-cost estimate to determine the appropriate level of insurance. Tax assessments are not necessarily indicative of the cost of replacing a home. Appraisals track a little more closely to the replacement cost, but even that may not necessarily be the same.”

At the time of a home purchase, buyers also should consider some optional insurance coverage. Flood insurance is not included in the standard policy, although the mortgage company will notify the buyers if the home is located in a flood zone and will require additional flood insurance.

Angie Hicks, founder of Angie’s List, a consumer group that provides members with information about local contractors and companies, says flood insurance can be obtained through the Federal Emergency Management Agency (FEMA) National Flood Insurance Program.

Mr. Porwick says some homeowners are choosing to purchase flood insurance even if they are not living in a flood zone.

Personal property also is covered by homeowners insurance up to a limit specified in the policy. Mr. Porwick says State Farm coverage is at least 75 percent of the insured value of the home. For a home valued at $300,000 for insurance purposes, the personal property would be insured up to $225,000.

“I encourage everyone to do a complete home inventory and take pictures of everything in their home to make sure their personal property is covered,” Mr. Porwick says. “This is especially important if you buy expensive items. The level of personal property coverage can be increased easily for a minimal amount of increased premiums.”

Mr. Lines recommends keeping receipts for high-end items and adding a rider to the policy to be certain specialty items are covered.

Jewelry is the most common item to require additional insurance, Ms. Hicks says.

Mr. Porwick says jewelry is usually covered up to $2,500 per piece and to $5,000 aggregate. Jewelry valued higher than that should be insured with a rider to the policy.

Ms. Hicks recommends that consumers make sure they have a “loss of use” rider, similar to rental car coverage on auto insurance, which would pay for a short-term rental or hotel stay if the home is uninhabitable while being repaired.

Mr. Porwick says that homeowners should check the level of their loss-of-use coverage to be sure it is adequate. State Farm covers rent payments for up to one year without a monetary cap if a home cannot be occupied.

Mr. Porwick also recommends the consumers review their policy to be sure it includes inflation coverage that automatically increases the limits of their insurance coverage to reflect rising costs of construction and repair work.

Another important optional coverage is backup sewer and drain protection, which provides coverage for the cleanup required if a pipe in the home backs up, the water company has a backup on the street or even if a sump pump gives out.

When purchasing homeowners insurance, consumers have the option of choosing the amount of their deductible. The lower the deductible, the higher the cost of insurance.

“When I first started in the insurance business, more people took the lower deductible, but now, in part because of the high cost of housing, more people are opting for a $1,000 deductible,” Mr. Porwick says.

Mr. Porwick says that sensitivity to the issue of putting in too many claims also enters into the deductible decision. He says, “At a $1,000 deductible, people are embracing the concept of self-insuring a little more, and they can save a lot of money on their policy.”

Ms. Hicks suggests that consumers review their homeowners insurance annually, while Mr. Porwick says policies should be reviewed at least every two years. Both agree that a home improvement project or major purchase should be a trigger to contact the insurance agent to discuss the policy.

Ms. Hicks says a recent study showed that homeowners spent an average of $11,000 on home improvements in 2007.

“Every time someone spends money to improve their home they should make sure their insurance coverage is adequate,” Ms. Hicks says. “Anytime you upgrade your house, you should talk to your insurance agent because when you are increasing the value of your home it becomes more expensive to replace.”

Mr. Lines says that contacting the insurance company is particularly important when adding living space to your home with a finished basement, a deck or an addition, since these projects would add significantly to the replacement cost of the home. Upgrading a kitchen or a bathroom or doing any other expensive projects should also be a time to re-evaluate the insurance policy.

Condominium owners pay for insurance on their building through their condominium association fee, but they need to carry additional insurance for their personal property and to cover any exclusions on the community policy.

An annual review of the homeowners insurance policy should become as standard a part of financial life as filing a tax return and should be less painful a process.

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