- The Washington Times - Thursday, March 17, 2011

Consumers are used meeting with their doctor every year for a physical and having an annual performance review with their employer, but not everyone remembers to schedule an yearly review of their homeowners insurance. Most homeowners insurance policies are renewed each year, but many policyholders only glance at the paperwork and check to see whether the premium is increasing before filing everything away.

Insurance agents recommend that homeowners take a few minutes when the policy is renewed to check their coverage and consult with an agent or their insurance company to make sure they are adequately covered. Homeowners also should let their insurance company know when they have made major changes to their home or to their personal property.

One of the more confusing aspects of homeowners insurance for some consumers is that insurance coverage is based on the replacement cost of the home, not market value. Some homeowners who have experienced a decline in their home’s value may assume they can lower their insurance coverage, but this is rarely the case.

“When homeowners buy insurance for the first time, the replacement cost is typically estimated by an appraisal company or a building-cost-estimate software program,” says George Bondon, agency principal of Bondon Insurance Services LLC in Silver Spring, Md. “Replacement insurance is meant to get the home back into the original condition, so the estimate is based on current cost of things like roof materials, building materials and even details such as French doors.”

Replacement cost covers the cost of rebuilding the structure, so the land underneath the home does not need to be insured. The full estimate for replacement cost is not generally repeated until the home is sold.

“Five years ago I would have said that the market value of a home was always higher than the replacement value, but in a few cases, now that home values have dropped, replacement costs are higher than market value,” says Thomas Bigoski, principal of the Thomas Bigoski Insurance Agency LLC in Gainesville, Va.

Mr. Bigoski says homeowners should make sure they have inflation protection on their homeowners insurance.

“Most companies work inflation protection of 2 [percent] to 4 percent annually into the policy premiums, depending on inflation rates,” he explains.

In addition, consumers should ask whether their insurance coverage includes a cushion of 10 percent to 20 percent in case the replacement cost estimates are too low. Most companies offer a replacement cost rider that allows customers to pay a small additional premium for extra replacement cost coverage.

“Homeowners can add 10 percent to 200 percent to their coverage to make sure their replacement costs are guaranteed,” Mr. Bondon says.

Raynold Mensah, a State Farm agent in Bethesda, Md., says homeowners should increase their replacement-cost coverage if they have built an addition, added a shed or a swimming pool or upgraded their property so that they have enough insurance to pay for replacing these items as well as the original structure in case of a fire or other damage.

Flood insurance

While standard homeowners insurance covers what are known in the industry as the “sixteen perils,” covering things such as fire, lightning, wind, hail, explosions, riots, volcanic eruptions, frozen pipes and more, damage due to a flood is not covered. Homeowners must purchase a separate flood insurance policy.

“A flood means rising water, which is water that doesn’t come from a windstorm or from some other location,” Mr. Bondon says. “Everyone should be offered flood insurance by their insurance company whether or not they are living in a designated high-risk flood zone by the government.”

The Federal Emergency Management Agency (FEMA) designates areas according to their risk factor for floods, but the agency says about 25 percent of flood insurance claims are from areas that are considered low- or moderate-risk areas.

Mr. Mensah says: “An insurance agent can check by address to see if your property is in a higher-risk flood zone, but homeowners who are in a low-risk area should also consider purchasing the flood coverage.”

Mr. Mensah estimates that flood insurance, available from insurance companies and regulated by FEMA, costs about $150 per year for a small home in a low-risk flood area. The maximum coverage allowed by FEMA is $250,000 for the structure and $100,000 for the home contents.

Homeowners should evaluate their risk of flood damage to decide whether they should purchase this coverage, Mr. Bondon says, looking for nearby water, a location on low land or the potential for water to flood into the basement.

A water-related insurance endorsement, usually identified as backup coverage for sewers and drains, also is recommended by most insurance agents.

“This covers you if your toilet overflows or rainwater flows into the house and causes your pipes to overflow,” Mr. Bondon says.

Mr. Bigoski recommends this backup coverage for all homeowners with a finished basement, particularly if they have a sump pump that could malfunction.

Even condominium owners might want to consider purchasing this insurance coverage to make sure they are covered for overflowing pipes that could damage their home as well as others.

Personal property

In addition to covering repair and replacement costs for the home, homeowners insurance provides coverage for homeowners’ personal property.

“Homeowners should check to be sure they have replacement cost for the home contents rather than ‘actual cash value,’ because the cash value is the equivalent of what you would receive if you sold all your belongings at a yard sale compared to how much it would cost if you had to replace everything at once,” Mr. Bigoski says.

Mr. Mensah says insurance policies on a single-family home generally include 65 percent to 75 percent of the replacement cost of the home for contents coverage. In other words, if the home is valued at $100,000, the contents would be covered for $65,000 to $75,000. For condominium owners, homeowners insurance coverage is less comprehensive and the homeowners may need to give their own estimate of the cost to replace all their possessions.

“Homeowners who have special items such as art, expensive jewelry, crystal, silver or antiques should consider purchasing extra insurance to cover these items,” Mr. Bigoski says. “Most policies cover $1,000 to $5,000 per claim for special personal property, not per item, so if you have an item of jewelry worth more than that you need to add a rider to your policy.”

Mr. Bigoski says adding a rider also insures the item for “mysterious loss,” such as losing a ring in the garden or leaving it behind in a hotel room. Cracks and breaks in crystal and artwork also are covered under a rider, but not under a standard insurance policy.

In addition to purchasing separate insurance for costly items and evaluating the level of personal property coverage, Mr. Bondon recommends that homeowners take inventory of their possessions.

“Make a list and write down all the serial numbers of electronics to make sure all your property is covered under the policy in case something happens,” Mr. Bondon says. “Take photos of your scheduled personal property, such as art and collectibles and re-evaluate their worth if they are old.

“I worked with someone who had purchased an Andy Warhol painting for $8,000 30 years ago and now appraises at about $150,000, so he needed to upgrade his insurance coverage.”

Other considerations

In addition to protecting the home and its contents, homeowners insurance includes liability coverage that will pay if someone is injured on your property or if you cause damage to an adjacent property.

“Liability coverage is particularly important for people who have kids and who have something like a trampoline or a swimming pool where someone can get hurt,” Mr. Mensah says. “If you live in a town house, you need to make sure you have coverage to pay if a kitchen fire in your home spreads and damages the house next door.”

Mr. Bondon says liability coverage usually ranges from $300,000 to $500,000, but that homeowners can increase the amount up to $1,000,000.

“If you have a high net worth, you may want to also purchase an umbrella insurance policy of another $1,000,000 or more that goes above the liability insurance on your home and your car,” Mr. Bondon says.

Mr. Bigoski says most insurance companies also include “loss of use” coverage that will pay for the living expenses of homeowners if they must vacate their home while damage is repaired or the home is rebuilt.

“Most companies will have a limit either at a specific dollar amount or they will pay in full for a certain period of time, such as for up to one year,” Mr. Bigoski says.

The insurance generally covers a hotel bill or the rent on a furnished apartment, and some policies also cover extra expenses such as eating out or additional commuting costs.

“Insurance should be used to cover big problems, such as a fire or massive storm damage or a lawsuit from someone getting injured on your property,” Mr. Bigoski says. “It is meant to prevent a bad situation from becoming a personal catastrophe. While there are lots of ways to save money on homeowners insurance, such as asking how to take advantage of discounts, I also think homeowners should increase their deductible to save money.”

Some homeowners opt to raise their deductible to $1,000 or even up to $5,000 if they know they will be able to pay that deductible in the event of a claim. Mr. Bigoski says the average homeowner makes one claim every 14 years.

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