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Homeowner's Insurance : Don't Overlook the
Details
By Lynn Asinof
If you have thought about your homeowner's insurance in the past few months, it is probably because you are refinancing your mortgage, buying a new home or filing a claim.
But unless you're in the last category, you probably didn't pay too much attention to the details. And that could be a mistake.
Just ask Pamela Rogers-Amy or Sara Harrington. Both had big losses from fires. Both were sure they would be fully covered by their insurance. Both now say they will never shop for homeowner's insurance in the same way again.
"People don't know what they've bought," says Ms. Harrington, whose Lexington, Mass., house was struck by lightning in 1995 and reduced to a shell by the resulting fire. "It is a cliché to say you have to read the fine print, but you do."
Homeowner's insurance policies are complex documents full of legalese and exclusions, which often can conceal big gaps in coverage. Because the policies can be so daunting, many people opt simply to shop for the best price. Too often, homeowners don't pay enough attention to coverage and service.
True, price is an important element. But the difference in cost between "bare-bones coverage and a policy that will cover everything is not usually large," says Judith W. Lau, a Wilmington, Del., financial adviser.
Each insurer offers its own mix of coverage and pricing, depending on the market it is targeting, and each has its own personality when it comes to claims.
"Some companies seem to try to help you. Other companies play hardball," says Robert Hunter, director of insurance for the Consumer Federation of American in Washington.
Sara Harrington and her husband, for example, say they spent months haggling with their insurer about what dollar figure to put on their loss. In the end, the settlement left them exhausted, frustrated and $40,000 to $50,000 short of the cost of rebuilding their one-year-old house.
The first step is figuring out the amount of insurance you need. This is typically done by using insurance-company estimates based on square-footage, building material and other criteria. The value of your land isn't included.
Many people protect themselves on this critical issue by buying a policy with "guaranteed replacement cost." Under this provision, an insurer agrees to pay the entire cost of replacing a home even if that exceeds the insured amount of the policy.
Some insurers, however, are backing away from guaranteed replacement, saying it has become too expensive. State Farm Fire & Casualty Co., Bloomington, Ill., for example, is phasing out its program, replacing it with a maximum payout of 120% of the policy amount. "That means homeowners have to pay more attention when reviewing their replacement-cost estimates," says Judith Mintel, associate general counsel for State Farm.
Relying solely on insurers' guidelines for replacement value can leave you underinsured. Talking to a local contractor can probably give you a better idea what it would cost to rebuild, but even then you need to factor in special features like fancy moldings or custom hardwood floors.
And remember that replacement value may have nothing to do with the market value of your home. On the East Coast, replacement value can be as much as 30% higher than market value, says Madelyn Flannagan, consumer-affairs advocate for the Independent Insurance Agents of America, Alexandria, VA.
Still, having a high enough replacement value, or even a guaranteed replacement policy, won't protect you if you run afoul of policy exclusions.
Pamela Rogers-Amy of White Lake, Mich., thought she was completely covered when she and her husband bought an insurance policy that provided guaranteed replacement for their 1950s house. But they didn't buy something called an "ordinance-and-law" rider, which Ms.
Rogers-Amy says their agent said they didn't need.
"I was told whatever it costs to rebuild your home, we will pay for it," she says.
But when the house was severely damaged by a fire in 1994, the insurance didn't cover building-code upgrades that White Lake required before the couple could move back into their home. Without ordinance-and-law coverage, the insurer would pay only to rebuild what was there. It made no difference, she says, that the original structure could no longer be legally built in White Lake.
With the insurance company agreeing to pay $93,000, Ms. Rogers-Amy and her husband were $125,000 short of what their contractor said it would cost to rebuild, because their home failed to meet code requirements in everything from the wiring and plumbing to the foundation and the roof structure. The couple is now suing their insurer, Liberty Mutual Insurance Co., Boston. Liberty Mutual says it doesn't comment on pending litigation.
If ordinance-and-law seems an esoteric detail, consider all the people hit by Hurricane Andrew who found their insurance coverage wouldn't pay to raise their homes out of the flood plain, as now required by law. "The only thing we promise is to put you back the way you were before the loss occurred," explains State Farm's Ms.
Mintel.
Who needs ordinance-and-law coverage? Insurance experts say people with new houses probably don't need to worry. But Ms. Rogers-Amy says everyone should buy this relatively inexpensive coverage, making sure the rider is for 100% of the policy value, paid at replacement cost and covering both the damaged and undamaged portions of a house.
Searching out such details about your homeowner's policy can take work. Each insurer can handle an issue differently and policies are being revised constantly. That means it may take repeated phone calls to get information from your insurer.
For example, some companies don't sell ordinance-and-law coverage at all. High-end insurers may automatically
include 100% coverage in the policy. And others limit the amount you can buy.
Moreover, ordinance-and-law isn't the only exclusion people need be wary of. Many policies exclude damage from backup of sewers and drains.
Philip L. Ladd, president of Dwight Rudd & Co., an independent insurance broker in Boston, cites the case of a homeowner who found he wasn't covered when a guest at an at-home business dinner fell, suffered a cut lip and sued. He hadn't purchased a $20-a-year rider for incidental business coverage, which was excluded on his policy.
Once you've figured out how much coverage you need, the bill may look daunting. If so, consider cutting the premium cost by raising your deductible. "Self-insure the smaller losses to make sure you have the coverage you need," says Mr. Ladd, noting people should consider deductibles of $1,000, $2,500 or higher if the savings are significant. "Most people can afford to cover the loss of a bicycle."
And don't turn down coverage that adds to your bill just because it seems unlikely. Noting that Boston is in an earthquake zone, Mr. Ladd says he now recommends earthquake insurance to all his clients and buys it for his own house. "The purpose of insurance is to cover a disaster," he says, adding that his peace of mind is well worth the extra $100 he pays each year.
Flood insurance is another type of coverage that may be worth considering, although it isn't something you can get as part of your homeowner's policy. This insurance is available only through the national flood-insurance program, although your homeowner's insurance company can write a policy through the federal program, explains Consumer Federation of America's Mr. Hunter.
The best way to figure out if you actually need flood insurance? "Go to city hall," he says, noting that's where you'll find a house-by-house map of the local flood plain.
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