To protect yourself, you need enough homeowners insurance to rebuild your castle from the foundation up. Most policies cover damage from heavy winds (except along hurricane coasts, where protection may be written separately). You may also need separate coverage for earthquakes or floods. But deciding what’s enough is not as easy as it sounds. Some people have too much insurance; many more have too little.
You overinsure when you buy a new house and cover it for what you paid. Part of that price is the value of the land, which won’t burn up or blow away and needs no protection from State Farm. To divide house from land, ask your insurance agent or the local builders’ association what it would cost to reconstruct a home like yours. At $60 a square foot (not counting the foundation), a 2,000-square-foot house should be insured for $120,000.
Now back up 10 years, and say that that house originally cost $80,000. You’re underinsured if you haven’t increased the size of your policy by enough to protect your current investment. You won’t be reimbursed in full-even for a minor claim like a small kitchen fire-unless you’re insured for at least 80 percent of the home’s replacement cost. In this example, you’re seriously at risk if you’re covered for less than $96,000.
What if, over the past four years, your house has dropped in value by 20 percent? That’s irrelevant to your insurance coverage. Construction costs have risen by an average of 3.2 percent annually since 1987, says economist Michael Carliner of the National Association of Home Builders. So you need more coverage, even though your property is down.
There’s one risk, however, that even a careful buyer can’t defend against-that’s white-collar looting, by business people who inflate the price of rebuilding your home. Before the Oakland fire, building luxury homes cost an average of $100 to $125 a square foot, says Emeryville, Calif., insurance adjuster Gil Malmgren. After the fire, “greed and gouging” by architects and contractors drove costs to $165 to $225, he says. The same thing is happening in south Florida, where sheets of plywood more than doubled in price the day after the hurricane hit. So your policy may not buy all the labor and materials you need.
The Cadillac homeowners insurance is called “guaranteed replacement-cost coverage.” It will repair or replace your house, virtually in every detail, even if the bill exceeds the policy’s face value. Most buyers can’t afford unlimited replacement cost, so they cap their insurance at 150 percent of face value. Normally, this gives you full protection. But with price gouging on the loose, even owners of these policies may find their coverage coming up short.
As for your home’s contents they’re normally insured for no more than their flea-market value. Take a couch that you bought five years ago for $700. Regular insurance would value it at $400 today. But if you bought replacement-cost coverage you’d get a new couch, even though its price has now climbed to $900. A replacement policy costs 10 to 15 percent more, but it’s the only way to restock your closets, rooms and china cabinets after a loss. Renters can get replacementcost coverage, too. So can owners of mobile homes.
Asked what homeowners most need to know to get the best from their insurance, every industry spokesperson said the same boring thing. Draw up a home inventory. You can always get an insurance settlement from a list you construct from memory. But “study after study shows that normally policyholders … don’t remember everything, or don’t attach a value to everything that the policy replaces,” says Bill Sirola of State Farm.
You may feel confident that you can visualize every little thing you own. But try this test: without peeking, write down what’s in every drawer and closet, in your kitchen, bedroom and living room. You’ll be surprised at how much you forget. And then there’s the attic, the garage, the kids’ rooms and so on.
Everything that’s not on your list wouldn’t have been presented to your insurer, if you’d had to put in a claim. And that means a lot of money lost. So take a weekend to go around your house with a still camera or videocam. Photograph everything-every wall, open closet and open drawer. Note when you bought things and what you paid. Then put the pictures in a safe-deposit box. Alternatively, make two sets of pictures-keeping one in a fireproof home vault and leaving the other at the home of a friend.
Hurricane Andrew isn’t done with its mischief yet. It’s going to leave scars on the pocketbooks even of consumers whose homes weren’t touched. Sean Mooney, senior vice president of the Insurance Information Institute, guesses that prices for homeowners insurance will rise nearly 10 percent in Florida, compared with 3 to 4 percent in a normal year. The same thing happened in South Carolina after Hurricane Hugo passed through. Physical debris eventually gets hauled away, but financial wreckage can litter your life for years to come.
