You have your homeowner’s insurance policy and you’ve made all the payments on time, but like a lot of policyholders, let’s say you’ve never had an actual claim. If you had to file tomorrow, are you certain you’d have enough coverage to pay to rebuild it from scratch? You might be unpleasantly surprised.
Just like gasoline prices from 10 years ago are much different than they are today, today’s repair costs are likely much higher than they were when you signed the dotted line. Sadly, many thousands of New York/New Jersey residents in the midst of a post-Sandy winter are discovering that stagnant home values in many regions of the country have masked the true costs of rebuilding destroyed homes.
One common mistake that many insured people make is to confuse “market value” with “replacement costs.” As risk manager Gary Raphael, with ACE Private Risk Services wrote for Advisor One, the drop in housing values during the Great Recession confused people into thinking that as their property values dropped, they could reduce their premiums by dropping some coverage they thought they no longer needed.
One common mistake that many insured people make is to confuse “market value” with “replacement costs.”
What they didn’t realize, Raphael said, was that the cost of raw materials and fuel continued to rise, even as the property values plummeted. While the construction industry was devastated by layoffs, and new construction all but ceased during the depths of the global economic crisis, the economy was booming in China. All of which, on top of an Asian building boom, drove up the costs of steel, copper, oil and lumber worldwide.
Although the gap between the two prices today has narrowed somewhat, a 2012 study by Marshall & Swift/Boeckh Insurance found that more than 60 percent of homes today are still underinsured by 18 percent. As a result, some families facing the loss of their homes are not being reimbursed enough to rebuild. Instead, they are forced to move to a much smaller house in what might be a worse neighborhood.
more than 60 percent of homes today are still underinsured by 18 percent. As a result, some families facing the loss of their homes are not being reimbursed enough to rebuild
Won’t get fooled again
So how can homeowners be sure they can keep all the insurance they need without breaking the bank? One easy way is to talk to your real estate agent or your insurance agent, or to contact your local builders association to help determine the true replacement costs per square foot for your area. Once that figure is agreed upon, multiply that by the square footage of your home and you’ll have a reasonable estimate. Then you and your agent can compare these costs with the current limits on your policy and see if they need to be adjusted.
Amy Bach, executive director of the advocacy group United Policyholders, recommends using some low-cost computer modeling tools that are similar to the ones the insurance companies use to determine their rates. She goes on to say that for just $8 and $7 respectively, AccuCoverage and HomeSmart Reports will produce an accurate report of the the total replacement costs you are likely to incur.
Today, some of the people most vulnerable to the underinsurance trend are first-time homebuyers who may not have much experience determining coverage limits. To stay on top of these price fluctuations, the Insurance Information Institute (III) has come up with an insurance checklist of things first-time buyers can do to ensure they aren’t left out to dry in the next catastrophe.
While it’s great advice for novices, it’s also a good idea to revisit this list each year to ensure your coverage keeps up with the times. Here’s a modified version that can be reviewed annually:
- Break it down into sections. Loretta Worters, spokeswoman for III, was quoted in a Fox Business story last month, advising homeowners to calculate their rebuilding costs by excluding the value of the land and just including the square footage, type of exterior wall construction, the style of the home, number of rooms and bathrooms, roof materials, kitchens amenities and any other home extras, including sheds and garages.
- Check for signs of age. Look for cracks in the plaster, plumbing leaks, integrity of wooden floors and ceiling molding, and any possible dangers with electrical wiring. Determine whether any necessary repairs should result in an increase in insurance limits.
- Look for leaks and moss growth on roof. Always one of the more costly parts of the house to repair/replace, so keep an eye on signs of age. You should also check with your insurer if you can get insurance discounts for adding fire or hail-resistant materials.
- Add up previous year’s maintenance costs. Were they more or less than normal? Do you expect other major costs in the coming year?
- Itemize your personal possessions. Did you make any valuable purchases in the last year? Make sure they are enumerated and recorded on your policy so you don’t have to create a list retroactively after a catastrophe.
Your policy is a living document that needs a little TLC every now and then
As we have seen, insurance coverage levels are not something you can just set and forget. Your policy is a living document that needs a little TLC every now and then. If you review this checklist each year and play a more active role in keeping tabs on your coverage limits, you can avoid heartache in the future – and perhaps discover a few extra discounts you didn’t know you had.