Reevaluate Your Homeowner's Insurance

Physician's Money Digest, March15 2004, Volume 11, Issue 5

Wall Street Journal

When a fire or other disaster strikes, manyphysician-homeowners are surprised tolearn that their homeowner's insurancepolicy will not pay the full cost ofreplacement. According to a report,a recent study reveals that three quarters of all homesnationwide are undervalued for insurance purposes byan average of 35%. Since your home is probably yourmost valued possession, you don't want to be caughtshort following a catastrophic event.

Home Replacement Coverage

Rising construction costs and property values havecontributed to the increased cost of replacing a home.The US Census Bureau reports that from 1996 to 2002the cost of building a home rose 28% in the Northeastand 33% in the West. During this time, many insurancecompanies stopped offering guaranteed replacement costcoverage, which promises to pay the full cost of restoringa home to its original condition, but does not coverthe home's contents.

Today, most companies offer extended replacementinstead of guaranteed replacement coverage. These plansinsure the home for a specific value, and generally add a20% to 25% buffer—or extended limit—if reconstructioncosts exceed that value. In addition, the policiescover the home's contents at 50% to 75% of the valueof the home. Many insurance companies also includeannual adjustments for inflation. However, increases inconstruction costs in a particular housing market couldgreatly exceed inflation provisions and leave you withinsufficient coverage.

Many insurance companies now sell policies thatmake homeowners responsible for ensuring that theircoverage reflects increases in both market values andrebuilding costs. Unfortunately, many homeownersaren't aware of this responsibility. Policyholders shouldregularly review their policies. When your policy is upfor renewal each year, check for any changes in coverage.Also, be sure to consider any major purchases or homeimprovements that might affect your policy.

Making Use of Technology

Insurers have traditionally used a square-foot measurementto set home values, without taking into accountcost differences in housing materials and amenities likehardwood floors, says Robert W. Crine, Jr, the presidentof Marshall & Swift/Boeckh. He notes that more insurancecompanies are turning to "total component estimating,"which analyzes all features of a house, fromroofing materials to bathroom tiles.

If your insurer does not utilize this technology, youcan hire a contractor, an appraiser, or an expert in buildingrepairs to provide an estimated cost for replacement.Experts recommend switching companies if the insurerrefuses to consider that estimate or insists on a less effectivemethod of setting values.