By Rosilyn H. Overton, CFP, CRPS
My friend’s house recently burned down to its foundation. Fortunately, her insurance agent had done a review of her coverage last year, so her homeowner’s insurance was up to date. It even paid for another place for her to live while her home was rebuilt.
Most people, however, never look at their policy again once they buy their home. So, even though the cost of rebuilding has soared, they have not increased their coverage. They also have not upped the coverage of their furniture and valuables, have too little liability coverage, and have not covered home offices. Any financial planner will tell you that insuring against risks like these is an important part of your financial plan.
What happens if my coverage is too low?
If your house is insured for less than it would cost to rebuild it, you will have to pay the difference. It used to be that some companies would pay for replacement costs up to 125 percent of your coverage, but most have now dropped that so-called “Guaranteed Replacement Coverage.” Your guaranteed replacement cost provision may have disappeared at one of your renewals. Each year when you pay your renewal, your insurer sends endorsements and changes to coverage. So assume that the amount shown is the maximum amount you will get.
Contents
Replacement value of contents is often a matter of controversy between the insurance company and the homeowner. You should have endorsements to cover valuables such as jewelry, furs and antiques. To substantiate your claim of their value, be prepared by taking videos of the items, and getting appraisals. Put the appraisals, a home inventory and the videotape in a safety deposit box. Most property-casualty insurance agents have terrific inventory books that you can use, and also booklets explaining how to document your items. See if your policy covers all risks for contents or has a list of perils covered. Many insurance companies do not want to cover all risks for contents, but they may have available an all-risk rider. This would probably increase your annual premium by 20 percent or more, so ask yourself if it is worth it to you.
Home Offices
Policies usually have limitations on business property in the home and business related liability. If you have a home office, its contents, such as your computer, fax and copier, are not likely to be automatically covered by your homeowner’s policy. Yet a policy endorsement to cover these items, and liability for business visitors, is relatively inexpensive.
Liability Coverage
Your homeowner’s policy includes your basic liability coverage in case someone slips and falls on your property or suffers some other injury or damage to property. Coverage of $500,000 is typical, but is probably not adequate. If you do not have an umbrella liability policy that increases your coverage to at least $1,000,000, call your insurance agent immediately. These policies often cost less than $300, and could be your savior in a lawsuit. Part of the benefit of these policies is that the insurance company will provide the defense, saving you much time and mental distress.
Do a Review
Pull out your homeowner’s policy and take a look at it. Most likely, unless you are a renter or own a condo, your homeowner’s insurance will be an HO 03, or one of its variations, a special form that pays for loss from all risks other than those specifically excluded. It will definitely exclude flood and earthquake. Your policy may also exclude damage from sewer backup or damage caused by rodents. A sewer backup rider could be less than $50 per year. If those are important to you, ask what they would cost. Prices vary greatly from company to company. Flood insurance is only available from the federal government, although many insurance agents will take care of getting it for you as a customer service. Adding earthquake coverage can cost as little as $100 per year. Do be aware that New York City is located on a major geologic fault and there has been speculation that an earthquake could occur here at any time.
See if the line in Section I Coverage “Dwelling” is an appropriate amount. A local appraiser or builder can probably give you a ballpark estimate on what an average house will cost per square foot. If you have some features in your home that would cost more than the average house to replace, such as antique doors or fireplaces, hand-blown Italian light fixtures, etc., you will need to add the cost of those items. Remember that you will still have your land, so this amount is not what you would pay for house and land together. The insurance company does not care what the market value of your house is, what they care about is what it would cost to replace it, so be prepared to substantiate any unusual value.
Your furniture, personal items, clothing, etc. are covered by the amount shown on the line “Personal Property.” Usually the insurance company figures out this coverage by some formula such as 50 percent of the value of the dwelling. If you think it is too low, talk to your agent. He or she can advise you on what to do. Remember, the amounts in the policy are the absolute top amount that the insurance company will pay, and they won’t care that your authenticated letter written by George Washington was lost unless you have declared it in advance. So-called “floaters” can be purchased for unusually valuable items.
The final line in Section I is “Loss of Use.” This number is the maximum that your insurance company will pay for renting some place until your house is rebuilt. Once again, this item is usually figured by a formula, such as 20 percent of the value of the dwelling. Would this amount be enough to pay rent for a year if it took that long to rebuild your house?
If you have found anything amiss, call your insurance agent. They are usually quite cheerful about helping you get the right coverage for your situation, and will even do most of it over the telephone.
Rosilyn H. Overton is a Certified Financial Planner and Chartered Retirement Plan Specialist whose practice is located in Little Neck. She is a Principal of Mid-Atlantic Securities, Inc., member NASD & SIPC, and Regional Vice President of MAI Corp., Registered Investment Advisor. She can be reached at 631-4000.
