You just mailed back your homeowner’s insurance premium and you’re feeling pretty secure right now. But, as any veteran of Hurricane Andrew, the California fires or the Midwest floods can tell you, Mother Nature can pack a pretty good wallop.
Is your home disaster-proof? A lot aren’t. According to government statistics, between 85 and 90 percent of the Midwest homes damaged in last summer’s flood did not have flood insurance. And only 25 percent of California homeowners have earthquake insurance.
The standard homeowners insurance policy, known in the industry as HO-3, provides coverage from damage caused by fire or lightning, windstorms or hail, explosion, riot or civil commotion, smoke, vandalism, vehicles or aircraft, theft, glass breakage, and volcanic eruptions, falling objects, weight of ice, snow or sleet, freezing pipes, accidental overflow of water or steam from plumbing systems or household appliances and artificially generated electric current.
Also referred to as “named peril” coverage, HO-3 protects homeowners from all perils except those specifically named in the contract-such as floods and earthquakes. But here in Chicago, miles away from coastal windstorms and major earthquakes, it’s more a matter of protection from man-made dangers than natural forces.
But it happens, experts assure. Garages collapse under the weight of heavy snow and homes are destroyed by fires that are sparked by a bolt of lightning. And tornadoes and floods are common.
Replacement coverage
“The primary question is do you have sufficient insurance to replace your home,” says Sean Mooney, an economist at the Insurance Information Institute, a New York-based trade group.
“People should buy insurance based on what it costs them to rebuild, not market value,” says Bill Sirola, a spokesman for State Farm Insurance in Bloomington, Ill. If you live in a prestigious neighborhood in which market value reflects posh addresses, rebuilding your home is probably going to cost less than what you paid for it, he explains. But in other neighborhoods, the market value of your home may actually be lower than what it would cost you to rebuild.
The easiest thing to do, Mooney suggests, is to determine the size of your home, then call local home builders and ask about construction costs per square foot. (Appraisers sometimes disregard the foundation of a home when computing its replacement cost, experts say. However, in California, severe heat from fires even destroyed the foundations of some homes.)
If you have an older home, it may be harder to estimate rebuilding costs, since the house may feature special details and materials that can’t be replaced. That, experts say, is why guaranteed replacement coverage is important. This special coverage, known as HO-5, will pay the full cost of replacing your home if it’s destroyed by a insured peril-even if the amount is higher than the policy’s coverage limit. (Many companies have limits but generally will pay 20 to 50 percent more than that figure.)
Generally, guaranteed replacement coverage costs about 10 to 15 percent more than a standard policy, Sirola says.
Guaranteed replacement coverage will also protect you in the event of a sudden increase in construction costs if an area-wide disaster results in increased demand for building materials.
Law and code
Many experts suggest purchasing “law and code” endorsements, which will cover costs in case your home is not built to existing codes. However, even guaranteed replacement cost coverage isn’t always adequate for older homes, which may be required to meet current codes during rebuilding.
Insurers typically advise homeowners to take the highest deductible they can afford, and use the savings to buy higher coverage.
Structural considerations are just one part of disaster-proofing your insurance. When it comes to contents, studies show that 25 to 35 percent of homeowners are underinsured, Sirola says.
Contents coverage originated during the 1950s, when homes were not so elaborately furnished, Sirola says. “Today people tend to overlook how much they have in contents,” he observes, ticking off home computers, video cameras and art as examples of pricey possessions.
Unless you also have replacement cost coverage for your contents, you’re only going to get actual cash value for damaged possessions, which factors-in depreciation. For example, a couch that cost $700 three years ago may only be worth $300 today.
With contents there are a lot of exceptions to nail down. For example, if your home computer or fax machine is part of your primary business, it’s not covered under homeowner’s insurance. You need a separate policy, Sirola says.
There are also exclusions for certain classes of contents, such as gun collections, camera collections, gold and jewelry, furs and art. If you want them protected, you’re going to have to attach a rider and probably have to pay more.
Insurance is not a “one-size-fits-all product,” Sirola says. It’s a service tailored to the needs of an individual.
Documentation
How can you make sure you’re disaster-proof?
Don’t assume you can simply tell the insurance company what went up in smoke and get reimbursed. Document, document, document, experts advise.
Besides snapshops, keep proof of purchase, serial numbers, blueprints, anything that can help verify your claim.
“It sounds imposing, but it needn’t be,” Sirola says. Insurers don’t expect homeowners to have safety deposit boxes stuffed with actual samples of their Italian tile and Oriental rugs, he says, but staying on top of things will help expedite matters when it comes time to file a claim.
And updating that documentation is crucial, says Kathleen O’Reilly, a spokeswoman for the National Insurance Consumer Organization in Washington.
O’Reilly suggests circling a date and taking an annual inventory of your insurance, to make sure coverage is keeping up with inflation and to reflect improvements you may have made. Some policies have a built-in inflation adjustment, but don’t take it for granted.
If you have made a very expensive purchase, such as a computer system, don’t wait for that annual date, says O’Reilly. Call your insurance company right away.
If you live in an area in which there is high risk of a certain peril, that peril might be excluded-wind in some coastal regions, for example. “Everything can be covered, but not everything is,” Sirola says.
Flood insurance
Homeowners living in a designated flood plain area are required to have flood insurance if they have a federally backed mortgage or if their lender is federally insured, which includes most borrowers. But often people purchase flood insurance the first year to qualify for the mortgage and then let it lapse, insurance experts say.
After a disaster, there may be typically an uptick in the purchase of special insurance. “But people let it drop a year or two later,” says Texas Insurance Commissioner J. Robert Hunter, a former administrator of the Federal Insurance Administration.
And it pays to be prepared. If you wait until the last minute, you may be out of luck. Flood insurance has a five-day delay before it goes into effect.
And many insurance companies place a moratorium on new sales in cases of eminent danger. So, if a flood crest is moving downstream and you’re not covered, chances of getting immediate insurance are slim.
Flood insurance is available from, and underwritten by, the federal government. This coverage can be purchased either from any licensed insurance agent or broker.
Yet to purchase flood insurance, your community must be enrolled in the National Flood Insurance Program, which is administered through the Federal Emergency Management Agency (FEMA). Participating communities agree to comply with land use restrictions and building activities. To find out if you’re eligible, call 1-800-638-6620.
Annual rates average about $314, which gives you about $93,000 in coverage, according to Don Collins, deputy administrator for the Federal Insurance Administration at FEMA.
However, premiums can cost much more. It’s an inverse ratio, experts explain: The lower the structure in a flood plain, the higher the premium.
“I’ve seen (annual) rates as high as $25,000,” Hunter observes.
Flood insurance coverage typically applies to both structural damage and contents, but only for actual cash value. It is possible to buy replacment-cost coverage if you own a detached single-family house and it is your primary residence, Collins says.
Earthquake insurance is available privately as additional coverage, but can be expensive. Of course, this depends on what neck of the woods you live in.
For Chicago residents, earthquake insurance is relatively cheap. Annual premiums for coverage on a $100,000 frame home would run about about $36, reports Barry McCall, a property underwriting specialist at Kemper Insurance in northwest suburban Long Grove.
If you put the same frame house in southern Illinois near the New Madrid fault line, where the risk of earthquake is greater, your annual premium would jump to $59, and in San Francisco, it would cost $194. Yet if that $100,000 home were brick, that premium in San Francisco would shoot to $1,214.
