West Chicago resident Patrick Dennis learned a $24,000 lesson in insurance company jargon recently.
The lesson: “Replacement” value, as defined in many homeowners’ insurance policies, doesn’t necessarily cover the cost of actually replacing items, especially if someone else is telling you how they have to be replaced.
Dennis, whose house was severely damaged in a February fire, learned the lesson when he started rebuilding his basement and other structural elements damaged in the blaze.
Not surprisingly, DuPage County required that many items be brought up to current code. Floor joists that were wood before the fire, for example, had to be replaced with steel beams, under the local codes, Dennis says. A dormer that measured 6 feet 8 inches before the fire, needed to be upgraded to a 7-foot height to meet codes.
Unfortunately, Dennis’ policy-like many homeowner policies-only covered the cost of replacement with similar items and not for code-required upgrades. The difference between his insurer’s replacement costs and the DuPage-required upgrades: about $24,000.
Dennis’ experience is a textbook case on the value of understanding what’s in your homeowner’s policy and asking “worst-case scenario” questions. Unfortunately, not many homeowners have opened that textbook, much less their insurance policies, as studies seem to indicate.
Misinformation
Most U.S. homeowners are misinformed or unsure about the coverage provided by a standard homeowner’s insurance policy, according to a 1992 survey by the Wheaton-based Insurance Research Council.
About 93 percent of U.S. homeowners have a homeowner’s insurance policy, but a significant number of them figure they’re covered for things-such as floods and earthquakes-that don’t fall under a standard policy, the IRC reports.
In Illinois, the most common complaints about homeowners’ insurance come from a lack of understanding, says a spokesperson for the Illinois Department of Insurance, the state’s primary insurance regulator.
“Most people don’t understand the coverage they have,” says spokesperson Nan Nases. “Either they didn’t have a clear understanding of the coverage when they bought it or assumed that some items would be covered or they just didn’t ask enough questions.”
Many Downstate homeowners, for example, have learned about the limits of standard homeowners’ policies when it comes to flood damage in the recent years.
“Mother Nature has run rampant (in Downstate Illinois) the last few years, and there’s been a lot more awareness of flood damages and the fact that it’s not automatically covered,” she says. Nases also points to damage caused by sewer backups as another event that many homeowners figure is covered, but isn’t under most policies.
(Insurance to protect against floods and related events, such as mudslides, can be purchased through the federal government or from one of about 200 private insurers for as little as $75 annually. The Federal Emergency Management Agency (FEMA) administers the program.)
Though such misunderstandings may seem like the homeowner’s fault, Nases says that problems aren’t just one-sided.
Agent’s responsibility
“It’s both-sided in a lot of cases,” she says. “Either the agent didn’t explain things carefully enough or the homeowner just assumed some things would be covered.”
There are a number of basics that every homeowner should know, starting with this fact, which surprises some people: If you own a home, you probably already have homeowners’ insurance because of mortgage loan requirements.
Homeowners’ insurance in the Chicago area generally costs between $300 and $400 annually for a policy that covers the house and its contents against 11 perils, such as fire, lightning, theft and hail.
Costs vary depending on a number of factors. Frame homes typically cost about 10 percent more to insure than masonry homes, according to a January study by the Illinois Department of Insurance.
Homes in urban areas tend to be more expensive to insure, due primarily to population density, crime rates and the fact that many urban homes are older than those in the suburbs.
“Older homes break down more, so we see more claims on them,” explains Mark Noffert, an agent in the Lombard office of Country Companies.
Most homeowners’ policies cover a few standard items, says Christine Young, spokesperson for the Washington, D.C.-based Insurance Information Institute. Most policies provide coverage for repairs or replacement of house, furniture and belongings and insure against claims and lawsuits against you for injury or property damage you cause. Additionally, many policies include monies for living expenses if damages to your home cause you to find temporary residence.
Country Companies agent Noffert advises that homeowners need to be especially aware of the difference between actual cash value and replacement costs. Many homeowners’ policies cover furniture, clothing and other personal belongings for actual cash value, or the original cost minus depreciation for wear and tear. Coverage for replacment value without any depreciation can also be purchased as a separate policy, though it may not cover the full replacement cost of items such as jewelry, furs and other valuables.
Replacement value
It’s best to insure your home for replacement value, which isn’t the same as market value, notes author Barbara Taylor in “How to Get Your Money’s Worth in Home and Auto Insurance” (McGraw-Hill Inc., 184 pages). Market value is based on what a potential buyer would pay for your home. That may be far greater or far less than the cost of building a new home from the ground up, depending on the home values in your neighborhood.
Taylor’s book, as well as several brochures and a toll-free consumer hotline (800-942-4242), are available through the Insurance Information Institute. The non-profit Illinois Insurance Information Service (IIIS) also runs a consumer hotline (800-444-3338). The materials and hotlines offer information on choosing an agent and the various types of coverage available on home, life, health and auto insurance.
Experts agree that an up-to-date inventory of belongings is critical. A list of personal belongings, along with store receipts and purchase dates, should be kept in either a fireproof box or stored off-premises. Photographs or home videotapes of major items are good ways to track your belongings.
Another technological tracking device: new home computer programs featuring functions to keep track of your stuff. Planix Home Design, a home CAD (computer aided design) program published by Kansas City, Mo.-based Foresight Resources, offers an Insurance Inventory feature that allows you to track your valuables according to name, price, I.D. numbers and even where you’ve placed them in the design. Computer files can be updated to reflect new contents or renovations.
“Updated” is the operative phrase in ensuring your insurance will cover losses. About two-thirds of all homes in the United States are underinsured by an average 35 percent, according to Marshall & Swift, a company that studies building costs data. The primary culprits: home improvements made after the original estimate, increased construction costs and exclusion of attached structures or foundations, as well as poor estimation practices.
The most important aspect of insurance may well be a sense of pessimism, coupled with a sense of trust in the agent who sells you your policy.
“The biggest thing is understanding your policy and asking `what if’ questions,” says Noffert, the Country Companies agent. “If you don’t understand what you’re covered for, you sure don’t understand what you’re not covered for. So you have to work through these things with an agent, and that takes time, effort and a comfort and trust in working with the agent.”
SHAVING THE COST OF YOUR INSURANCE
Fortunately, where there’s money to be made in the business world, there’s competition. The Insurance Information Institute offers these tips for lowering the cost of homeowner’s insurance:
– Shop around: Use the usual sources-phone book, friends, your employer’s human resources department. Get a general feeling for prices and service from several insurers. Once you’ve narrowed the field to three, ask for price quotes.
– Raise your deductible: Homeowner policy deductibles typically start at $250. By increasing your deductible to $500, you could save up to 12 percent; a $1,000 deductible could save up to 24 percent.
– Buy home and auto from the same insurer: Some insurance companies offer 5 to 15 percent off premiums if you buy more than two policies.
– Insure your house, not the land: Not including the value of the land in deciding how much homeowner’s insurance to buy can help lower premiums.
– Stop smoking: Some insurers offer modestly reduced premiums to non-smoking households. The reason: Smoking causes 23,000 residential fires each year.
– Go for group coverage: Some companies and associations work out insurance packages that include homeowners. Ask at the office.
– Be a good customer: Some insurers will reduce premiums by 5 to 10 percent if you keep your policy with them from three to six years.
