Homeowners Insurance Basics….Buying the Right Policy

If you have been living in San Diego County since 2003 then you will vividly recall the "Fires of the Century" which occurred in 2003 and 2007! Some families in our community were still in the midst of rebuilding their homes following the devastating wildfires which rocked our community in October of 2003 and then it happened again but four years later. Could another fire be looming again? I am hesitant to say this but it could very well -- and likely will -- happen again. I know that soon after the 2003 fires the majority of us homeowners vowed to take a hard look at our insurance policies and many of us did just that. And, many of us were surprised at just how outdated and underinsured our policies were. Unfortunately, I also know with absolute certainty that for many, the project got pushed to the proverbial "back-burner". As a result, when the 2007 fires struck, a good many of my readers were still living with a homeowner policy which had not been reviewed and updated for many years. Hopefully, this is still not the case and most of you have vowed to review your policies each and every year so that if you did suffer significant property damage you would have sufficient insurance coverage to rebuild your home and replace the contents.. My confession is that up until just before the fires of 2007, I too was guilty. I put off a review of my own policy and like a lot of those things at which I procrastinate so well, it bothered me that I had not "walked my talk". Yet, I did end up making some fairly significant changes to my policy. Yes, my annual premium is up a bit but, I am convinced that should my most valued asset be damaged or destroyed I would have the means to re-build without digging into my own pocket. I also ended up increasing my liability limits significantly with a change to my umbrella policy at very little cost. Let me start by providing to you 10 things you can do so that you can enjoy peace of mind... and full protection:
  1. Buy the right insurance. You must read your policy to understand what you have and you should know ahead of time that you are adequately covered. I recommend that you look at your insurance coverage in four key areas: the structure of your house, your belongings, your liability to others, and your living expenses if you're forced out. If there's a disaster, you want to be able to rebuild your home and replace everything in it. And you need enough liability coverage to protect you in case you get sued. "Loss of Use" and/or "Additional Living Expenses" would cover the costs of making the house livable or living elsewhere while your home is being repaired or rebuilt.
  2. Get replacement value insurance. Face it, this is an insurance policy, not a garage sale. You don't really care how much your possessions would fetch on the open market... the so-called "cash value" or "fair market value". You want to be able to replace everything you lost with similar, new items so make sure that your policy spells out that both your home and its contents are covered by replacement-value insurance.Here´s a quick lesson. When the coverage on the structure was initially established, the amount could have been determined in a variety of ways. Typically, the insurance company either estimated the minimum rebuilding cost through an on-site evaluation or through information you provided over the phone. As home values escalated or new contents changed the total value of your property, many homeowners found themselves significantly underinsured. Sound familiar? That´s exactly what made the news here in 2003 and 2007. So what to do? Well, here are a couple of options for you to consider. Most companies today allow the homeowner to choose to upgrade their coverage beyond the old standard "Actual Cash Value" coverage which merely pays depreciated market value. Instead, consider:
    • Guaranteed Replacement Cost Coverage With (or Limited or Without) Building Code Upgrade. The company pays the full amount needed to repair/replace the damaged or destroyed dwelling regardless of policy limits (minus your deductible). You can also choose whether to add coverage which will provide additional costs of repairing/replacing your dwelling to comply with any new building standards (codes, zoning, laws) required by governmental agencies & in effect at the time of rebuilding. This is probably the most expensive coverage afforded by an insurance company and unfortunately, not every company offers it.
    • Extended Replacement Cost Coverage. This coverage is similar in nature to the Guaranteed Replacement Coverage noted above except that it only pays the replacement costs up to certain amount above the policy's limits. As an example, my company provides the option (endorsement) to choose between additional coverage in the amounts of 25 or 50% of the basic dwelling coverage. Obviously, this coverage is less expensive than Guaranteed Replacement as the risk exposure to the insurance company is less but, it is a good second choice alternative if you are not able to obtain or afford the "Guaranteed Replacement" type noted above. One word of caution though... you absolutely must be certain to have this type of policy (and really all types) reviewed at least annually... by you and your agent. Also, you should be aware that most contractors these days are only using approximately $175/ square foot when they provide a dollar cost for home rebuilding. This amount will generally only replace the most basic of furnishings and will not be sufficient for you to purchase such items as granite, upgraded carpeting, 12 foot ceilings, better fixtures and cabinetry, etc.
    • Replacement Cost Coverage. This coverage, moving down the scale, provides exactly what the name suggests. The company will pay up to the policy´s limits.
    • Actual Cash Value Coverage. Again, as mentioned above, the insurance company will pay the depreciated market value of the damaged or destroyed dwelling up to the policy´s limits. This is typically the least expensive form of homeowner´s insurance. 
  3. Understand the claims process. Two policies can promise the same amount of coverage, but they can be vastly different when it comes to making you whole after a loss. Have the agent explain exactly how claims are handled, especially when it comes to writing you a check. Do you receive your entire claim upfront or just a fraction? Does the company pay you for all the things you've lost or only those things that you replace? Some policies will give you the cash value of your possessions right after a loss, but wait to cover the replacement value until after you've replaced your items -- and have the receipts to prove it. This could be a problem if you're wiped out and have no cash reserves. Equally important is the timetable on replacement. If you go from living in a five bedroom home to sleeping in a motel room with four kids and a dog, you might not want to go on a shopping spree right away and instead order up some Prozac! Anyway, check to see how long you have to replace your things?
  4. Take inventory. Filing a claim involves two steps -- proving you owned certain items and verifying their worth. This is a lot easier to do when you still have your things. Go through your home with a video camera (rent one if you don't already have one.) Walk through each room, do a quick sweep and video everything you own. Don't forget the attic, closets and offsite storage locker, if you have one. Or take the low-tech method: make a list and take photos. Stash your video or photos in a safety deposit box with a copy of your policy. If you keep your inventory at home, make a second copy to give to a friend, keep at the office or save on-line.
  5. Buy floaters. Many times, homeowners and renter's policies limit the amount you can collect on some big-ticket items -- usually things like computer equipment, jewelry, furs and fine collectibles -- to a fraction of the replacement value. If this is the case, you need to pick up a special policy known as a "floater" or "endorsement" for each of those items. A floater will also reimburse you if you simply lose the article. In the case of something new, save the bill of sale with your inventory and fax a copy to your insurance agent. If the item is older, have an appraisal done. Again, save one copy and send another to your agent. That way, you'll never have to worry about proving you owned an item and there will never be a dispute over what it's really worth.
  6. Keep pace with inflation. This is especially important with a homeowner´s policy. It may have cost you $200,000 to build your home 10 years ago, but it might cost $500,000 to replace it today. Many companies have inflation guards or "Adjusted Building Cost" provisions which cover the increasing cost of rebuilding. When your policy comes up for renewal, talk to your agent to verify that your coverage amounts are still realistic. And when you make an improvement, add it to the total.
  7. If you own a condo, you need to protect your property. Make sure that the condo board or association has a policy that covers the common areas and get a copy. Also look at the association bylaws to find out what portions of the home you must cover. It's usually from the drywall in. Since condo owners need their contents policy to cover things like cabinets, appliances and fixtures, they need a bit more insurance than the typical renter. Sometimes you get a price break if you go with the same company that wrote the policy for the condo association or that has your auto policy. You also may want to consider assessment coverage. If the condo association's policy is not large enough to cover a loss or if there is a hefty deductible, the association will split the additional costs among the members in the form of an assessment. With assessment coverage, your insurance company pays the tab.
  8. Consider earthquake insurance. Granted, this is not for everyone. But since we live in an area prone to earthquakes, you should know that most property policies do not cover these disasters.
  9.  Think about buying an umbrella policy. Liability insurance which picks up the tab if someone gets hurt on your property or through the actions of your family members, tops out at $300,000 on many homeowners policies. But have you heard of anybody suing for $300,000? That usually starts at $1 million. My recommendation is that if you have assets, pick up an umbrella policy that would add extra liability coverage to your home and auto policy.
  10. After a life-changing event, call your agent. Getting married or divorced? Are the kids moving out -- or back in? The amount of insurance you need -- and the items you want to cover -- change over the years. Be sure you keep your policies and inventories up to date.
OK, I hope this information and lesson on homeowner´s insurance will "kick start" you into action. Thanks to Scott Benjamin from Partners of the West Insurance Services, LLC, for his assistance with this article. Scott would be pleased to help you assess your insurance coverage and offer suggestions. He may be reached at 858-336-1325.

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