While the advice of an insurance professional in purchasing insurance for a home or business is important, property owners can benefit from rolling up their sleeves and scrutinizing their insurance policies closely to make sure they are adequately insured.
“Take an interest in the amount and type of coverage you buy,” said Loretta Worters, vice president, Insurance Information Institute. “Don’t rely on others to do it for you. It is the most important investment you’ll ever make. Why trust that to someone else? Review your replacement cost and insurance yearly with your agent. Educate yourself; make sure you have the right coverage. If you don’t understand parts of your policy, ask your agent to explain it to you. If the agent doesn’t adequately address your needs, find another agent you are comfortable with.”
When buying homeowners insurance, the three most important questions to ask your insurance agent or company representative are:
1) If my house is destroyed, do I have both the right amount and type of coverage?
2) Are my belongings properly insured?
3) Do I have enough insurance to protect my assets if I am sued?
Worters said insurance coverage terms homeowners should be aware of include:
• Guaranteed replacement cost. Insurance pays whatever it costs to rebuild a home. It is no longer commonly available.
• Extended replacement cost. Policies will pay a certain percentage, often 25% over the coverage limit, to rebuild your home, using the same type and quality of materials. For example, if your home is insured for $200,000, your policy will pay up to $250,000 to rebuild it.
• Modified replacement cost policies are often required for older homes because of the expense involved in recreating moldings and other special features. These policies require the home be rebuilt using standard building materials. Some companies, however, do specialize in older homes and you can get coverage.
• Law and ordinance coverage. Law and ordinance coverage offers protection in the event a home is partially or completely destroyed and must be rebuilt.
Most homeowner policies are written without this important coverage. In the event of a catastrophic loss, a homeowner policy with law and ordinance coverage can:
1) Pay the cost of bringing the house into compliance with the current state and local building codes.
2) Pay to upgrade the undamaged portion of a home in order to comply with building codes.
3) Pay to demolish even the undamaged parts of the building because of local or state codes.
Worters said law and ordinance coverage is necessary because as houses age, changes occur in town or county building codes and ordinances change to reflect new standards for home construction. When a disaster occurs that requires a home to be partially or completely rebuilt, complying with code changes can necessitate a change in design and building materials and can incur substantial additional costs for labor and materials. This may mean adding structural reinforcements, widening stairways, or even moving the house further from the road.
“If the requirements of new laws are not met during re-construction, the code inspector will stop construction and declare the house uninhabitable until standards are properly met,” Worters said. “If a homeowner’s insurance doesn’t cover the cost of rebuilding to new codes, then the homeowner must pay for upgrades before resuming residence. Another instance when law and ordinance coverage is indispensable occurs in older established communities when commercial or retail establishments sprawl into residential areas. Zoning laws are changed and existing older homes are ‘grandfathered.’ In the event of a partial loss, homeowners with law and ordinance coverage should be able to rebuild and have their costs covered.”
Since many properties are valued at more than the National Flood Insurance Program cap of $250,000, homeowners should consider purchasing excess flood insurance. Worters said private insurance companies began selling the coverage about four or five years ago. Limits range from $250,000 in additional dwelling coverage to as much as $75 million.
“Bare in mind, some insurers won’t sell the coverage unless a client also buys a homeowners policy,” she said.
Contact MBJ contributing writer Becky Gillette at email@example.com.