Homeowners Should Consider Rebuilding Costs Not Real Estate Market When Deciding on Insurance Coverage


INSURANCE INFORMATION INSTITUTE
Contact: Press Offices
New York: 212-346-5500; media@iii.org
Washington, D.C.: 202-833-1580


NEW YORK, June 10, 2008 - For many people, their home is still their greatest investment. To protect their home financially against tornados, fires, hurricanes and other disasters, homeowners should review their insurance regularly to make sure that they have enough insurance coverage to rebuild their home and replace their personal possessions, according to the Insurance Information Institute (I.I.I.).

"With home values falling in many parts of the country, some consumers may think they can reduce their homeowners insurance coverage. Doing this, however, could result in a homeowner being dangerously underinsured," warned Jeanne M. Salvatore, senior vice president and consumer spokesperson for the I.I.I. "The real estate value of a home is very different from the rebuilding cost."

To properly insure your home, the I.I.I. recommends that you ask your agent or company representative three key questions:

1. Do I have enough insurance to rebuild my home?
Your policy needs to cover the cost of rebuilding your home at current construction costs. Quite simply, you should have enough insurance to rebuild your home in the event that it is completely destroyed. Homeowners who have made alterations or upgrades to their home should to alert their insurance company so that these improvements are also properly insured. Be sure to consider the following types of coverage:

• Replacement Cost
  Most homeowners policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality.
  
  
• Extended Replacement Cost
  This type of policy provides additional insurance coverage of 20 percent or more over the limits in your policy, which can be critical if there is a widespread disaster that pushes up the cost of building materials and labor in your community.
  
  
• Inflation Guard
  This coverage automatically adjusts the rebuilding costs of your home to reflect changes in construction costs. Find out if your policy includes this coverage or if you have to purchase it separately.
  
  
• Ordinance or Law coverage
  If your home is badly damaged, you may be required to rebuild it to meet new, and often stricter, building codes. Ordinance or law coverage pays a specific amount toward these costs.
  
  
• Water Back-Up
  This coverage insures your property for damage from sewer or drain back-up. Most insurers offer it as an add-on to a standard policy.
  
  
• Flood and Earthquake Insurance
  Standard homeowners insurance provides coverage for disasters such as fire, lightning and hurricanes. It does not include coverage for flood (including flooding from a hurricane) and earthquake.
  
  Flood insurance is available through the federal government's National Flood Insurance Program, but can be purchased from the same agent or company representative who provides your homeowners or renters insurance. Make sure to purchase flood insurance for both the structure of your house and the home's contents. Excess Flood Protection, which provides coverage over and above the NFIP coverage in the event of catastrophic loss by flooding, is available from some insurers. Keep in mind that after signing up for an NFIP flood policy there is a 30-day waiting period before it takes effect.
  
  Earthquake coverage is available in the form of an endorsement from private insurance companies. In California, supplemental coverage is also available from the California Earthquake Authority (CEA).

2. Do I have enough insurance to replace all of my possessions?
Most homeowners insurance policies provide coverage for your personal possessions for approximately 50 percent to 70 percent of the amount of insurance you have on the structure of your home. So if you have $100,000 worth of coverage on the structure of your home, you would be covered for $50,000 to $70,000 worth of the contents of your home, depending on the specific policy.

The best way to determine if this is enough coverage is to conduct a home inventory. A home inventory will detail everything you own and the estimated cost to replace these items if they were to be stolen or destroyed by a disaster. To make this task simple, the I.I.I. offers free, downloadable software and information on how to create and store your inventory at www.KnowYourStuff.org.

You can insure your possessions in two ways: by their actual cash value or their replacement cost. Make sure you review with your agent or company representative which type of coverage is best for your particular situation.

• Cash Value Policy
  This coverage pays the cost to replace your belongings minus depreciation.
  
  
• Replacement Cost Policy
  This coverage reimburses you for the full current cost of replacing your belongings.

To illustrate the difference between the two types of policies suppose, for example, a fire destroys a 10-year-old television set in your living room. If you have a replacement cost policy for the contents of your home, the insurance company will pay to replace the TV with a comparable new one. If you have an actual cash value policy, it will pay only a small percentage of the cost of a new TV set because the old TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies specify that the new item be purchased by the insurance company as it may be able to purchase at a bulk or special rate. Replacement cost policies cost about 10 percent more, but provide more extensive coverage. 3. Do I have enough insurance to protect my assets?
Homeowners insurance does not just protect the structure and contents of your home, it also provides liability protection. Both homeowners and renters insurance provide liability protection which covers you against lawsuits for bodily injury or property damage that you or your family members cause to other people. This coverage pays for both the cost of defending you in court and court awards-up to the limit of your policy. Most standard home and renters insurance policies will generally provide at least $100,000 of liability coverage. Additional liability protection is available and everyone should consider getting enough insurance to protect their assets and finances.

You can increase the amount of liability insurance on your home or apartment to $300,000 or $500,000. If you need more liability protection, you can also consider purchasing an umbrella or excess liability policy. These policies cost about $200 to $350 for $1,000,000 of additional liability protection and there is a requirement that a certain amount of underlying coverage already be in place-generally about $300,000. Umbrella policies also provide broader coverage for claims involving libel and slander.

For more information on how to properly insure your home, go to the I.I.I. Web site.

For related audio, go to Is Your Home Properly Insured? Three Questions to Ask Your Insurer.

For a related video, go to Underinsurance. Reporters who would like a DVC Pro or Beta hard copy of the b-roll footage, please contact: Susan Stolov at 301-728-1978 or SusanStolov@WashingtonIndependentProductions.com .


The I.I.I. is a nonprofit, communications organization supported by the insurance industry.