Homeowners should double-check insurance coverage
Q. We received a letter from the company that provides our homeowners insurance policy, urging us to upgrade our current “actual cash value” coverage to something called “replacement cost” coverage. The letter doesn’t make much sense, and our insurance broker hasn’t returned the three calls that we have made to ask him to explain the difference. Can you?
A. Sure. But first, you should seriously consider looking for a new agent. If he or she won’t return repeated telephone calls to answer a basic insurance question about the policy you already pay for, the agent may be even less helpful if you ever need to file a claim.
Understanding the home-insurance coverage you have can be difficult, and too many agents and brokers don’t do a good job of explaining it.
I’m devoting this entire column to addressing some common concerns that readers have about insurance, whether they have owned their home for several years or are planning to buy their first one during the peak homebuying season that begins in the spring.
To answer your question, the actual cash value coverage that you currently have will take your property’s pre-loss condition into consideration if you ever file a claim. To illustrate, let’s say that your kitchen sink overflows and ruins the carpet you bought four years ago for the adjacent dining room. The insurer would calculate the cost of replacing the damaged carpet with a new one, subtract an amount that’s equal to four years of normal wear and tear to the old one, and then give you a check for the difference (after also subtracting any deductible that you might owe).
Now, let’s say that you had a more comprehensive (but more expensive) replacement-cost policy or a similar replacement-cost endorsement. The insurer would pay to repair or replace the carpet without subtracting a depreciation deduction for the four years of previous wear and tear.
There are two even more comprehensive — and again, more expensive — types of home-insurance policies that are worth considering if you want to protect against the total loss of your home due to fire, high winds or a few other types of perils.
Extended-replacement-cost coverage will pay you a preset amount over and above your current policy limits, usually 20 or 25 percent, if the current limits aren’t high enough to completely repair or reconstruct your home after a covered loss. For example, if the limits on a policy you took out a few years ago would pay a maximum of $200,000 to rebuild your house after a total loss, but it would cost $240,000 to rebuild it today because labor and material costs have soared, the policy would reimburse you for most or all of the unexpected overage.
Then there’s what some experts call the “Rolls-Royce” of homeowners insurance policies. Known as guaranteedreplacement-cost coverage, it typically pays for the entire reasonable cost of both rebuilding and refurnishing your house, regardless of your policy’s limits.
Yet, even a Rolls-Royce homeowners insurance policy won’t always cover everything. That’s why one of the fastest-growing types of supplemental homeowners coverage involves a buildingcode endorsement that can be added to a homeowner’s new or existing policy.
Why? Because local building codes are always changing. Even if you purchased a home that was built just five or 10 years ago, there’s a good chance that those codes have since been heightened to include required upgrades to roofing, plumbing, electrical systems or the like if the home must be reconstructed or simply remodeled.
Even if a top-of-the-line guaranteedreplacement-cost policy doesn’t cover those legally required upgrades, a buildingcode endorsement should.
Remember too, that you might need additional types of insurance, even if you have the fanciest of policies. Although the most basic and inexpensive policies will usually cover damage caused by fire, high winds or even riots, they will not pay for damages caused by many natural hazards that have a long history of striking areas.
For example, if you live in California or another earthquake-prone state, you would have to pay even more for an additional policy that would provide coverage for quake-related damages. Ditto for the millions of other Americans who live in a areas that are prone to floods; they must buy flood insurance from the federally backed National Flood Insurance Program
(www.floodsmart.gov) or the few privatesector insurers that are beginning to offer such policies. Bankers won’t approve a loan in flood areas unless a flood policy is in place.
More issues are involved if, say, you have a pricey new TV or expensive jewelry. Talk to your agent for help with all your insurance issues, but look for a new agent if you aren’t called back soon.
ABOUT LIVING TRUSTS David Myers’ most popular-selling booklet, “Straight Talk About Living Trusts,” provides the information that readers need to determine whether forming an inexpensive trust would be a good idea based on their individual circumstances.
For a copy, send $4 and a self-addressed, stamped envelope to D. Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405. Net proceeds will be donated to the American Red Cross.