Finance: Homeowner Headaches

By Linda Stern

WASHINGTON (Reuters) - Don't look now, but your homeowner's insurance policy isn't the safe blanket of protection you think it is.

In recent years, most insurers have quietly dropped their "guaranteed replacement" provisions, while the costs of rebuilding have risen more rapidly than average inflation rates. Those costs have risen sharply not only for building materials but also for the skilled labor required for installation.

On both coasts, rebuilding costs run $200 to $300 a square foot, and many homeowners -- the majority, by some counts -- don't have the kind of coverage that would pay for that.

Most insurers have moved to a newer form of coverage called "extended replacement policy."

These policies set a fixed dollar amount for full replacement and then agree to add an extra payment of 20 percent or more, if the home is destroyed in a "widespread disaster" such as a hurricane or earthquake, says Jeanne Salvatore of the Insurance Information Institute. In many cases, the policies will provide a complete rebuilding, but in many others they will not.

Some people are learning this the hard way. People whose homes were destroyed by last year's southern California wildfires have been complaining in record high numbers to the state insurance commissioner.

Commissioner John Garamendi says one in five affected homeowners is complaining about the way their insurance company has handled their claim, compared with the more typical rate of one complaint for every 100 claims.

It is, of course, best to deal with this problem before your house is damaged. Here are some ways to protect yourself.

  • Hold out for a policy that still offers guaranteed replacement costs. At least two companies -- MetLife and Chubb -- both offer it, says Salvatore. Make sure that the company you go to has a clean record of paying claims in your state.

  • Stick with your current insurer if you've been happy with them, but call for a consultation and find out how you would have to modify the policy to cover replacing your home. "If you follow your insurance company's coverage recommendations, you'll generally be in a strong position should a catastrophic loss occur," suggests Norman Boone, a San Francisco, financial adviser.

  • Make sure your policy has an automatic inflation adjustment in it, and check to make sure your company uses a realistic inflation figure -- that of the cost of building and not just the generic Consumer Price Index -- to calculate the inflation adjustment every six months or year.

  • Raise your deductible. The point of insurance is to protect your lifestyle against catastrophic loss, not to insulate you from ever spending money, so raise your deductible to $1,000 if it isn't already there.

That helps your insurance picture in more than one way. It will lower your premiums, perhaps by as much as 25 percent. Secondly, it will keep you from filing claims for little things like a branch-damaged gutter or a bathroom floor ruined by a leak. Those little claims can kill you; more insurers are denying coverage to owners living in homes for which many claims have been filed. It is important for homeowners to reserve their coverage for when a true disaster strikes.

  • Look for add-on coverage. Some policy riders to consider are "ordinance and law" coverage and "backup of sewers and drains," says Salvatore. The first covers rebuilding up to current codes, something most older homes probably wouldn't meet. The second coverage is self-explanatory, but used more than you might think. A sewage backup into a home can cause great and expensive damage and may not otherwise be included in your policy.

  • Don't nickel-and-dime your coverage. The average homeowner is paying just over $600 a year, and that's not all that much, when you think about what your home is worth to you. Make sure you are dealing with a quality company by checking it out with your state insurance examiner's office. Then pump up the coverage, and sleep tighter at night.



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