Should Homeowners Buy More Coverage?

By CHRISTOPHER OSTER
Staff Reporter of The Wall Street Journal 

Dec. 31, 2002 -- The good news is that your home price has doubled over the past five years. The bad news is that now your insurer wants you to double the amount of insurance you're carrying on the home.

Insurance companies, which have lost billions of dollars on their homeowner's insurance business in the past few years, are pressing their customers to boost their coverage. Already, homeowners have been hit with rate increases averaging 15% or more in many states. Now, they're also facing pressure from their insurance companies to raise their coverage limits, which will result in even heftier bills.

It's the latest push by the industry to fix the home-insurance business, which has been a money loser for years. Until recently, insurers viewed home insurance as a loss leader while they made their money writing more profitable auto insurance. Now, with many insurers bleeding money on auto insurance, they're toughening up on home policies. Witness, for example, the industry's decision in the recent past to dump large numbers of policyholders after suffering big losses on mold-infestation claims.

Some consumer advocates say the rate increases are an overreaction by insurers. But this may be a good time for homeowners to at least reassess the coverage they have. One reason: Many people wrongly assume they are covered for the full replacement cost of their home.

As recently as five years ago, chances are you didn't need to worry about insurance-assessment updates. Back then, more than half of all policies included provisions that guaranteed full replacement costs. If your house burned down and you had that kind of policy, the insurer footed the bill no matter what.

But after getting hammered with big losses on those policies in the early '90s, insurers have all but eliminated those guarantees. Today, fewer than 10% of policies still have them, according to Robert Hartwig, chief economist of the Insurance Information Institute, a trade group.

That may come as a big surprise to some homeowners. While insurers are required to notify state regulators of any changes to their policies, consumers often don't notice such subtle changes, particularly when a change happens in an annual renewal.

As a result, a reassessment -- and a higher premium -- may be all but inevitable. Still, the payout may be worth it to make sure you don't wind up an apartment dweller if your home goes up in flames. Typically, for every $1,000 increase in a home's insured value, the premium rate rises about $4, according to John L. Ward, a Cincinnati-based consultant to insurance companies. A $100,000 increase in value means a $400-per-year jump in premium.

Insurance companies say they have been urging consumers for several years to do policy updates. Farmers Insurance, the nation's third-largest home insurer, sends a letter with every renewal notice telling customers to check the value of their home. State Farm and Allstate, the top two home insurers, say they are doing the same. Some insurers, such as Chubb, do reassessments every year, but others have traditionally been more lax.

Recently, however, some insurers have stepped up the effort. Insurers including Prudential Financial and Hartford Financial Services Group have given their agents sophisticated home-valuation tools and software to make sure they are collecting enough in premiums on the homes they cover. Marshall & Swift/Boekh, a company that tracks construction costs, has phoned more than two million policyholders this year on behalf of insurers -- a significant jump from last year -- who use the data to identify people who are underinsured.

Even if it was the insurer that undervalued your home in the first place, it can still become your problem. Nick Hay, a Minneapolis, Minn., lawyer, has been feuding with his insurer since his home burned down two years ago. At the time, he had about $250,000 of coverage. Mr. Hay says that was the insurer's own assessment of the replacement cost. The number had been updated for inflation since he first bought the policy in the mid-1980s, but he says the insurer hadn't kept up with rising home costs in his neighborhood. Mr. Hay now puts the replacement cost at more than $1 million.

Assessment By Phone

The insurer, OneBeacon, a subsidiary of White Mountains Insurance, has made a partial payment, but not enough to replace the home, according to Mr. Hay, who points out that his policy still had a guaranteed-replacement clause, too. Mr. Hay has hired a lawyer to try to settle the claim. The insurance company says it doesn't discuss specific individual claims.

If you haven't updated your home's value in a year or two -- or have done any improvements on the house -- a re-assessment may be necessary. Insurers typically can do this over the phone. But they rely heavily on rote formulas involving a home's square footage and number of rooms. It is up to you to alert them to any significant renovations.

Once you get your insurer's take on how much your home is worth, ask how much the insurer will pay in the event your home is destroyed. A few companies, including Chubb and Fireman's Fund, still offer guaranteed-replacement policies. Others, however, will pay only a certain maximum percentage above the insured value. State Farm and Allstate, for instance, will pay up to 120% of your home's value. The extra dollars are meant to cover any cost overruns, changes in building codes or other problems that might be encountered when the home is rebuilt.

Double-checking the Numbers

If you have a hunch your insurer's numbers are off-base, there are a couple ways to double-check them. The first is to get a full, independent appraisal done, which generally costs $200 to $300. A cheaper option is to consult a local contractor, who often for $50 to $100 -- or for free if it's a friend, or a company that has done work on your home -- will give an estimate of what it will cost to rebuild your home.

Reassessments don't always lead to soaring premiums. When Marc Karlan switched insurers recently, his new carrier insisted on a reassessment. The verdict: The replacement cost had tripled since his last appraisal in the late 1980s. Yet Mr. Karlan, a Chicago doctor, ended up paying only a marginally higher premium because he changed insurers, and the new company, American International Group, was courting the business of higher-end homeowners.

The lesson: Shop around when you reassess, and adjust the other variables in your coverage to see if you can keep your premiums stable. If you haven't touched your policy in many years, your deductible may be lower than you need. Another possibility: Most policies insure the contents of a home for some percentage of the total replacement cost of the structure (50% to 80% is normal). If your home's value has jumped but you've got mostly the same stuff inside, check to see if you can cut that cost.