Will your home insurance really 'replace' your home?

By Scott Van Voorhis Posted : 09/16/2011

Home insurance repairColorado's Fourmile Canyon fire ripped through 160 homes last fall, making it the worst wildfire in state history.

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But a year after the inferno swept through the upscale Boulder suburb, a second tragedy has started to unfold for fire victims. More than 60 percent of them are at risk of not having enough home insurance coverage to fully rebuild, according to a recent survey by the United Policyholders consumer group.

To date, only a handful of homeowners have begun rebuilding, with several others locked in bitter arguments with their insurance companies over how much reconstruction will be covered.

"I have seen some of them with just 50 percent of what they need," Stacey Coleman, lead complaint analyst at the Colorado Division of Insurance, says of Fourmile Canyon homeowners.

Coleman adds that for many residents, "the foothills of Boulder County are a lot more expensive to rebuild in than estimated."

Bad assumptions about home insurance

Simply assuming your home insurance policy has you covered could be a major mistake, says Carole Walker, director of the Rocky Mountain Insurance Information Association. Rocked by a series of global catastrophes – from killer wildfires to epic hurricanes – insurance companies are placing tighter limits on what they will pay for, Walker says.

"There are things that are included and things that are excluded," says Walker. "Most people buy their policy and put it up on their shelf and don't think about it. In this day and age, you need to be keeping up with it."

The average home insurance policy cost just over $800 a year in 2010, according to the National Association of Insurance Commissioners (NAIC). The amount increases incrementally as additional coverage is added.

Home insurance is especially costly if you live in a high-risk part of the country. Many residents living in hurricane country in Florida have to pay thousands of dollars a year for homeowner insurance, not hundreds, says Ron Moore, senior product manager for auto and home insurance at MetLife.

Most policies cover standard “perils,” from fire and wind to hail and falling trees. If you live in earthquake country or next to a river, you will need separate – and often government-sponsored – insurance, Moore says.

Choosing your level of homeowner insurance

There are three basic flavors of home insurance. Here's what to consider when choosing your level of coverage:

  • Replacement cost. This is most basic policy – and maybe the most misleadingly named. This sets a replacement value for your home. And whether it is $200,000 or $500,000, this is what your insurance company will pay out if your home burns to the ground or is blown away. The replacement value is based on average labor and construction costs for your area. The good news is that insurers and agents armed with more sophisticated software programs are getting better at estimating costs. The bad news is that construction prices remain hard to predict, especially in the aftermath of a major disaster. “As people hear ‘replacement cost,’ they think their home will be replaced,” Moore says. “The reality is that it will only be repaired or replaced up to a limit.”
  • Extended replacement cost. This adds another 25 percent to 30 percent onto your basic replacement expenses. If your house is just one of thousands damaged in a hurricane, contractors may suddenly jack up prices and the cost of everything from plywood to windows may soar. Buying extended coverage may cost you less than $100 extra a year, but will protect you from any post-disaster price hikes. It may make sense if you live in an area where real estate values and construction prices are high and prone to sudden increases, Moore says.
  • Full-value replacement. This is the Cadillac of home insurance policies. It means your insurer will go beyond the stated policy replacement value of your home to rebuild your house. It is not without limits, however. Many policies will only cover part of the increases if they are due to changes in local building codes that have made it more expensive to rebuild. Moore says these policies may cost as little as 5 percent to 10 percent more than basic replacement-cost policies. However, in high-risk areas such as Florida or Tornado Alley, these policies can be much harder to get, Moore says. The extra cost can run into the thousands of dollars.

In the end, there is likely no perfect answer to how much insurance coverage you should buy, says Jim Whittle, assistant general counsel and chief claims counsel at the American Insurance Association (AIA) trade group.

“That is why it is so important to know your own tolerance for risk," Whittle says.

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