Homeowners need to stay updated on what policies cover, experts say

5/12/2014 (Permalink)

Owners of the 22 homes submitted badly damaged or destroyed in the Yarnell, Arizona area during recent wildfires have asked the Arizona Department of Insurance to review their claims and coverage limits to verify whether insurers carried out policy terms correctly. For other Arizonans and millions of homeowners across the country, the episode underscores the importance of checking occasionally to make sure you have enough insurance to rebuild after a disaster. Insurers regularly urge customers to review their policies and alert them when buying new furnishings or making improvements that increase the value of a dwelling, but homeowners counter that it's still up to the companies to make sure coverage amounts are accurate.

 As the Yarnell case demonstrates, specifying an appropriate rebuilding or "replacement cost" amount isn't easy, especially because building costs can escalate when hundreds of homes get destroyed in a catastrophe.

 "Don't get confused by the market value of your house," said Linda Ma, whose two-bedroom house was among 127 destroyed by the blaze, which also caused the deaths of 19 Granite Mountain Hotshot firefighters. A home's market value isn't the same as the cost necessary to rebuild it, she noted.

 J. Robert Hunter, director of insurance for the Consumer Federation of America, said underinsurance is a pervasive problem of the sort that doesn't become apparent until after a fire, flood, severe windstorm or other calamity causes heavy damage. "It follows almost any kind of disaster," and even individual fires or other problems, he said.

Policies don't cover the value of land on which homes sit, and foundations probably don't need to be covered either, Hunter said.

Marshall & Swift/Boeckh, a leader in building-cost information, last year estimated that 60 percent of American homes have inadequate insurance, with values understated by an average of 17 percent. That figure has gradually improved from two decades ago, when the company said 73 percent of homes were undervalued by 35 percent, but it still means a lot of people couldn't completely rebuild their dwellings at today's costs for labor, materials and fees.

If you have a mortgage, your lender will require insurance. But if the house is paid off, especially by retirees on a budget, there's a temptation to cut back on coverage — or let it lapse.

Insurers often urge homeowners to make sure they have adequate coverage, but they can't force people to obtain it. Homeowners, in turn, want to minimize their premium payments and often are more than willing to go along with lower home-value estimates.

"People often buy too little insurance, even on purpose," Hunter said. "They don't expect a total loss."Premiums reflect factors including local housing prices, materials costs, competition in the state's insurance market and perceived risks in the area for windstorms, hail, floods, earthquakes and other hazards.

Coverage varies. The most basic form is actual cash-value coverage, which pays a reduced amount for items and structures, reflecting depreciation and wear and tear. Rather than a new couch, you would receive enough money to buy a replacement for the 10-year-old used couch you just lost. Premiums on actual-cash value policies tend to be lower.

Replacement-cost coverage provides more extensive protection, often 25 percent above the dollar limits specified in a policy, said Christopher Hackett, director of personal-lines policies for the Property Casualty Insurers Association of America.

But even replacement-cost might not be enough to rebuild in full. Some insurers offer guaranteed replacement-cost coverage, for a higher premium, that would foot the entire bill of reconstruction. But a lot of insurers don't offer this open-ended protection, or do so only on a grandfathered basis for their longest-standing policyholders, said Hackett.

And there might be other variations, such as coverage that pays to reconstruct a home to current building codes. For example, some cities including Boulder, Colo., require homes to be built using energy-saving features that are more costly, said Nicole Mahrt, a spokeswoman for the PCIAA.

Other factors

Insurance policies can be hard to understand, but it's important to find out whether your coverage is for actual-cash value, replacement cost or something else.

 "Most agents steer homeowners away from actual-cash-value policies," Hackett said. "They want you to have a good customer experience if you make a claim."

Standard policies typically insure a house and adjacent structures if any, along with personal belongings. They also usually pay related expenses, such as lodging costs for the household's occupants and pets if they must evacuate or if the home becomes unlivable. That's in addition to personal-liability and medical components that cover accidents and injuries to others at the property.

Other types of coverage, for things such as debris removal or separate structures such as garages, often are based on the policy limits for the main home. So if the dwelling has insufficient coverage, so, too, could these other items.

All that's in addition to trying to estimate the value of furnishings, other personal belongings, carpeting, cabinetry, fixtures and more.  Photos are important, but a full inventory also should include receipts, model numbers or styles and other documentation that can bolster a claim.

Surge in demand

A recent general notice mailed by State Farm to some customers warns about the dangers of insuring a home for less than its replacement cost — a scenario that "may result in your having to pay thousands of dollars out of your own pocket to rebuild your home if it is completely destroyed," the notice said.

State Farm and Farmers insured 14 of the 22 Yarnell-area homes for which owners are disputing settlements. First American had two disputed policies, while Allstate, Travelers and a handful of other firms had one each, according to the homeowners group.

"There are times when consumers may undertake remodeling projects, room additions or upgrade furnishings and personal belongings without realizing that these changes may have an impact on the amount it would take to fully replace their homes," Farmers said. "Other situations like having a home office or having a collection of items that support a hobby may also affect the amount of insurance."

State Farm's letter warns about "demand surge" or the tendency of prices to escalate for labor and materials following a disaster such as an earthquake, tornado or hurricane. It's a problem that Yarnell residents have been complaining about.

While cognizant of higher rebuilding expenses in their area, Yarnell homeowners said they mainly see the issue as one where insurance companies offer lowball settlements in the hope that displaced homeowners will accept them.

But insurance officials counter that the incidence of complaints after disasters often is low. For example, New York's Department of Financial Services, in a report published one year after Hurricane Sandy, found that only about 1 percent of homeowners, motorists and business owners in the state who filed claims had lodged complaints up to that point against their insurers.

State Farm's letter encourages homeowners to obtain a current rebuilding-cost estimate from the company, one of its agents or from an independent contractor, architect or real-estate appraiser. That's part of the rub, because homeowners might assume their agents can provide accurate assessments when those estimates, in reality, could fall short.

More-accurate cost estimates would help, but it's also critical for homeowners to make sure they have the right type of policy. For example, homeowners can compile a detailed list of what it would cost to reconstruct their dwellings. But if they stick with actual-cash-value coverage to save money in premiums, they still likely wouldn't receive the entire amount necessary to rebuild.  That's why more homeowners need to do a better job perusing their policies and the notices sent periodically by insurers describing updates.

Are you underinsured?

Your homeowners insurance policy might not provide adequate compensation in the event of fire or other disaster. You might be underinsured if:

 • Your coverage estimate is based on market prices, which aren't the same as rebuilding costs.

 • You haven't included changes or improvements such as a new bathroom, customized kitchen, new flooring or expensive window blinds.

 • You live in an outlying area into which laborers and construction materials would need to be imported at added expense.

 • You haven't adjusted the coverage value to reflect inflation in materials and labor costs.

 • Your home has historical significance or was constructed with unusual building materials.

• You haven't factored in separate structures, added living expenses or landscape-debris removal