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The word "guaranteed," and the liberal
coverage that went with it, has been disappearing over the past
decade. Insurance companies found out how expensive guaranteed replacement
coverage was after such events as 1992's Hurricane Andrew and the
1994 Northridge, Calif., earthquake, says David Bauer, president
of Capital Bauer Insurance in Albany, N.Y., and chairman of the
Independent Insurance Agents and Brokers of New York.
"When you have a devastating storm, the resources
needed to rebuild are totally wiped out," says Bauer. This
post-disaster jump in price is on top of the annual increases in
materials and labor costs that typically occur each year.
The rate of the price increases over the past several
years has not been inconsequential. Wholesale prices on building
materials have hiked the cost of building an average new home by
$5,000 to $7,000, according to the National Association of Home
Builders, which say ssupply shortages could mean further increases.
A national survey this summer showed builders reported
price jumps on framing lumber cement, plywood, steel, gypsum wallboard
and insulation.
Plywood prices have reached an historic high. A plywood
sheet which a year or two ago cost $10 to $15 now can run as high
as $35. The cost of hardwood for flooring has also been increasing.
Shortages of cement also appeared this spring, thanks to soaring
demand for cement in China and prohibitive duties that have limited
supplies from Mexico.
To protect themselves, insurers began putting caps
on the amounts they would pay out in the event of claims. Today,
almost all policies are for replacement or extended replacement
coverage. A few companies -- Chubb and Firemen's Fund are two examples
-- continue to offer guaranteed replacement cost coverage. Both
focus on higher-priced homes.
If you have an existing policy that still provides
for "guaranteed replacement coverage," review carefully
any notices or new policies from your insurer incorporating a language
change. You may think nothing has changed but a few words can make
for big differences.
Taking stock
To determine if your homeowners insurance is likely to provide
adequate coverage in the event your home is damaged or destroyed,
review your policy annually. Check the amount for which your home
is insured, and make sure it reasonably reflects the current cost
to rebuild it.
That means you'll want replacement or extended replacement
coverage, not "actual cash value." While the premiums
are higher as you go up the ladder, the extra coverage can help
cover the rise in costs that often occurs after a disaster.
Also check whether your policy offers inflation guard.
This means that the value of the policy automatically increases
with inflation. So, if your original policy was for $100,000, and
inflation comes in at 3 percent during the year, the value of the
policy also will increase, to $103,000.
Remember also, building prices (like most others)
tend to creep up each year. For instance, between 1993 and 2003,
the price of a new, single-family house increased 45 percent, according
to the U.S. Census Bureau.
Say you bought your house 10 years ago and covered
it for $100,000. Today, it would probably cost about $145,000 to
rebuild it. If it burned down, and your insurer paid you $100,000,
the extra $45,000 would come from your pocket.
If you have both inflation guard and extended replacement
cost, the amount of coverage is based on the value of the policy
once it's adjusted for inflation. Again, using the example of a
policy for $100,000, with extended replacement coverage of 25 percent
above the amount of the policy, you would be covered for $128,750,
or $103,000 multiplied by 1.25.
It's difficult to say whether the amount of the adjustment
for inflation adequately captures the actual rise in building materials.
That's because each insurer calculates its own inflation rate in
determining the amount the policy coverage will increase, says Stander.
Given the different types of insurance available,
it's critical that homeowners take the time to assess whether the
value of their insurance policy properly reflects likely rebuilding
costs. In most states, it is not the insurance company's responsibility
to determine how much insurance a homeowner needs, says R.A. Martinez,
author of Mold,
Fire, Flood & Other Topics: Homeowners Insurance Explained,
and an insurance adjuster. "It is the homeowner's job to see
to that."
Getting back on your feet after a major disaster is
difficult. Having adequate insurance coverage can make the recovery
a bit easier.
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