Undercovered
Many homeowners lack adequate insurance. They might get a nasty surprise if a hurricane hits.
By HELEN HUNTLEY
Published June 12, 2005
If a hurricane destroyed your home, would your insurance cover the cost to rebuild?
Don't wait until a storm is threatening offshore to find out.
"It was a major, major problem for us," said Wayne Sallade, emergency operations director for Charlotte County, where Hurricane Charley roared ashore in August. "People didn't find out they were underinsured until the contractor came out and said "here's the tally' and the adjuster came out and said "here's what they're paying."'
Most homeowners aren't adequately protected, according to Marshall & Smith/Boeckh, a California company that provides property valuation services. The company says 61 percent of U.S. houses are underinsured, with an average shortfall of 25 percent of what it would cost to rebuild them.
Sometimes policy limits haven't kept up with soaring construction costs. In other cases homeowners neglected to tell their insurance companies about room additions and other remodeling projects.
A secondary problem is that many homeowners aren't aware that their policies exclude or limit some coverages, reducing the amount they would recover in a disaster or other loss.
"There's a lot of responsibility on the part of the homeowner to work with the carrier to get this right," said Peter Wells, senior vice president of Marshall & Swift/Boeckh.
Insurance companies agree.
"The insured has to be responsible to review their policy coverage," said Rade Musulin, vice president of Florida Farm Bureau Insurance. "If they think for some reason it is inappropriate, wrong or different, they need to contact their agent."
Carrying adequate insurance is essential for maintaining replacement coverage, which pays the full cost of replacing a roof instead of deducting for depreciation based on the roof's age. Insurance companies generally require insurance limits that are at least 80 percent of full value in order to maintain replacement coverage.
But be aware that even replacement coverage isn't guaranteed to be enough to rebuild a house that's been destroyed. Policies typically are capped at the policy limits or, if you have "extended" replacement coverage, at 20 to 25 percent above those limits. If you live in a house that's more than a few years old, it's important to buy "law and ordinance" coverage that would pay the extra cost of rebuilding in compliance with upgraded building codes, up to 50 percent more than your policy limit.
The Florida Department of Financial Services says 5 to 6 percent of the nearly 400,000 calls it took after last year's hurricanes were from consumers who did not have adequate coverage.
Figuring out how much insurance you need isn't as simple as checking out what your new neighbors paid for a house similar to yours. Policy limits for homeowners insurance are based on the cost of rebuilding on the same lot, so they are supposed to exclude the value of the land.
The Florida Association of Realtors says existing single-family houses in the Tampa Bay area sold for a median price of $183,000 in April, a 23 percent increase over the same month in 2004. But it is important to note that rising land values have been a big part of price increases, especially for waterfront property.
Building costs rose between 6.8 and 8 percent last year in parts of the Tampa Bay area, according to Marshall & Swift, which tracks numbers across the country. Prices for essential building supplies such as cement, brick, lumber, steel and roofing shingles have been on the rise. Higher gas prices are affecting construction costs.
Many insurance companies use Marshall & Swift's cost information to increase coverage limits when homeowners renew their policies each year. State Farm Insurance says it uses the data to adjust policy limits automatically throughout the term of a policy.
However, changes based on a cost index have their limitations.
"People are remodeling their homes aggressively and indexing is not enough to capture that," Wells said. "And if you have a house with a lot of custom features, brick or glass or unusual shapes and designs, the index doesn't deal with that."
But trying to calculate replacement cost on your own is a pretty stiff challenge unless you happen to be in the construction industry. It will get easier next month with the launching of a Marshall & Swift interactive Web site allowing consumers to do those calculations for a fee. Details, including the Web address, are not available, but the consumer site likely will be linked to the company's Web site (www.marshallswift.com)
Insurance companies say there's no need to go it alone - that's what your agent is for.
"We encourage everyone to speak with an agent once a year to be sure they have adequate coverage and are protected," Allstate Insurance spokesman Ryan Priest said.
Policy limits aren't the only thing to ask your agent about. Make sure you clearly understand what your policy won't cover, such as flood damage. You'll need a separate flood insurance policy if you want coverage for flood damage, even if you don't live in a flood hazard zone where mortgage lenders require its purchase. Relief from other types of water damage, such as a sewer backup, also may be limited.
In addition, your homeowner's policy may exclude or set a low coverage limit for items such as screen enclosures, fences, sheds, landscaping, cash, guns, boats, vehicles, jewelry, furs, business equipment and records.
Liability coverage also may be limited or excluded for animal bites and injuries involving certain equipment, such as trampolines and watercraft. When coverage is restricted, it may be possible to increase the limits with a rider to your policy or to buy a separate policy. Or you just might decide to get rid of some items or store them somewhere else.
It's also important to be sure you understand the deductibles that apply to your policy. A $500 or $1,000 deductible is typical, but when the National Hurricane Center declares a hurricane watch or warning in Florida, a higher deductible applies for claims related to windstorm damage.
The most common hurricane deductible is 2 percent of the insured value of the house, but homeowners can choose a higher deductible, up to 10 percent, to save on premium costs. Just be sure you have the cash to pay those costs out of pocket should a hurricane come your way.
While underinsurance is a widespread problem, being uninsured is even worse. If you don't have a mortgage on your house, no one will require you to buy homeowners insurance or flood insurance, but no insurance company will step in to help you rebuild.
That's called self insurance. Surprisingly, it's a route thousands of Floridians have chosen.
"Many people perfectly capable of having adequate insurance, because they didn't have a mortgage and it wasn't required, simply took the risk that it wasn't going to happen to them," said Sallade in Charlotte County.
It's a big gamble.
-- Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.