Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 31, 1994 TAG: 9410310005
SECTION: BUSINESS PAGE: A6 EDITION: METRO
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
DATELINE: LENGTH: Medium
Conversely, many other owners may be surprised to discover that a smaller policy will do.
These reappraisals are the aftershock of the record catastrophes of recent years - the costly floods, hurricanes, earthquakes, tornados and winter storms. On average, insurance companies have lost money on homeowners policies since 1989, the trade magazine Best's Review concludes. Many homeowners lost money, too, including some who thought that they were fully insured. Here's what's going on:
House-by-house reappraisals: Agents for State Farm, headquartered in Bloomington, Ill., have reinspected more than 4 million homes since June 1, 1993, according to Bryan Freeman, assistant vice president of underwriting. Last year, Metropolitan Property and Casualty in Warwick, R.I., completed a three-year re-evaluation program conducted in 47 states. At least five other major property insurers are on the same track.
When figuring how much insurance you need, pay no attention to your home's market value. You're insuring for the cost of rebuilding it, if a disaster brings it down. Rebuilding costs have been widely underestimated, for several reasons: Your insurance company may have been using average costs for mass-produced new home construction, which are lower than the cost of rebuilding one house at a time. Your insurance agent may never have brought your policy up to date. You may have improved your home since it was last appraised. Changes in local building codes may have made it more expensive to rebuild.
Adjustments in policy size: For full coverage of partial losses, like a kitchen damaged by fire, you must be insured for at least 80 percent of the cost of rebuilding your house from the ground up. For full coverage of a total loss, you must be insured for 100 percent. The odds are that you'll need a larger policy. Studies by Marshall & Swift Co., a Bridgewater, N.J., firm that collects building-cost data, conclude that 67 percent of U.S. homes are underinsured by an average of 31 percent.
You can challenge your insurer's appraisal, if you think it's too high. Or you can look for another insurer. But you've done yourself no favor if you buy too little coverage.
State Farm reports that almost 900,000 of its properties were underinsured, and about 300,000 were overinsured. At Metropolitan, 55 percent were underinsured, and 45 percent had no change or were overinsured, according to Richard Berstein, vice president and general counsel.
Overinsurance usually occurs when the mortgage lender asks for a policy large enough to cover the entire loan. But that effectively includes the value of the land, which has nothing to do with how much it would cost to rebuild your home.
Risk adjustments: Insurers are working on better ways of pinpointing homes that present a high risk of loss. In California, for example, Aetna currently evaluates a property's earthquake risk, based on the type of soil it's built on, its proximity to faults and other indicators. The company may insure one house but not its next-door neighbor. If the house is accepted, premiums will vary depending on the area's risk.
Aetna has also been working on markers for hurricane risk, says Robert Restrepo, head of the company's homeowners business unit - studying such indicators as the distance from the coast, type of construction, local building codes and the site's elevation. Right now, ``most insurers are leery of East Coast homes within 1,000 feet of the beach,'' Restrepo says. They may refuse to insure the properties or impose high deductibles for wind damage. But closer study may show that some homes within that belt are attractive to insure, if they have storm shutters, certain types of construction and a high elevation.
Price increases: The cost per $1,000 of homeowners insurance is rising an average of 3 percent to 4 percent, says economist Sean Mooney of the Insurance Information Institute. But increases of 20 percent and up are occurring in flood, earthquake and hurricane zones, with discounts to homeowners who shoulder higher windstorm and other deductibles.
One final change, in Florida and probably coming to other states: limits on the popular replacement-cost coverage, which guarantees to rebuild your house regardless of cost. Insurers are capping their liability at 20 percent over the policy's face value as an incentive for homeowners to hold down rebuilding costs.
by CNB