"This section contains
additional data that supplements basic information contained in
Your
Money Matters
and should be used in conjunction
with the material contained in
Your Money Matters."
One of the most important purchases a homeowner makes is a purely defensive one — homeowner’s insurance. Without it, you could lose more than your shirt — you could end up losing the roof over your head! And while most homeowners are aware of their need to insure, many remain unwittingly underinsured.
For renters, it’s a different story. The majority of renters, especially the younger set just starting out, are uninsured — perhaps because they view their situation as a temporary station on the road to home ownership, or perhaps it’s out of ignorance. Whatever the reason, the results can be disastrous. This section examines the why and wherefores of homeowner’s and renter’s insurance — how much is enough, how much is too much, and how to go about getting the coverage you need at the best possible price.
There are three levels of private residence (home) coverage: HO-1, HO-2, and HO-3. The higher the number, the broader the coverage. Renter’s coverage is HO-4, and condominium coverage is HO-6. HO-3 policies are the most popular choice for homeowners because of its broad-based coverage, and because the cost is only slightly more expensive than HO-2.Condo and Co-op Owners
Condominium and co-operation owners need to know the legal responsibilities that come with their form of ownership. Condo owners, for example, are liable if the condominium association is sued and is not able to cover the full settlement; in such an instance, each unit owner is assessed to cover the gap. Check the adequacy of the association’s master policy to ensure there is a loss-assessment insurance endorsement. If none exists, the association should add it. Otherwise, one can be added to your own insurance policy for a minimal fee.
Before you begin to shop for the
most suitable policy, you need to understand what you’re
shopping for. Consider the following items as minimums for basic
homeowner’s coverage:
v The house itself
v Other structures on the property, like a porch, garage, or outbuilding
v Personal property and the main contents of the main dwelling, usually up to 50 percent of the coverage of the main dwelling
v Living costs above the current expenditure incurred while repairing damages caused by an insured risk, usually up to 20 percent of the coverage on the main dwelling
v Losses of personal property while away from home, including the possessions of children residing at school, usually with a limit and under certain conditions
v Personal liability up to a maximum for each occurrence, usually up to $25,000
v Medical payment for injuries that occur on the premises, up to a maximum per occurrence, usually set at $500 per person
v Damages to trees, shrubs, and plants up to five percent of the coverage on the main structure
v
Damage to property of others, usually up to $250.
With the exception of areas
pertaining to the structure itself, most of the above items are also
included in a standard renter’s policy.
The replacement cost is the value of a lost or damaged item based on what it would cost to replace the item, regardless of age or condition. Homeowner’s/renter’s insurance should cover at least 80 percent of the replacement cost of the home, allowing for annual inflation. The basic insurance coverage usually specifies actual cash value or market value. (Actual cash value is the value of a lost or damaged item that takes into consideration its age and condition immediately prior to the loss or damage.) Using these estimates can lead to underinsurance. Repair costs rise faster than the market value of your home, and thus the rebuilding costs may be much higher than the market value.
Replacement cost coverage on your home is more expensive (usually 10 to 15 percent higher) than the basic coverage, but it’s worth it. The reason is simple: It provides much more protection. Insurers, however, are not always willing to underwrite this insurance unless the house is covered to 100 percent of its replacement value as appraised by the company. Furthermore, such coverage on the main structure does not also cover the contents of the house at their replacement values; such coverage is normally available under a separate policy rider.
This is an extremely valuable
option for both homeowners and renters. It avoids disputes with the
insurer over the “actual cash value” of losses and provides
for peace of mind knowing that no economic loss will be sustained in
a claim settlement. If you have this added coverage, the insurance
company will pay to replace your lost items with new ones, subject to
some limits. Adding replacement cost coverage to personal property
coverage will raise the premium for homeowners by about 10 percent,
while renters and owners of co-ops or condominiums, who are insuring
the contents alone, not the structure, may face increases of up to 30 percent.
Household contents are normally insured to 50 percent of the coverage on the main structure, although you can increase this coverage to 70 percent for an additional premium. The real problem with homeowner’s and renter’s policy exclusions pertains to valuables. Silverware typically is limited to between $1,000 to $2,000, jewelry is limited to $500, and coins to $100. An endorsement allows you to raise the limit in any category by paying a higher premium — for example, $20 for a $1,000 increase in coverage on jewelry or $5 for an equal increase in coverage on silverware.
There are limits on endorsements. Separate “floaters” can increase the limits on valuables, and they are well worth considering if you have expensive valuables.
This is not normally covered. Personal computers and other equipment used to operate a home-based business must be insured separately. Basic home-office coverage is often available as a rider to the regular homeowner’s policy for some, but not all, occupations. Such riders extend homeowner’s liability to include business-related injuries and reimburse damage to business equipment. The liability limit and deductible on home-office riders are generally identical to those on the homeowner’s policy, although they can be expanded. Office equipment coverage is typically limited to $10,000. Basic home-business policies are also available separately.
There has been a recent spate of lawsuits against hosts whose guests are later involved in alcohol-related accidents. Such liability may not be covered unless you have added “host liquor” coverage or have a comprehensive policy. Be sure to check with your insurance agent or company about this coverage.
A standard homeowner’s insurance policy does not cover either earthquakes or floods (although a fire caused by an earthquake is covered). These disasters may generally be covered by an addition to the homeowner’s policy. Even though more than half of all earthquake policies have been sold in California, earthquakes can strike virtually anywhere. Costs of these policies vary according to the region’s vulnerability to earthquakes and to the type of house to be insured. Whether you want to pay for this added coverage is a tough call. Certainly, if it will make you sleep better at night, it’s worth the cost.
A flood is another frequently
overlooked event that could cause catastrophic damage to your
property. Flood insurance is available from the federal government
for flood-prone areas, and some private companies offer coverage.
There are limits to the total amount of coverage that is available
for the home and its content.
A floater policy provides extra coverage for specified valuable possessions. It does not relate to flood insurance. If you keep these valuables at home or use or wear them, they should probably be covered under a floater policy. This will require a professional appraisal unless they have just been purchased. A floater provides a specific amount of insurance for each object on an itemized basis, guaranteeing full replacement value and eliminating deductibles. The cost varies, but it usually averages about $5 per $1,000 of value for silverware, $15 per $1,000 value for jewelry, and $4 per $1,000 of value for furs. In high-risk urban areas, if theft insurance on valuables is available at all, it may cost considerably more. (Maybe you should move to Butte.)
ALL-RISK COVERAGE
Be sure that the floater policy provides “all-risk” coverage that will reimburse you no matter what the cause of the loss, including “mysterious loss” where you don’t know how you lost something you lost. Some policies are written on a “named-peril” basis, which means the insurance company will provide reimbursement only when the type of loss is listed on the policy. If the loss is caused by an unnamed peril, your reimbursement would be zero. The all-risk coverage of a floater will also eliminate the need to prove theft, which is often difficult under the guidelines set by insurance companies.
All-risk coverage is provided on
an item-by-item basis. As a result, companies usually require that
applications for floaters be supported by sales slips or professional
appraisals. If items in a collection are bought and sold frequently,
or if there are many items to be insured but none are of exceptional
value, the blanket coverage provided by an endorsement may therefore
be more convenient than a floater. Some companies provide special
blanket coverage policies for people who are lucky enough to have
extensive collections of valuables.
If jewelry or other valuables are stored in a safe-deposit box, insurance is probably a good idea. Many people do not realize that the contents of safe-deposit boxes are not insured by the bank, and insurance under a regular homeowner’s policy is limited to $500 or less. If you store only stock and bond certificates in your name in your safe-deposit box, insurance is not necessary since they can be replaced if stolen or lost. But if you store valuables there, you need safe-deposit box insurance, which is simply a rider to your homeowner’s or renter’s insurance policy. A rider on your homeowner’s policy can add safe-deposit box insurance for only about $6 per $1,000 of coverage.
By the way, whatever you keep in
your safe-deposit box, be sure to maintain an up-to-date inventory of
its contents, including the serial numbers on stock and bond
certificates. Not only will this provide you with important
information to replace lost items, it will also help you avoid making
a wasted trip to the bank in search of an item that isn’t there.
Taking a personal inventory is crucial to assuring that you get back what you deserve in the event you suffer a loss. Record all identifying information, including serial numbers as well as a complete description of your personal possessions. Photographs of furniture, appliances, and the like will be a big help. Make no mistake about it — taking a household inventory is one of the most boring things you’ll ever do! Save it for a rainy Saturday, but don’t wait too long to do it. (Don’t forget the garage.)
By the way, store your inventory and photographs somewhere away from your house — in your safe-deposit box or in your desk at the office. Also, remember to keep your inventory up to date by adding receipts for possessions subsequently acquired to your inventory file.
Companies offer videotaping services that can identify unique items more positively than a photograph. But since this service allows an outsider access to your personal property, you should check the reputation of the videotaping service with the local police and the Better Business Bureau before the videotaping session. Note: Only some practitioners in this field are bonded. A better alternative, perhaps, is to videotape your possessions yourself.
To download a Household
Inventory Worksheet. click on...
In order to qualify for a floater policy on valuables, you must submit recent appraisals or sales receipts of the items to the insurance company. There are two types of appraisers: generalists and specialists. Generalists usually appraise the contents of entire homes in one visit, using instruments and reference books. Specialists are usually extremely well informed in one area, such as jewelry, silverware, art, or the furniture of a single era. Most of us can get by with a specialist, and we can save a lot of money by taking our silver or jewelry to an appraiser rather than having him or her come to us. If you are blessed with a lot of valuables, read on.
Most homes can be appraised in an afternoon, and some appraisers charge a flat fee based on that much time. Others require that they be hired for a minimum period that may be anywhere from one hour to a whole day, which may or may not include travel and research time. Rates usually range from $100 or $300 an hour for both generalists and specialists.
One way to reduce the expense of an in-home appraisal is to prepare your home beforehand. Belongings should be clean and, along with any sales slips and receipts, easily accessible. Valuables like jewelry and silverware, which are usually stored in drawers or cupboards, should be spread out on a blanket in a convenient location.
Alert the appraiser that the appraisal is for insurance purposes. Tax appraisals are made at fair market value, which may be significantly lower than the replacement value used in insurance settlements. A good appraiser will report the condition, size, age, and value of an object. He or she will also include a disclaimer that lists the purpose of the appraisal and states that the fee was not contingent on the value of the objects.
Appraisers can sometimes evaluate the original worth of items that have already been lost, stolen, or destroyed. For this, you should provide all sales slips and photographs of the object as well as the remains if the item has been broken.
Appraisal fees paid at the time of insurance purchases are not tax deductible. In case of loss, they can be included as a miscellaneous itemized deduction when the casualty loss is computed because they constitute an expense incurred in determining tax liability. But miscellaneous itemized deductions are subject to a floor of two percent of your adjusted gross income.
Some objects fluctuate in value
upward or downward with changes in the market or inflation. These
should be reappraised every few years. Yes, this costs money, but it
assures that you will maintain the right amount of insurance coverage.
Bargains aren’t always your best bet. Unlike shopping for a car, shopping for an insurance bargain may not be a good idea. This doesn’t mean that you should sign up with the first policy that comes along. There’s work to be done to ensure that your insurer is a solid, reliable company that will provide you with the service you want at a price that is not out-of-line with its reputable competitors. Homeowner’s insurance should be as comprehensive as necessary, although some cuts in premium costs are possible without seriously affecting your overall level of protection. For example, you can select a higher deductible, or take steps to increase home security, thereby reducing your premium somewhat. Also, you may find that you can get along without some of the “optional extras” that are attached onto your policy — at extra cost.
Different companies’ rates can vary according to the location, age, and condition of your house, as well as other factors. You may find that some insurance companies are less interested in your business than others, and that is reflected in much higher premiums. Hopefully, your insurance agent will shop around for the best deal, but you may want to do a little shopping yourself if you suspect you can get a lower premium. A few years ago I reduced a homeowner’s policy premium by almost two-thirds just by making a few phone calls. But remember, the financial soundness of the insurer and its responsiveness to claims should not be sacrificed for lower costs.
Increasing the security of your home has two advantages for the homeowner: It results in a safer home, and it reduces your insurance premium. Companies warn, however, that the reduction in premiums may not be as extensive as you might expect. Smoke detectors, for example, are not considered an adequate improvement by some companies, and expensive items such as an alarm system directly linked with the local police station may translate into a modest 5 to 10 percent premium reduction.
No homeowner’s or
renter’s policy should go beyond three years without updating.
And these days, no insurance company should go without a financial
health checkup for more than a year. Many people would benefit from
an annual review of their property insurance coverage. As I’ve
said before, make your agent earn his or her commission. Demand a
periodic review of your policy.
If worse comes to worst, having a complete record of your personal possessions contained in your household inventory reduces some of the misery associated with having to detail all that you have lost. Expect the claims process to be disconcerting. The following list of steps should help to minimize the problems associated with filing claims and maximize reimbursement in the event of your personal property loss.
1. Contact your insurance agent, or the insurance company if you bought the insurance without an agent. This person will start the claims process and advance you cash for your immediate expenses in appropriate circumstances. (They’re not being kindhearted — the advance is eventually deducted from your settlement.)
2. If a police report has not been filed, find out from the agent or the insurer if a report is necessary to collect on a claim.
3. Tour your house or apartment and make a record of whatever is lost and of whatever is salvageable of what remains. Provide as much detail as possible on the articles destroyed, and make reasonable estimates of the value if there is no record. (Borrow a neighbor’s videocamera if you have to.)
4. If necessary, secure your house against vandals and children — this is sometimes required by law. A boardup service, which patches holes in walls and doors, can be found through the insurance agent or in the Yellow Pages under “glass.” Most glaziers can refer you to a boardup service. Costs for securing the house may go into the thousands of dollars, but they are eventually reimbursed by the insurance company.
5. Obtain the household inventory, insurance policy, and house deed from wherever they are stored. (It’s at this point that you’ll be thankful you didn’t keep the inventory at home!) The lawyer and the insurance agent cannot process your loss claim without these papers.
6. Sign no papers until they have been examined by your lawyer. You should not make any statements or sign any papers, especially those proffered by a representative of the insurer, unless they have been approved by your lawyer or unless you have read through the agreement — including all the small print — and unless you know thoroughly and exactly the conditions and consequences of the agreement and have agreed to the settlement.
7. In cases of extensive loss, you
might consider contacting your lawyer, who will find and engage a
public adjuster and advise you on any settlement. The public adjuster
is the key to handling negotiations with the insurance company.
Currently, over half the states require public adjusters to have a
license; usually the adjuster is awarded 10 to 12 percent on small
settlements and 3 to 7 percent on major claims. The adjuster is
invaluable in reading and understanding your insurance policy, taking
inventory of the remains of a disaster, and ensuring that any
replacements meet the quality of the original. Note: Don’t
confuse public adjusters with insurance adjusters. The latter
operate on behalf of their employers, the insurance companies.