Insurance Information Institute

INSURANCE FOR YOUR HOUSE AND PERSONAL

POSSESSIONS: DECIDING HOW MUCH YOU NEED

If your house burns down or is destroyed by a violent windstorm,

or if your possessions are stolen, you don't want to suddenly

find out that your homeowners insurance policy pays less than you

thought it would.

The information in this brochure may help you avoid such

unpleasant surprises if you file a claim.

Here's what you can do to avoid being underinsured.

1. Find out how much it would cost to rebuild your home. The

amount of insurance you buy should be based on rebuilding costs,

not the price of your home. The cost of rebuilding your house

may be higher (or lower) than the price you paid for it or the

price you could sell it for today.

Your insurance agent or company representative generally can

calculate rebuilding costs for you or you can hire an appraiser

to do the job. Your local real estate agent will be able to give

you the names of appraisers.

The cost of rebuilding your house is based on local construction

costs and the kind of house you have, including the type of

exterior wall construction -- frame, masonry (brick or stone) or

veneer; the square footage of the structure; the style -- ranch

or colonial, for example; the number of bathrooms and other

rooms; the type of roof and the materials used; and whether it

was custom built. Other things that affect the rebuilding cost

are an attached garage, a fireplace, exterior trim and a home's

special features, like arched windows.

A good way to get a ballpark estimate of the cost of rebuilding

your house is to calculate the square footage and multiply it by

local building costs per square foot for your type of house. For

example, suppose your home is 2,000 square feet (1,200 square

feet on the ground floor and 800 on the second floor) and that

building costs in your community and for your type of house are

$80 per square foot. The cost to replace your home would be

approximately $160,000. You can ask a real estate agent or

appraiser for average building costs in your area.

2. If you already have homeowners insurance, make sure you have

enough. Most insurance companies recommend you insure your home

for 100 percent of the cost of rebuilding it.

Few homes are totally destroyed but yours could be one of those

few. If it's insured for less than 100 percent of the rebuilding

cost, you run the risk of not having enough money to replace it

with one of similar size and quality.

Make sure your agent knows about any improvements or additions to

your house since you last talked about your insurance policy. If

you don't increase your limits to cover the cost of rebuilding

the new deck, a second bathroom, a larger kitchen or other

improvements that have increased the value of your home, you may

save a little money on your insurance premium but you risk being

underinsured. Depending on the kind of policy you have, if you

don't have sufficient insurance, your insurance company may only

pay a portion of the cost of replacing or repairing damaged

items.

Look at your policy to see the maximum amount your insurance

company would pay if your house was damaged and had to be

rebuilt. The limits of the policy typically appear on the

Declarations Page under Section I, Coverages, A. Dwelling. Your

insurance company will pay up to this amount to rebuild your

home.

Some banks require you to buy homeowners insurance to cover the

amount of your mortgage. If the limit of your insurance policy

is based on your mortgage, make sure it's enough to cover the

cost of rebuilding.

3. Make certain that the value of your insurance policy is

keeping up with increases in local building costs. If the limits

of your policy haven't changed since your bought your home, then

you're probably underinsured. Ask your insurance agent or

company representative about adding an "inflation guard clause".

This automatically adjusts the dwelling limit when you renew your

policy to reflect current construction costs in your area.

4. Find out whether you have a "replacement cost" policy for the

dwelling. Most policies these days cover replacement cost for

structural damage, but it's wise to check with your insurance

agent or company representative. A replacement cost policy will

pay for the repair or replacement of damaged property with

materials of similar kind and quality. The insurance company

won't deduct for depreciation -- the decrease in value due to

age, wear and tear, and other factors.

If you own an older home, you may not be able to buy a

replacement cost policy. Instead, you may have a modified

replacement cost policy. This means that instead of repairing or

replacing features typical of older homes, like plaster walls and

wooden floors, with similar materials, the policy will pay for

repairs using the standard building materials and construction

techniques in use today.

Insurance companies differ greatly in how they insure older

homes. Some won't insure older homes for 100 percent of

replacement cost because of the expense of re-creating special

features like wall and ceiling moldings and carvings. Other

companies will insure older homes for 100 percent of replacement

cost as long as the dwelling is in good condition.

If you can't insure your home for 100 percent of replacement cost

or choose not to do so -- in some cases, the cost of replacing a

large old home is so high that you might not want to replace it

with a house of the same size -- make sure the limits of the

policy are high enough to provide you with a house of acceptable

size and quality.

5. Find out whether building codes in your community have

changed significantly since your home was built. Building codes

require structures to be built to minimum standards. If your

home were severely damaged, you might have to rebuild it to

comply with the new standards. In some cases, complying with the

code may require a change in design or building materials and may

cost more. Generally, homeowners insurance policies won't pay

for the extra expense but some insurance companies offer an

endorsement that pays a specified amount toward these costs. (An

endorsement is a form attached to an insurance policy that

changes what the policy covers.)

6. Consider buying a guaranteed replacement cost policy. A

guaranteed replacement cost policy will pay whatever it costs to

rebuild your home as it was before the fire or other disaster,

even if it exceeds the policy limit. This gives you protection

against sudden increases in construction costs due to a shortage

of building materials, for example, or other unexpected

situations but it generally doesn't cover the cost of upgrading

the house to comply with building codes. A guaranteed

replacement cost policy may not be available if you own an older

home.

7. Find out from your local government office whether your home

is likely to be flooded. If it is, contact your insurance agent

or the Federal Insurance Administration at (202) 646-4623 and ask

about the National Flood Insurance Program. Remember: Your

homeowners insurance policy does not cover flood damage. If you

buy a federal government flood insurance policy, consider

insuring your home for 100 percent of replacement cost and buying

insurance to cover the contents of your home as well as the

dwelling.

8. Make a list of all your personal possessions -- everything

you and your household own in your home and in other buildings on

the property, except your car which must be insured separately.

Among the things you should include are indoor and outdoor

furniture; appliances, stereos, computers and other electronic

equipment; hobby materials and recreational equipment; china,

linens, silverware and kitchen equipment; and jewelry, clothing

and other personal belongings.

9. Estimate the value of your personal possessions at current

prices. The total is the amount of insurance you would need to

replace the contents of your home with new items if everything

were destroyed.

10. If you already have a homeowners insurance policy, find out

how much insurance you have for the contents of your home. The

limit of the policy is shown on the Declarations Page under

Section I, Coverages, Personal Property. The contents limit

generally is 50 percent of the amount of insurance on the

dwelling but may be as high as 75 percent. On a home insured for

$100,000, for example, the contents limit would be $50,000 (50

percent) or $75,000 (75 percent). Now compare the contents limit

with the total value of the items on your list of personal

possessions. If you think you're underinsured, discuss this

problem with your insurance agent or insurance company

representative.

11. Consider replacement cost insurance for your personal

possessions. There are two ways of insuring your personal

possessions. If you have a homeowners insurance policy, find out

whether claim payments for damage to your personal property would

be based on replacement cost or actual cash value. Check your

policy under Section I, Conditions, Loss Settlement or ask your

agent. As with insurance for the structure, a replacement cost

policy pays the dollar amount needed to replace a damaged item

with one of similar kind and quality without deductions for

depreciation. An actual cash value policy pays the amount needed

to replace the item, minus depreciation.

Suppose, for example, a tree fell through the roof onto your

eight-year-old washing machine. If you had a replacement cost

policy for the contents of your home, the insurance company would

pay to replace the old machine with a new one. If you had an

actual cash value policy, the company would pay only a percentage

of the cost of a new washing machine because a machine that has

been used for eight years would be worth less than its original

cost. That means that you would have to either buy a used

machine or pay the difference between the amount your insurance

company paid you and the cost of a new machine.

12. Check the limits on certain kinds of personal possessions,

such as jewelry, silverware and furs. This information is in

Section I, Personal Property, Special Limits of Liability. Some

insurance companies also place a limit on what they'll pay for

computers. If the limits are too low, consider buying a special

personal property "endorsement" or "floater." An endorsement is

an addition to your policy. A floater is a form of insurance

that allows you to insure valuable items separately. Under a

floater, you'll be able to insure these items for higher amounts

than you can under a standard homeowners policy.

13. Now that you have a list of your personal possessions, keep

the list up to date. If you have a claim, the more information

you have about the damaged items -- a description of each and the

date of purchase and purchase price -- the faster the claim can

usually be settled. Videotape or take photographs of rooms and

their contents. Note where and when you bought each item and the

price. Write down the brand names and model numbers of

appliances and electronic equipment. Add new items as you buy

them. Keep receipts with the list. Store the list, photos and

other records somewhere safe off the premises -- in a bank

deposit box or with a neighbor or relative -- so that they aren't

destroyed if your home is damaged.

14. Be a wise consumer. Use the information in this brochure to

find out how much insurance you need to avoid being underinsured.

Ask your insurance agent or company representative questions

about your policy. Ask your agent to explain what factors were

used to calculate the policy limits for the dwelling. If you

don't understand the answers the first time, ask again. Check

with friends. If you still have a problem or need more

information, call NICH (National Insurance Consumer Hotline) at

1-800-942-4242.