Unfortunately, disaster can strike at any time. No one is immune to the threat of losing his or her home due to any number of possible hazards. But a recent survey found that most homeowners are seriously underinsured. Marshall & Swift/Boekh, a leading insurance data services company, found that 66 percent of homeowners had inadequate coverage by an average of 18 percent. That works out to $36,000 for a typical $200,000 home. While few people would willingly choose a policy with a $36,000 deductible, that is the net result of being underinsured by that much on what may well be their most valuable asset.
Market Value vs. Replacement Cost
The market value of what your home would sell for today is very different from the amount of replacement cost coverage to properly insure the rebuilding of a home. Market value takes into consideration the land value, depreciation and other nearby market factors while the replacement cost simply reflects the cost to rebuild a home. These can be very different numbers.
For example, you can have a home that is worth $400,000 in one neighborhood while an identical home across town could have a market value of half that much, even assuming they were built on lots of equal size. But actually replacing those homes – rebuilding them in place using similar construction methods and materials – would essentially cost the same for both. Rebuilding costs can be higher or lower than market values, since factors like land value and depreciation don’t affect rebuilding.
Sitting down with your agent to review the features of your home is very important, as homes with features such as crown molding, hardwood floors and tile cost more to rebuild. Other factors that are weighed are the quality of kitchens and bathrooms; for example, custom or luxury kitchens can add significantly to the rebuilding costs. Your agent will take these and other factors of your home into consideration, including the total square footage to determine the home’s replacement cost. This is the amount you should insure your house for; this is sometimes referred to as “Coverage A” in your homeowner’s policy.
Separate structures, sometimes referred to as “other structures” or “Coverage B”, refers to any structure that is on your property, but not attached to your main house. Examples of separate structures include:
- Detached garage
- Garden shed
- Detached in-law unit
- Retaining walls
- Swimming pool
- Outdoor kitchen
Most homeowner policies automatically include separate structures insurance (Coverage B) that equals 10% of the amount of insurance on the main house (Coverage A). If the number and value of separate structures are significant, such as a detached living quarters or many others beyond one item listed above, a separate valuation should be done for each to determine if extra coverage is needed. If you have just have a normal size fence and nothing more, you will probably be fine with the 10% figure. But in either case, this should be brought up when discussing replacement costs with your agent.
Your homeowner’s policy will automatically include personal property coverage, which is a separate item sometimes known as “Coverage C” that can equal 50% to 75% of the Coverage A amount. If you have a typical amount of personal property in your home, this should be adequate. However, if you have a lot of personal property or you have higher value items, then you may want to discuss an additional amount of coverage with your agent. Items such as jewelry, guns, coins, computers, business and high risk property typically have policy sub-limits, some of which may be $1,000 or less. Such special items should be discussed with your agent, especially if you have them valued over $1,000. A homeowner’s policy has many options to increase these personal property coverage amounts.
Larger Homes and Other Special Risks
In some cases, the insurance company will have an appraiser come by and visit your property. This will provide a better valuation than relying on a database estimate alone. This is commonly done for homes larger than 5,000 square feet, for some commercial properties, or for structures with unusual characteristics, such as unique craftsmanship and materials, historic value, and other special considerations.
Know The Value Before a Catastrophe
Knowing the value is part of good financial planning and risk management. What you are doing is protecting what you have as well as the investment in your home. Shortchanging yourself only create problems when a claim occurs. The worst thing you can do is deal with value after a claim, because at that point, it is too late. That is why it’s best to address this now and let insurance serve its purpose and allow you to smoothly proceed with your life after a claim occurs.
Important tip: be sure to take a detailed home inventory before any disaster strikes. Take photographs and record serial numbers where applicable, particularly on high value personal property. There are a number of commercial websites that can help you with this process and will automatically store this information offsite, where these important records are not vulnerable to the same disaster that befalls your home and property.
Rob Macoviak is the President of Oyer, Macoviak and Associates. Oyer, Macoviak and Associates is the oldest independent insurance agency in Boynton Beach and has been in business since 1953.