Ensuring Adequate Coverage with Home Insurance Reviews: Your Home is Damaged or Destroyed by Fire, Do You Have Enough Insurance Coverage to Replace What You Currently Have?
If the question above gives you pause, stop reading, call your agent, and ask the same question. Now. They’ll love hearing from you. After all, disaster can occur at any time. Nationwide Insurance reports that two out of three homes are currently underinsured. The average underinsurance amount is 22%, but they report that some are 60% underinsured. That should scare the bejeebers out of anyone. If you’ve met with your agent within the last year and feel comfortable with your coverage; great, you can sleep well tonight. If it has been more than a year since you have last reviewed your policy and valuations, schedule an appointment, sooner rather than later. You may be at risk.
Lindstrom Restoration bases this recommendation on insurance industry periodical research, buzz from insurance agents, and our actual experience when we mitigate damage and do repairs and rebuilding. We can tell you that most insurance professionals are very frustrated when their clients put off or won’t schedule annual reviews. There are lots of reasons why customers don’t. Many are too busy. Others find the exercise unpleasant and dreary. Some fear that their rates will go up, or they will be upsold to more coverage resulting in higher premiums. As we will find out later in this article, “bury your head in the sand” Short-term thinking can cost you more in the long run. Don’t overlook the importance of regular home insurance reviews to ensure you have adequate coverage.
Lindstrom Restoration is not an insurance agency, nor are any of us licensed or qualified to give insurance advice, but we are a firsthand witness to what happens when a property is damaged or destroyed and restoration and repair/rebuild services are required. Increasingly, we are discovering that some homeowners are woefully underinsured when a wind, fire, or water damage event occurs. They either end up footing the additional expense themselves, or reducing the quality of the materials (countertops, flooring, fixtures, etc.) that go into the rebuild process.
There are many reasons for this. Time may have passed since their last insurance review, and inflation in the last couple of years has significantly increased the cost of labor and rebuilding materials. The Covid 19 pandemic created supply chain issues and has wrought havoc within the construction industry. Things have settled down significantly, but problems still persist.
Some homeowners make improvements, but don’t inform their insurance company. A client replaces their laminate countertop with granite, then upgrades their hollow core doors to solid wood. A bathroom remodel is done with upgraded fixtures and plumbing. New cherrywood floors are put in over cheap carpet. Clients refinish their basements and even put on their additions, but seldom think that their insurance coverage should keep pace with these new and much more expensive improvements. How’s the agent supposed to know if they aren’t told or there is no inspection? Guess what the policy covers when there is a major loss? Lindstrom estimators have seen several situations where homeowners must dig into their savings and cover the difference.
We observe that most agents request annual review meetings with their clients. A few don’t. On occasion, homeowners tell us that they never hear from their agents, or authorized representatives. Direct telemarketer insurers may send information by mail or email, or leave phone messages with clients, but a lot of people toss postal mailings and delete electronic communications without reading them. The result is, they risk being underinsured.
If you want to do things right, take our advice at the start of this article and set up a review with your agent. Their carriers have access to sophisticated valuation information and technology that assists them in determining the proper replacement value for your home.
According to Insurance.com, the replacement cost of your home is the cost to rebuild the entire house from the ground up, including any attached structures like a deck. This is the foundation of your home insurance policy. An HO-3 policy, which is the standard homeowner’s insurance policy, is a replacement cost insurance policy. The dwelling coverage on the policy is based on the replacement cost of your home, which is calculated to meet the actual cost of reconstruction at current prices. So obviously, if the coverage amount is lower than the cost to rebuild, your claim won’t pay enough money to cover the full cost of replacing your house.
Most insurers rely on third-party tools and software to arrive at home values factoring in such information as the type of construction, age of the home (some older homes have plasterwork and ornate, custom molding), and type of roof (asphalt, tile, cedar shake, or metal), as well as the quality of the building materials. Again, according to Insurance.com, since costs differ in parts of the country, the locality is also factored into the algorithms that eventually spit out the cost estimates. To keep up with these changes, home insurance reviews are vital.
A “Forbes” magazine article recommended asking your agent or carrier about inflation adjustment coverage, which automatically updates dwelling coverage at renewal time based on the current inflation rate. Inflation has been dropping for the last few months to a current rate of around 3% according to government statistics but was as high as 9% in June of last year. So, if you haven’t had an insurance review for a while it is paramount that you revisit today’s valuations to make sure you are properly covered.
Insurers rely on what they call the 80% Rule, which requires homeowners to have dwelling coverage of 80% or more of the replacement cost required to rebuild. One can see that continuing inflation as well as remodeling or upgrading can cause replacement costs to significantly increase. This may cause homeowners to slip under the required 80%. According to “Forbes,” the result will be that the insurer may not cover the entire cost of fixing your damage. Indeed, Lindstrom Restoration has seen several cases of this. The policyholders have been devastated. To avoid such devastating situations, consider a home insurance review to ensure you’re meeting the 80% Rule.
Ultimately, the solution is to stay on top of things and that means annual reviews with your agent. If you are very concerned about continuing economic chaos and want to make doubly sure your insurance coverage is adequate, Insurance.com advises hiring a home appraiser to make sure your coverage amounts are accurate and reflect the true costs of rebuilding. That, however, will be an out-of-pocket expense for you. Home insurance reviews with your local agent provide a more accessible and proactive approach to staying adequately covered
Homeowners should be aware of the difference between replacement cost value and market value. Market value is what your home is really worth on the real estate market. That can sometimes be more than the replacement cost of the structure. Replacement cost doesn’t factor in such neighborhood elements as corner lots, wooded areas, lakes, school districts, and desired locales that have amenities that appeal to more people. Lindstrom Restoration has also seen instances where a house has a lesser market value than replacement cost due to some negative factor about the locale. It could be the home was very poorly maintained and a mess inside. The home may have mold resulting from a major water loss or some continual leaking. It could be a crime-ridden neighborhood.
Insurance agents can provide great help in ensuring that your home is adequately protected from what life and Mother Nature throw our way. But in the end, it is the homeowner’s responsibility to actively monitor their own coverage and outside economic conditions so that adequate coverage is there for replacement costs. That means annual reviews and responding to insurance company requests. Failure to do so may result in unplanned, out-of-pocket expenses. When you embark on home improvements, make sure you document what you did with your agent, and maintain records of expenses incurred in the process. That will make the loss settlement process go much smoother. But let’s hope you stay loss free!
In the event that bad things come your way, call Lindstrom Restoration for any storm, fire, or water damage losses. We’ll respond 24/7/365 to your issue. We’re always ready.