Homeowner’s insurance is under-going major changes. You can’t take for granted important details about your homeowner’s insurance policy, and you can expect premium increases soon and probably over the next few years. The good news is you could receive a much higher level of service at little additional cost.
Insurers are under a lot of pressure from recent events. The Federal Reserve has kept interest rates near zero since 2008 and plans to continue that policy until at least mid-2013. There’s also been a cluster of disasters resulting in a record $105 billion in insured global losses, with about $25 million of those in the U.S. The result is lower earnings and higher payouts for insurers.
Major insurers State Farm, Allstate and Travelers are raising rates. State regulators approved about 1,500 requests for HO rate increases in 2011. If your insurer hasn’t informed you of an upcoming premium increase, the news likely is on the way.
You might not be able to switch insurers. Insurers are expanding the areas they consider high risk, and they’re refusing to cover some homes. Homes with roofs older than 10 years, for example, are being denied coverage in some areas.
In addition, you can’t count on your policy covering what you always thought it covered. Traditionally insurers routinely drafted their policies to copy model policies developed by the Insurance Services Office (ISO), which is funded by insurers.
Insurers now are more likely to draft provisions that differ from the ISO terms, and the differences can be radical, according to a study to be published by a University of Minnesota law professor. Daniel Schwarcz compared policies from the top 10-selling insurance groups in six states to ISO forms. Many insurers have variations, and they often don’t spell out to you exactly how their provisions differ from the standard ones. The difference often is the addition of a few adjectives that limit or potentially limit coverage.
Here are some major variances Schwarcz found:
? A standard policy will pay up to $1,000 for each item damaged by a sudden electric current. But some insurers pay $1,000 in aggregate damages for all items damaged in each incident.
Some policies provide coverage for mold and lead, while others don’t. Some insurers specifically exclude damage from mold.
? The standard policy covers ?risk of direct physical loss to property.? Some policies insure ?risk of accidental direct physical loss to property? and others ?risk of sudden and accidental direct physical loss.? Can you see the difference?
Here’s an example. A homeowner discovered water damage resulting from moisture between the home’s outer wall and a stucco exterior covering it. The stucco was improperly installed. The insurer denied the claim, and a court agreed, concluding that the damage did not result from either a sudden event or an accident. It had built up over time and was caused by the builder’s negligence.
? Some policies won’t coverage damage when the policyholder’s negligence caused or contributed to the loss. A classic example is when a tree falls on a house. The insurer will decline to pay the damages when it believes the insured know or should have known the tree was a problem and didn’t remove it. If it chooses, an insurer can aggressively deny coverage because the insured ?should have known? of the risk and failed to take action.
? Many people don’t realize the difference between market value and replacement cost of a home. While home prices declined since 2005 or so, construction costs for the most part stayed the same or increased.
An HO policy covers the cost of rebuilding up to the maximum amount named in your policy. If you used market value as the guideline for your coverage limit, you could be underinsured, because he cost of rebuilding probably is more than market value. Some insurers provide a cushion by covering up to 50% more than the replacement value in the policy.
Not all of the variations from ISO standards are unfavorable to policyholders. Some insurers are more generous in their coverage of personal liability, mold, and other events. You should know about these as well so that you won’t buy duplicate coverage.
Insurers say that the changes shouldn’t be viewed as new limits in coverage. Instead, insurers say the new terms are what they always believed the policy terms were and are the basis for setting their premiums. But some court decisions interpreted the policies differently, so the insurers reworked the language.
Schwarcz’s goal is for state insurance departments, which approve all policies sold in their states, to post the actual language of each policy or at least the top 10 sellers on their web sites. That way the policies more easily can be compared before purchases. In addition, consumer groups or financial advisors seeking to build reputations can compare the policies and issue reports to consumers. If you agree, contact your state representatives to get the process moving.
Not all news on the homeowner’s insurance front is negative. Several insurers provide additional services that can prevent damages and make things easier after damages are suffered. The services are targeted at high-end and second homes.
A traditional policy pays to replace damaged items with a like- or equal-kind, which gives the insurer some flexibility when deciding how much to pay for luxury or custom items. But some policies agree to replace items exactly.
Some high-end insurers also offer prevention services such as monitoring unoccupied second and third homes either physically or through electronics. When an area experiences a widespread catastrophe, the insurers will send adjusters and appraisers into the area to assess damage and limit further damages instead of waiting for the insureds to travel to the homes and file claims. Some will store undamaged goods, extract water from a home, install tarps and other protection, and estimate repair and replacement cost. To receive such high-end coverage, consider policies from Chubb, Chartis, Fireman’s Fund, and Ace Private Risk Services.
In addition to understanding policy terms, there are two other ways to maximize the coverage for your premium dollar and avoid being surprised by uncovered losses.
Be sure the inventory and values of your ?scheduled items? are up to date. These are items that aren’t covered by the basic policy but are covered when you itemize them in a separate schedule, such as some electronics, jewelry, gold, furs, collectibles, and art. Because prices of these items have been so volatile, you need to check the valuations in the schedule. If you haven’t updated the valuations for a few years, you’ll find some items are dramatically undervalued and therefore undercovered.
Also, consider increasing your deductible. This often is required for the high-end policies but also can be a cost-saver for others. Insurers estimate that there’s typically 11 years between claims under a policy. Suppose the deductible on a policy is increased from $500 to $2,500. According to Ace, this reduces the insurance on a million dollar home by $900 annually. The higher deductible saves $9,900 over 11 years. That’s far more than the $2,000 increase in the deductible that must be paid by the insured when a claim is filed. So, unless a proper suffers a lot of claims, raising the deductible should be a long-term money saver.
RW February 2012