Homeowner Insurance May Require Updating : Many Policies Have Not Kept Up With Rise in Property Values, Improvements, Additions

When was the last time you gave your homeowners’ insurance policy a checkup?

If it’s been more than two years since you reviewed your protection, you could be woefully underinsured--or paying way too much for coverage you don’t need.

“Too many people take out an insurance policy and then forget all about it,” says Bob Hunter, president of the National Insurance Consumers Union in Alexandria, Va. “Those are the people who don’t have enough protection or are paying more than they need to.”

Unfortunately, Hunter says, many homeowners assume that their policies’ built-in “coverage escalators” are providing them with adequate increases in their insurance protection.

Insurers say thatmore than 90% of all policies have such escalators, which automatically increase coverage--and premiums--each year based on changes that affect construction costs.

Proper Coverage Level

Relying on these escalators, however, can be risky. First, they assume that your initial policy provided the proper amount of coverage. But if the original policy was inadequate, automatic annual increases might not be enough to bring your coverage up to a safe level.

In addition, the annual adjustments sometime bear little resemblance to what’s really happening to values and construction costs in a given area. Some insurers, for example, calculate changes and use ZIP codes to determine how large an adjustment should be made.

But since the quality and price appreciation in various neighborhoods of a particular ZIP code vary, the adjustment may be too small or too large to accurately reflect the replacement cost of a particular property.

Even wider disparities can result when insurance companies determine annual increases based on larger geographic regions, and them lump the data in with neighboring states.

Homeowners who are leery of their insurer’s adjustment can hire a professional to appraise the property and estimate the home’s replacement cost. However, the owner, not the insurance company, will have to pay the $150 to $250 most appraisers charge.

A better alternative may be to request a 5% to 10% annual increase in coverage. The increase in the premium will be nominal, but the added coverage will prevent you from being underinsured in case your home is destroyed.

A large portion of the people who are currently underinsured bought their homes or moved into an apartment within the last few years. Many purchased minimal coverage because their new mortgage or rental payments strained their budgets and their personal possessions weren’t worth much.

They eventually began improving their homes or buying new furniture and other big-ticket items, but they’ve forgotten to increase their coverage.

Even long-time homeowners who have plenty of spare cash can be underinsured, especially if they have added rooms or performed major renovation jobs.

Additions, Improvements

“Some people build new rooms or decks or convert their garage, but they don’t consider how those improvements increase the replacement cost of the dwelling,” says Bob Szymanski, an executive for Chicago-based insurance and financial services giant Kemper Group.

If disaster strikes and coverage has never been increased, he says, “you’re in big trouble” because you may not be able to recover your entire loss.

But while major additions will raise the cost of your homeowners’ insurance, some improvements can reduce your premiums. For example, homeowners who have overhauled an older home’s electrical, heating, cooling or plumbing system often qualify for premium reductions.

Many insurers also offer discounts if your home has smoke detectors or burglar alarms. Kemper, for example, offers a 2% discount if you have a smoke detector or alarm that sounds in your home; a 5% discount if they are wired to the local police or fire department, and a 10% discount if they are plugged into a private security service.

Discounts Offered

A fire sprinkler system can reduce premiums by more than 10%, depending on which insurance company you use.

Some insurers also offer discounts when one of a household’s policyholders turn 60 or 65. Those insurers assume that the older homeowner will be home more often, which reduces the chance of burglaries and fires.

“If you’ve already made those kind of changes, you ought to call your insurance company and see if you can reduce your premiums,” Howard says.

Of course, you can also lower your premiums by requesting a larger deductible amount.

You might even be able to reduce your insurance costs by contacting your lender and insurance agent. All lenders require insurance on homes they finance, so borrowers tend to get a policy that reflects the price they actually paid for their property.

However, some homeowners don’t realize that their lender may only require them to have structural insurance; the land itself doesn’t have to be insured because dirt is virtually indestructible.

Premium Dropped

The premiums paid by one Los Angeles couple recently dropped about $65 a year when--after getting approval from their lender--they changed their policy so it no longer covers the value of the ground underneath their home.

If the coverage on your personal possessions is inadequate, it’s easy to arrange a “floater” for additional protection.

“People don’t realize how much they spend on jewelry, dinnerware, furs or guns,” says Jennifer Nicholson, a spokeswoman for the Santa Ana-based Western Insurance Information Service. “And a lot of people have inherited valuables, like coin collections or antiques, but forgot to insure them.”

Nicholson says policyholders should review their documents at least once every two years. A detailed list of personal possessions should be made out and, if serial numbers are available, they should be jotted down.

A duplicate list should be kept in a safe-deposit box at a bank or elsewhere to prevent it from being stolen or destroyed.

Also, take a hard look at your liability coverage. Although most current policyholders have $100,000 in liability protection, some agents now recommend at least $300,000 because lawsuits are proliferating and jury awards are soaring. The added protection can cost as little as $25 a year.

Experts are divided over whether you should purchase earthquake insurance. Those who favor such coverage point out that standard insurance policies won’t cover your losses if your home or personal possessions are damaged or destroyed by a temblor.

Skeptics, however, say some insurers might be unable to pay the millions of dollars in claims that would result if a major quake should strike a densely populated area. Critics also point out that earthquake protection is unusually expensive, typically ranging from $1.50 to $3 per $1,000 of coverage.

So far, the skeptics seem to be winning: Less than 20% of all California homeowners have earthquake protection, according to the state’s Department of Insurance.