Do You Know Precisely What Your Auto and Homeowners' Insurance Cover? You Should
Ellen Kinsella
Dec 1, 1997
If a tree falls into your living room, will your insurer hear your pleas for money?
Chances are, unless you're an insurance agent or have had such an unfortunate incident recently, you don't know what the answer is, because you don't have much idea what your homeowners policy covers.
The same goes for your auto insurance. What does it cover? What doesn't it cover? You have little idea, right? But if a family member needs extensive medical care after an accident, the last thing you want to find out is that your policy's coverage for bodily injury doesn't go far enough.
Though sitting down to pore over an insurance policy isn't high on anybody's list of ways to spend an evening, it is just plain good sense to review your home and auto coverage periodically. The time and effort you invest not only can help you make certain you have proper coverage but also may allow you to trim your premium costs.
Your Home
Protecting you from the cost of damage to your home from falling trees, fire and other perils is the job of a homeowners policy. When buying a policy, insurance experts say, the most important feature to have is "replacement-cost" coverage -- coverage that would pay to rebuild your house if it were completely destroyed.
Your insurance agent will calculate the current replacement cost for your type of house. But arriving at an accurate figure means knowing what not to factor in -- namely, the value of the land on which your home is built. Be sure you don't wind up paying higher premiums just to be overinsured.
"A lot of people get confused between replacement value and market value, which tends to fluctuate more," says Bryan Freeman, assistant vice president of fire and casualty underwriting at State Farm Insurance Cos. in Bloomington, Ill. "If your home is in a high-priced subdivision of town, the land value may far exceed the replacement cost."
If you already have a replacement-cost policy, check to see that it automatically adjusts coverage to reflect rising construction costs in your area. If not, an inflation-guard clause can be added, usually for just a few dollars more a year.
Major renovations or improvements made to a house are a common source of replacement-cost increases. "If your coverage is for $150,000 and you add on a $30,000 extension, now your replacement cost is $180,000," says Paul Pinchak, vice president of underwriting for Prudential Property & Casualty in Newark, N.J. "That is what you should be insured for." So be sure to update your policy as you update your home.
Even replacement-cost coverage might not be enough in extreme circumstances. In the aftermath of Hurricane Andrew in 1992, the cost of many building supplies shot up due to shortages. Many homeowners insured for the full value of their houses still wound up short of the amount actually needed to rebuild.
One way for consumers to protect against the resulting gaps in coverage is to purchase a "guaranteed replacement cost" policy, which will pay whatever it costs to rebuild, even if it exceeds the appraised value of the home. Though some companies have cut back on such coverage, citing prohibitive costs, it may be worth seeking out, especially if you live in a high-risk area.
As an alternative, some insurers will sell an expanded policy under which coverage can exceed the value of the home by a specified amount -- say, 25% more than replacement costs.
Your Possessions
Homeowner's policies also provide coverage for the things you have in your house. (Renters, who don't have to worry about protecting the building in which they live, can purchase special policies that will protect their belongings.)
Insurers recommend taking an inventory, complete with a video camera and narration by you, walking from room to room, noting major possessions like furniture, appliances, and electronic equipment such as stereos and computers.
"State everything in as much detail as possible, including serial numbers," recommends Jeanne Salvatore, director of consumer affairs for the Insurance Information Institute, a trade group based in New York. "Also get in the habit of saving receipts. Certainly, the better you can substantiate your loss, the easier the claim process will be."
After you have taken inventory, you should figure out a rough estimate of the value of your possessions and compare it with the limit on coverage for personal property in your policy.
For homeowners, the limit in a policy generally will be about 50% of the insurance on the dwelling (though some policies go as high as 75%). So if your house is insured for $220,000, the limit of your contents coverage will usually be $110,000. If such a limit seems inadequate based on your own estimate, it's a good idea to talk to your insurance agent about bridging the gap.
Standard policies also place limits on the amount they will pay for such individual items as jewelry and antiques. If the diamond tennis bracelet you received for Valentine's Day is worth $10,000, you will probably need to purchase separate insurance known as a "floater" to provide increased coverage.
"One of the biggest mistakes people make is being underinsured, simply because they don't take the time or have the knowledge to come up with true replacement costs for fine art, fur, jewelry and other valuables," says Scott Garfield, national sales manager for the personal-insurance division of Chubb Group of Insurance Cos. in Warren, N.J.
And remember to have valuables reappraised periodically. A diamond ring appraised 20 years ago may have a higher value today due to inflation, in which case you may want to increase coverage. But a fur coat may be worth less today due to wear and tear, and you could reduce the amount of insurance.
"What you're doing is assuring the appraised value, and paying the premium based on that," says Ms. Salvatore.
Your Car
Auto insurance involves a package of different types of coverage that provides financial protection for your car, yourself and other individuals in a variety of circumstances.
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