Stormy Times for Home Insurance

Wes Danskin is going to Florida to lend a helping hand. He doesn't know much about hurricanes, but in the past year he's become an expert on homeowners insurance and how most people don't have enough of it.

When a California wildfire raged through his northern San Diego community on Oct. 26 destroying 312 homes, Danskin remembers that he and some of his homeless neighbors shared one small consolation.

"A lot of people thought they were well-insured the day of the fire," says Danskin, a government hydrologist. He lived in a 2,100-square-foot home with his partner Linda Scott and their three teenagers in the Scripps Ranch neighborhood, where homes are valued at $600,000 and up. Some fire victims even turned away offers of merchant gifts or discounts and asked that they be given to the less fortunate in other fire-struck communities.

"Then reality set in," recalls Danskin.

The reality? Even in a neighborhood of middle- and upper-middle-class residents who dutifully protect their biggest assets -- their homes -- with insurance, the vast majority were not adequately insured against catastrophic loss. Danskin, a community leader who personally talked with 200 of the burned-out homeowners seeking to rebuild, estimates that 90% are underinsured as much as $50,000 to $200,000. At least 100 are suing their insurers, he says.

As part of his negotiated settlement with his insurer, Danskin is not allowed to say what he is receiving to rebuild his home. But he will say this: "The insurance was far more stressful than the fire for me."

The insurance industry itself agrees that underinsurance is a problem, as it braces for billions of dollars in claims from hurricanes Charley, Frances and Ivan.

"This is a problem we see everywhere," says Pete Moraga, spokesman for the Insurance Industry Network of California, a nonprofit, nonlobbying media-relations group for the property-casualty insurance industry. Public interest in the subject "surges after a catastrophe."

(Although the hurricanes are a wake-up call to homeowners throughout the country, Florida is a special case because of state laws that limit insurers' liabilities due to hurricanes. For homeowner tips on dealing with insurance claims, see below.)

Homeowner Insurance Do's and Don'ts Are you adequately insured against a major loss?
Remember you are insuring the cost to rebuild your home, not its market price, which includes the land. The cost to rebuild is a reflection of the size and type of the house and local building costs. If there's a building boom, chances are that materials and costs have been going up faster than inflation. Your policy might not reflect that, if you have lived in your home for more than a few years. Consider adding an "inflation guard" clause to your policy. Read your annual policy. "It's not the sexiest reading," admits Pete Moraga, spokesman for the Insurance Information Network of California, a non-profit group, but it's an essential starting point.

A 2003 building cost survey found that nearly two-thirds of U.S. homes were underinsured by an average of 27%.

The studies were done by Marshall & Swift/Boeckh, a division of the British Columbia company MacDonald, Dettwiler and Associates, which provides building-cost information software to the insurance industry and has been tracking valuation vs. policy limits since the early 1990s.

Why aren't more homeowners fully insured? The reasons are many.

One that has gone unnoticed by many homeowners is a change in the type of coverage now offered by most insurance companies to limit corporate losses from major disasters.

Rather than provide what is known as a "guaranteed replacement policy," in the late 1990s insurers began substituting something called an "extended replacement policy." They sound similar, but the first essentially guarantees replacement of a destroyed home, while the second pays the amount stated on the policy (Part A), plus an additional 20% to 25%.

Insurers say it is now up to homeowners to follow up on their annual policy notices to make sure they have enough coverage to replace their homes. "We can't force people to update their policies," says Moraga.

He notes that many people don't know what kind of policy they have and have never read it. The cost to replace a home varies from city to city, neighborhood to neighborhood. "Ultimately, the choice and the responsibility is the consumer's," he says.

While insurance policies tend to go up a bit every year, that doesn't mean the policy is keeping up with the 6% to 8% annual increase in construction costs due to the nation's building boom of the past several years.

Talk to your insurance agent and ask for an explanation of anything you don't understand. Ask how your insurer arrived at the amount of coverage to replace your home - typically Part A on your declarations page. It can be critical, not just to rebuilding your home. It is also the basis for other numbers - such as loss of use while your home is rebuilt, compensation for personal property and separate structures on the property. Don't settle for your insurer's quick estimate; many insurers use software to determine rebuilding costs. Ask to sit down and go through the most detailed software version that best describes your house, the style, the roof, floors, countertops and upgrades. If you are still uncertain, hire an independent contractor for several hundred dollars to give you a formal estimate of the cost to rebuild your home. Then ask your insurance company to cover you for that amount.