10 Things You Need to Know About Homeowner's Insurance

Story corrected, as Travelers and Chubb distribute their products and services through independent insurance agents.

NEW YORK ( TheStreet) -- During this time of fear over the U.S. and world economies, homeowner's insurance may not be at the top of your agenda, but you can get creamed if you don't at least learn the basics.

Although many of the items discussed below are of prime importance to home buyers, most apply to anyone who already owns a home, and the bottom line is that it pays to have a detailed discussion with your insurance agent once in a while, to identify ways to save money that you haven't considered. It also pays to speak to other agents, who might offer less expensive coverage from other carriers.

For first-time home buyers, especially in certain areas prone to floods, earthquakes or hurricanes, it's very important to get a handle on homeowner's insurance before you even place a bid on a house, or you could be in for a very nasty surprise one or two years down the road.

Depending on how long the previous owner has owned the home, he or she may be paying a much lower insurance premium than you will face as the new buyer. There are a variety of reasons for this, as we discuss.

The local scene is also of prime importance, especially if you are moving to a new area. Local building codes and proximity to water also factor heavily in insurance premiums.

Read on for 10 important things you need to know to save money on homeowner's insurance.

1. Research insurance premiums before placing a bid on a home.

If you move from the Northeast to a state around the Gulf Coast, for example, your insurance costs can increase several times over.

Don't rely on your real estate agent for an estimate of what it will cost to insure the house you wish to buy. The previous owner's insurance premium may have no relation to the premium you will have to pay.

For one thing, insurers are trying to pull out of some states, and may be unwilling to provide a policy for the next owner of a house. That means you will be paying more than the previous owner.

An insurer may also be providing a large discount to the current owner of the home, based on a long term customer relationship. You won't be getting that discount.

Talk to more than one insurance agent, providing as much information as possible about the home's location, age, construction and maintenance as possible.

2. Make sure the policy covers actual replacement cost.

Check with an insurance agent before placing a bid on a home. If you decide to move forward and apply for a mortgage, the lender will require proof of insurance, and prefer that your taxes and insurance be escrowed, meaning that the loan servicer will collect money from you each month, along with your loan payment, and pay your annual insurance premium for you, as well as your property taxes.

The lender will probably require that the homeowner's insurance policy cover the amount of the loan, however, in this down real estate market, there's a good chance that the loan amount would be less than the actual replacement cost for the home.

Wayne Cox, of Cox Insurance Agency in Fort Pierce, Fla., told TheStreet that home buyers should "be sure to ask for replacement cost coverage, for the structure and the contents of the home, because a lot of cheaper policies only cover the actual cash value of the structure."

In order to avoid being over-insured, "don't insure the land, just insure the replacement cost of the home and the contents," says Cox, who adds that "you may need to argue the point with the mortgage underwriter."

3. Look into building codes and save money.

Depending on where the home is located, its construction can cut your insurance premium in half. In Florida for example, a cement-block home will certainly cost less to insure than a wood frame house in the same area. And you'll avoid replacing wood over the years, and termites and carpenter ants will be less likely to visit.

The age of the roof of house is also a very important item to consider, and in certain areas, you can get large discounts if the home is inspected for wind-damage mitigation or for adherence to the newest earthquake mitigation standards.

Speaking of location, being close to a fire hydrant or firehouse is also an important factor that insurance carriers consider when setting rates.

4. Consider flood insurance

Homeowner's insurance policies cover water damage if the water comes in through your roof, but not damage from rising water. If you take out a mortgage loan to buy your home, the lender or loan servicer will require you to have a special flood insurance policy if the home is determined by FEMA to be in a special flood hazard area.

If your home isn't in a special flood hazard area but is in an area that could be prone to floods, you might consider getting a relatively inexpensive flood policy.

5. Don't forget windstorm or earthquake coverage

In certain areas prone to hurricanes or earthquakes, these hazards aren't covered by regular homeowner's insurance policies. While lenders in Florida and California will require a mortgage borrowers to obtain additional insurance policies to cover these hazards, homebuyers who don't take out mortgages might be making a big mistake if they overlook the special hazard coverage.

It's also very important to consider the actual location of the home. In Florida, for example, if your home is close to the coast, wind coverage --and homeowner's coverage for that matter -- could be prohibitively expensive.

6. Know your loan servicer.

What many mortgage borrowers don't know is that the lender, or loan servicer, is likely to be the loss payee in the event of a claim. An astute loan servicer will make sure their name appears on the policy, so that in the event of a claim, the check goes to them, and not to you.

Some servicers will simply mail you a check if the claim is below a certain amount, but for large claims, in order to make sure the repairs are actually made, the servicer will dole out the money as the work is done.

This is one reason that it pays to know your loan servicer. Ask your mortgage lender who will actually be servicing the loan after it is made. The lender may service the loan themselves, or transfer the servicing to another company immediately, or at any time, for that matter.

If your mortgage is escrowed for taxes and insurance, as is likely for most borrowers, the servicer is responsible to pay your annual insurance premiums and taxes, adding a monthly escrow portion to your loan payment.

It is very important for you to make sure the servicer pays your mortgage premium on time. If they don't, and your policy is cancelled, a replacement policy may not be available from the same carrier, and a new policy from that carrier or from a competitor, may be much more expensive. Yes, through no fault of your own, you could be stuck with a much larger premium, although some states have laws protecting consumers in this scenario.

Another danger for a borrower is the timing of the loan servicer's annual escrow analysis. If your insurance premium or property taxes have increased, the servicer will increase our monthly escrow payment to make up for the shortfall.

Sounds simple, right? Well, depending on the timing of the analysis, you may be making up one year's shortfall, while also facing an increase for the following year. If your premium, for example, goes up by $1,200 -- which is quite possible in some areas of the country -- you might expect a $100 increase in your monthly escrow payment, but since the servicer needs to make up the previous year's shortfall, your loan payment will go up by $200 during the first year after the premium increase, all things being equal.

If you're facing mortgage escrow nightmare, call the loan servicer to see if there are alternate payment plans for making up a shortage.

7. Consider a higher deductible.

It's typical for a homeowner's insurance policy to have a $1,000 deductible. Raising the deductible to, say, $2,500 can save you hundreds on your annual premium. Besides, you don't want to place a relatively small claim anyway, because it could cause your premium to increase.

A small claim would also jeopardize any premium discount you're already receiving Many insurers also provided a discount for policyholders who don't place claims.

8. Shop Around

The largest homeowner's insurance providers are familiar names, including State Farm, Allstate ( ALL), Nationwide, and these carriers may be competitive in our area, however, their agents may only offer one particular carrier's coverage. You should also shop around with an independent agent or two, to see what is available from smaller carriers.

Travelers ( TRV) and Chubb ( CB) work through independent insurance agents.

In some states, such as Florida, the larger carriers are shying away from certain areas to avoid exposure to special hazards. It's possible to find a bargain among the niche players.

9. Check ratings

A smaller insurance carrier might be solidly capitalized and well-prepared for a flurry of payouts when disaster strikes. Then again, it might not.

TheStreet's Insurance Ratings Screener contains financial strength ratings for insurance carriers provided by Weiss Ratings, which generates the ratings using very conservative criteria, based on statutory filings. Unlike some competing ratings agencies, Weiss doesn't get compensated by the companies they cover.

Gavin Magor, senior financial analyst with Weiss says "one category 5 hurricane can wipe-out a large number of Florida insurers." Magor added that "on the back of the worst tornado season in at least 50 years, home insurers are praying the hurricane season is kind to them."

10. Place your claim as quickly as possible.

Many carriers have 24-hour claims service. If you are in the middle of a tropical storm and see water dripping in from the ceiling, pick up the phone and place a claim with your insurance carrier immediately. Since you'll need to get in line after an area-wide disaster and possibly wait months for a claims adjuster to visit, you might as well jump to the front of the line.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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To submit a news tip, send an email to: tips@thestreet.com.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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