So far, the hurricanes that have blasted Florida and the Gulf Coast this year have largely spared the Washington area. But they can -- and have -- happened here.
And, as everyone knows, hurricanes are not the only kind of disaster that can strike.
So, now is a good time for homeowners to review their insurance to make sure they understand what is and is not covered, how much the coverage is, and what they themselves would be expected to pay as a deductible -- or as insurers like to call it, homeowners' "share" of the risk.
Homeowners insurance has grown increasingly complex over the years as disasters have become more frequent and more expensive. Insurers, insureds and regulators have been bobbing and weaving, with homeowners trying to get as much from their policies as they can, insurers trying to keep from insuring too much risk, and regulators trying to keep coverage affordable without having carriers leave their state.
The result is now a patchwork of deductibles, exclusions and murky terminology that can hold nasty surprises for homeowners when disaster does strike.
The first thing a homeowner should be clear on is how much of the house the policy will pay to replace. Although a speaker of English might think "replacement" means what it says, in an insurance policy it usually doesn't.
A policy that will pay to build your house back as it was, regardless of the cost, is called a "guaranteed replacement" contract. These were once common, but are now increasingly rare -- and expensive. Instead, insurers now offer "extended replacement," which means that the policy will pay to rebuild or repair your house up to the limits of the policy. So if you have one of these contracts with a policy limit of, say, $200,000, and the work turns out to cost $300,000, the extra $100,000 is on you.
Many policies build in a cushion of 20 percent or so to account for the spike in construction costs that typically accompanies a widespread disaster like the Florida hurricanes. Also, carriers typically offer inflation clauses that boost the limit as time passes, but in most parts of the country construction costs outrun general inflation. Some insurers offer a provision that is indexed to construction costs, but that costs more.
Still, "underinsurance is a really big problem," said Carolyn Gorman of the Insurance Information Institute, an industry group here.
She recommended that homeowners confer with their insurance agents every year or so about their policy limits and provisions. She also said owners should tell their agents immediately if they have done major renovations or put on additions.
Owners of older homes should raise the question of whether their houses are up to current building codes, and whether they need additional "ordinance or law" coverage to pay for upgrades that would be legally required in a reconstruction.
In fact, some insurers are sending out inspectors to look at houses they cover. Carriers say their goal is to get a handle on the extent of underinsurance, as well as to spot perils that should be dealt with. In some cases, carriers will threaten to cancel or "non-renew" a policy if the owner doesn't follow through on such repairs.
Lenders, who usually require that borrowers carry adequate insurance, have also become concerned, and are stepping up their own inspections, said Madelyn Flannagan, vice president of education and research at the Independent Insurance Agents and Brokers of America. She said this is particularly true in areas such as Washington where prices and costs have been soaring. To be extra safe, an owner can also have his or her own assessment done by an appraiser or contractor to make sure that coverage matches what the reconstruction cost would be.
The next question is whether a disaster would be covered at all.
All catastrophes are not alike in the eyes of insurers. Fire is generally covered, but flood is not. In fact, private carriers don't sell flood insurance; you have to get that from the federal government through the National Flood Insurance Program. Terrorism is generally covered, but acts of war are not. But with terrorism there can be twists -- if your house is blown up by a terrorist, it probably would be covered; but if it is washed away because a terrorist blew up a nearby dam, it wouldn't be unless you had federal flood insurance.
Wind and hail are generally covered, but in many places insurers won't write a policy in the first place. In much of Florida, for example, owners can find coverage only through a state-run insurer. In coastal areas of other states, state-organized "pools" are the only insurance available for wind damage. Maryland is considering such an arrangement for the Eastern Shore, where regular coverage is disappearing.
Earthquakes are not covered by standard policies, but add-on coverage is offered by private carriers, at least in places where earthquakes aren't likely. In California, most coverage is written through a state fund.
Finally, homeowners should understand their deductibles. Broadly speaking, this is the amount of the damage the owner must pay for before the insurance kicks in. Deductibles can be in the hundreds or thousands of dollars, and generally the higher the deductible, the lower the policy premium.
But increasingly there are special premiums for special perils, such as hurricanes in Florida. These premiums are often a percentage of the insured value of the house, meaning that if the deductible is, say, 2 percent, and the house is insured for $100,000, the owner would have to pay the first $2,000 of the repair costs.
Florida allowed such deductibles to keep insurers in the state after Hurricane Andrew in 1992, but after Charley and Frances officials are wondering if they were too generous to the insurers, especially since insurers are imposing separate deductibles for each hurricane.
To try to cover all bases, homeowners should sit down with their insurance agents and basically work through a series of questions along the lines of, If my house burns down, will I be covered? What is the maximum the policy will pay? What would I have to pay? Then repeat, substituting, If my house blows away, washes away, is leveled by an earthquake, blown up by terrorists, or suffers any other disaster you can think of.
Flannagan noted that a lot of homeowners pay their insurance bills as part of their mortgage payments, which may put insurance out of mind as well as out of sight. She suggested that such owners pick a regular time each year to go over their coverage.
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