RUNAWAY REAL estate values are a mixed blessing. What a feeling to know you can sell your house for five times what you paid for it a few years ago. But, meantime, what do you do about insurance and taxes?
Taxes are easy. You pay them or you lose the house. Insurance is something else. How much could you come up with if your roof caves in tonight? If this sounds as absurd as a big bad wolf huffing and puffing and blowing it down, consider the fact that the insurance industry pays out well over $4 billion in property claims each year. Granted, only 1 percent or so of these are for total losses, but even a partial loss could wipe out all chance for a happily-even-after ending.
If your house isn't insured for at least 80 percent of what it would cost to rebuilt it, your insurer may come through with only half the repair bill and, legally, you don't have a quarrel.
It can pay you well to review your policy carefully each year at renewal time.
Some insurers enclose, with the renewal notice, a "handy form" to help you review your policy. New bathrooms or kitchens obviously raise the property value. But how fancy is the style? How high is the quality of materials, the quality of construction? What's the square footage? How many room? Are your floors plywood or parquet? Insurers run your answers through a computer and can, they claim, come up with a figure that's within 5 percent of what it would cost to replace your house, parquet by parquet and brick by brick.
Don't shade the truth in hopes of keeping your premium low. Your custom-made bath with bidet, jacuzzi and double-sinked Italian marble vanity may rise the value more than you'd like your insurer (or your tax accessor) to know, but the safety wiring your electrician added may modify the increase. Also, if you fib a little on the low side you may have to pay for your sin later. Try to collect when that once-mighty oak you can't bear to remove crashes through your window and splits your one-of-a-kind sink beyond recognition. The inspector won't believe you. Even if he does you're out of luck.
If you aren't insured for at least 80 percent of the cost of replacing not just that marble marvel but your entire house with "like, similar or comparable materials," the company will pay you on an "actual cash value" basis. This is a phrase insurance pundits love to discuss and define but which comes down to an amount that will buy you a sink on sale at Hechinger's.
"Actual cash value" assumes your property constantly depreciates. Exactly how much depends on the item in question. When the current value is established you get a percentage which varies company by company and policy by policy. It gets sticky when you and the insurance adjuster disagrees.
By insuring your home for 80 percent of replacement cost you know you'll be compensated 100 percent (minus any deductible) for a partial loss. In this case you'd get enough to restore your bathroom to its original condition. Of course, if the tree knocks down your house, you'll only get 80 percent of what it costs to erect a new one.
You're probably safe with 80 percent coverage. Some lenders require 100 percent replacement coverage on new homes, since the loss would be theirs as well as yours. VA and FHA loans are insistent on this point.
Insuring for replacement cost is more expensive than insuring for actual cash value. But the price difference is not that great, considering how much more soundly you'll be able to sleep. Shopping around pays off. One company's price for insuring your house of 80 percent for replacement cost may be no greater than another company's price for 60 percent.
Besides figuring how much it would cost to replace your house, consider the "risk" and "perils" you'll insure against. You decision will affect your premium. Since the mid-'50s, when insurers began combining fire and windstorm, burglary and theft, glass and a variety of other coverages to form one "Homeowners" package, the industry had developed a layered system to accommodate the various exigencies of the economy and the times.
The Insurance Services Office (ISO), a membership organization of insurance companies, has an alpha-numerica system of forms most companies either imitate or follow, however rigidly or loosely. The forms stretch from HO-1 to HO-8, "HO" meaning Homeowners. Forms HO-4 and -6 are for renters and condominium owners, respectively. HO-8 is a special clause for buildings that would cost more to replace than they're worth on the market. The industry had the good taste to skip the lucky number 7.
It's the choice among HO-1, -2, -3 and -5 (basic, broad, special and comprehensive) that concerns most homeowners. Consider the risk of rain coming through your door, windows or a bad roof. According to the ISO forms, HO-1 and -2 won't pay for any water damage. HO-3 will pay for damage to your house but not its contents. HO-5 will pay for everything, which is one reason why the HO-5 is so expensive.
Even with its generous provisions, you'll be out of luck if you don't have enough of the HO-5 to meet the 80 percent requirement. Very few agents write HO-5 because it's so expensive, and very few write HO-1 because its provisions are so limited. Most popular are the HO-2 and HO-3. An HO-3 policy costs about 20 percent more than an HO-2. Some companies have only a 5 percent difference.
Read each company's various HO provisions carefully, and read them every year because they change. One of the popular recent changes (popular with insurers, not homeowners) is the new restriction of theft. If you live in the District or in Maryland, and want to insure your silver for more than the standard $1,000, you'll have to pay extra. The standard in Virginia is $500.
All this makes a good insurance policy sound terribly expensive. It doesn't have to be. If you, for instance, live in an "average" $60,000 brick house in Virginia, GEICO will sell you an HO-3 for $118. If you know you couldn't duplicate your house for a nickel less than $120,000, GEICO will up your coverage to $100,000 for a total yearly premium of $231. That's 80 percent of replacement cost.
Your house is not likely to jump from $60,000 to $120,000 in one year. Inflation will raise its replacement cost at least 12 percent, however. A District house that could have been replaced last year for $100,000 will check in this year at $112,000, according to industry estimates. Replacement costs have gone up about 50 percent since 1976. Your coverage should have gone up accordingly.
Most insurers offer an inflation clause. They assume an annual inflation rate and bill you quarterly for the extra, usually about 3 percent of your premium. If you insure your house for 80 percent of its replacement cost and you experience a loss before the next renewal, the insurer will absorb the difference inflation causes.
It pays to remember these points when you review your policy:
Don't make the common mistake of insuring for market value. You'll have to answer to the tax accessor for a choice location, but for insurance purposes the esthetics of your garden or your proximity to a subway station don't matter. If you paid $80,000 for a shell on Capitol Hill and then spent $60,000 making it liveable, you'll get off easy if your $140,000 investment is taxed at that level. No stack of crumbling bricks or termite-ridden 2x4's is worth $80,000. You paid for the location. Your house could be replaced for between $80,000 and $100,000. There are exceptions, of course.
If your house is not more than five years old, you can save 10 percent of your premium in Maryland or the District, or 15 percent in Virginia, depending on the insurance company.
Your garage, tool shed and fence are "apputernant structures." Their coverage is "free"; at least it's automatic (usually for 10 percent of your home's coverage) in a good policy.
Burglar-proof your house. Homeowners in some Maryland jurisdictions can get premium discounts as high as 10 percent by passing the Shield of Confidence test. A policeman inspects the house for needed safety improvements (deadbolt locks for doors, pins for windows, etc.). Making the improvements, typically $170 if the homeowner hires them done rather than doing them himself for less, qualifies the homeowner for a certificate that some insurers honor.
Consider a professional apparaisal of your property. You can get a copy of your banker's appraisal if you have bought your home recently. You might use your banker's appraisal, anyway.Be sure to figure in any improvements as well as inflation. Ask your insurer to send a representative to inspect your house or hire an independent appraiser.
Consider deductibles. The most common is $100. By raising it to $250 you might be able to save 10 percent on your premium.
Don your spectacles and read the fine print.