How much insurance should you carry on your home?

Just as the conventional rule of thumb about not buying a house priced at more than two and a half times your annual income is yielding to the changed economics of two-income families and soaring real estate values, so the yardstick of insuring a house for 80 percent of the replacement value is being replaced.

Although many homeowners are still inadequately insured even by that standard, a growing number in high priced areas are beginning to seek full coverage, insurers say. At the same time, insurance companies try to guard against too much insurance on a house. New types of policies to accommodate changing requirements are gaining popularity.

Under the traditional policy, an insurance company will refuse to pay the full face value of a policy unless the house is insured for at least 80 percent of its replacement value. If the house is only partially destroyed - and just one out of 200 claims involves total loss, according to State Farm Insurance - the company will pay on a pro-rata basis.

So long as the market value and the replacement value bear a traditional relationship to each other. 80 percent coverage - or 90 percent as many insurers are now recommending - would seem adequate. It is when the two differ widely that risks increase and refinements must be made.

For example, one Bethesda man - whose firm conducts insurance investigations - lives in an old-fashioned house with hand-hewn timber beams. He said that a contractor estimated the house's replacement cost at $210,000, yet the market value is about $150,000.

The man, who asked not to be identified, said his insurer refused to write coverage based on the replacement estimate because it decided there was no way the 60-foot beams could ever be replaced today. So, in order to protect itself from overinsuring a building, which might then become a target for arsonists, and to save the client excess premiums, the company insured the building for its market value, the owner said. In case of a total loss, the Bethesda house would be reconstructed with modern materials.

Effective next year in Maryland, owners of palatial old homes where replacement value far exceeds market value, will be able to get new state-backed insurance with coverage ranging from 50 to 70 percent of replacement cost.

At the other end of the spectrum is the relatively new house whose market value far surpasses its replacement value. A couple in the lower Foxhall road NW area learned that a new house virtually identical to their eight-year-old house was to sell for $175,000. The original contractor estimated that the replacement cost of the existing house was $90,000 to $100,000, while the builder-developer of the new house put their replacement cost at $110,000.

Subtracting $30,000 for land from the $175,000, the couple figured that the developer's slice on his new house amounted to $35,000. Approximately halfof that would go for overhead, financing, permits and other costs, and the rest would be profit, they figured.

In case of a total loss, the couple wondered, would that builder-developed agree to replace their house for $110,000 or would be insist on more profit, similar to what he was getting out of the new house nearly identical to theirs? In other words, how much insurance coverage should there be on a house whose market value is about $175,000 and whose replacement value is somewhere between $90,000 and $120,000?

The question was put to the Insurance Information Institute. The association, using tables from a large insurance company such as an agent would use, estimated the replacement value of their older house at $99,500. The assumptions, based on nationwide averages, included a 10 percent profit and a multiplier factor for the District.

However, institute spokesman Ron Vincent said average prices have little meaning in the city, where builder-developer profit margins range from 7.5 to 20 percent and more, depending on the desirability of the neighborhood, the degree of speculation, and the availability of the builder.

Having a contractor do a formal, on-site appraisal of replacement costs is a more accurate method, but the cost of this operation, $100 or more, can be more to the homeowner than simply increasing the premium by $10,000 or so. In any case, Vincent added, the closest one can hope to come to exact replcement costs is withing 10 percent.

With the escalating price of houses in the metropolitan area that margin of error may mean a difference of $10,000 to $15,000 in replacement costs on a house with a market value of $175,000 over and above what the insurance company will pay in case of a total loss.

To minimize this eventuality a number of insurance companies are now advising homeowners to insure to 100 percent of replacement cost and to increase their coverage annually as construction costs rise. But this type of coverage will still pay only the face value of the policy in case of a total loss. If the company has miscalculated the actual replacement cost as a result of some of the variables mentioned above, the homeowners is still left to pay the difference.

Three years ago in California tow insurers, Utica Mutual and the Hartford Cos., initiated a policy designed to cover total replacement costs, regardless of the face value of the policy. In exchange the homeowner must agree to insure for 100 percent replacement cost coverage of the dwelling, to report improvements and to pay mandatory annual increases, based on the insurer's estimate of construction cost increases. Henry Kroll, Utica Mutual's agent for this area, says 90 percent of the policies he writes are of the Dwelling Protection Unlimited type.

Utica, in common with the Hartford and a few others, also offers a personal property replacement costs endorsement for contents. Customarily, the contents of a home are insured for one half of the face value of the property. But when a loss occurs, the insurer will depreciate the furniture and appliances to their actual market value.

Utica will increase the ceiling by 60 percent so that, for example, the owner of a $100,000 home could collect a maximum of $80,000. Instead of $50,000 , for the contents in case of a total loss. About three-fourths of Kroll's clients elect this type coverage. (The Hartford currently writes this policy in Virginia only in this area.)

The cost of total dwelling protection runs about 13 percent higher than 90 percent coverage, and the contents replacement costs about 25 percent more. On a $100,000 house, Utica's standard 90 percent coverage costs $286. Total replacement costs $320, plus an additional $79 for increased contents protection.

While this type of upgrading would seem to be a bonanza for insurers, the Hartford's assistant secretary of property casualty underwriting, Charles Culpepper, said the actuarial calculations prove difficult for some companies.

"I recall our first total loss," he said, "We paid out $41,000 (replacement costs) on a $30,000 policy." The Hartford has since improved its estimating and hopes to be able to increase its coverage to $300,000 next year.

Ten percent of its California purchasers now choose total replacement cost policies now. (The Hartford doesn't write in this area.) He added that a number of other firms have expressed interest in this type of insurance, which protects the homeowner against the ravages of inflation and the insurance against the ravages of dissatisfied customers.