Jim Mellon can't recall ever seeing flood damage as bad as that caused recently by Hurricane Floyd.
"Many homeowners have lost everything, and some houses are so severely damaged that they are unlivable," said Mellon, president of Mellon Certified Restorations, a Yeadon, Pa., firm that cleans up and repairs property damaged by floods, fire, wind and vandalism.
Mellon, who usually is dispatched by an insurance company, examines every square foot of a damaged house, store or factory. Then he determines, for example, what it will take to get the soot out of computers or the mud out of carpeting.
If you have insurance, Mellon tells you how much the company will be willing to compensate you for his work. Many people try to get him to overestimate the job so they can extract more from their insurer, but if the company says it will pay 39 cents a square foot to repaint your living room, that's all it will pay.
What Mellon has found in the years he's been in business is that many homeowners either don't have the proper amount of insurance or the right kind. Until Hurricane Floyd hit in September, many people had no idea that they lived in an area prone to flooding.
Most Americans don't even have enough homeowners' insurance. A survey by National Underwriter, an insurance industry trade journal, found that 67 percent of all homeowners fell into the "underinsured" category.
Too many policies reflect market value, not replacement cost. If you didn't provide correct information to the insurance company when you obtained the policy or made changes to the house that added to the replacement value, you end up being underinsured, and are thus unable to rebuild without additional cost to you.
Many home buyers believe that the policy required by their mortgage lender at settlement is sufficient, but that's hardly the case. Lenders merely want to protect their investment, and so require the buyer to have a policy to cover the amount of the mortgage.
If you want to have just enough to pay off the mortgage and walk away, then the policy required by the lender may seem sufficient. But most homeowners want to rebuild.
And, of course, not all losses are total. Partial losses on a building will be paid by the insurer, but if the carrier determines that the building was knowingly underinsured, there may be what are known as "coinsurance penalties," which vary from insurer to insurer and are best explained by your agent.
Find out how much it would cost to rebuild your house. Your insurer can calculate those costs, or you can hire an appraiser to do it. A good way to estimate replacement costs is by multiplying the square footage of the house by residential construction costs typical in your area.
For example, if your house is 2,000 square feet, and local building costs are $150 per square foot, the replacement cost would be $160,000. Most insurers recommend that you insure your house for 100 percent of the cost of rebuilding it.
Look at the policy to see the maximum amount your insurer would pay if the house had to be rebuilt. Limits typically appear on the declarations page under "Section 1, Coverages, A. Dwelling."
You also should have insurance on your possessions.
There often is a distinction made between replacement cost and actual cash value.
Replacement cost is the amount to repair or replace the damaged property using materials of like kind and quality, without deduction for depreciation. Depreciation is the loss in value that develops as an item ages, wears out or becomes obsolete.
Actual cash value is the replacement cost of an item, less the amount for depreciation.
When you calculate the cost of replacing your house, do not include the cost of the foundation and the land, and don't use the sales price, the tax-assessment value or the value that the lender used to determine the house's worth. All of those can vary greatly from the construction costs.
If you have an older house--one built at the turn of the 20th century, for example--you likely have a substantial amount of architectural detail such as plaster molding, stained-glass windows, mahogany woodwork and oak flooring.
Standard homeowners' policies for older houses pay for restoration of the damaged property, but not necessarily with the same kind or quality of materials as the original.
For the typical homeowner, the standard policy provides replacement-cost coverage if the amount of the insurance equals 80 percent or more of the full replacement cost of the building just before the loss.
Some companies offer a guaranteed-replacement policy. This endorsement provides coverage for the cost to rebuild or repair your house at today's prices. There typically is no deduction for depreciation, even if the amount exceeds the limits listed in the policy.
The coverage limit for contents is usually 50 percent to 75 percent of the amount of insurance on the dwelling. And there often is a limit on the dollar amount for jewelry and silverware, for example. Additional insurance, called a rider, may be needed.
If you disagree with the settlement offered by your insurer, you can follow the dispute-resolution process outlined in your policy. To forestall such disputes, make sure you obtain appraisals of each of the items and have your agent state those values in the policy. Keep the appraisals up to date.
Make a list of personal property. You'll need it when making a claim. If actual receipts aren't available, insurance companies generally will accept photos, warranties, owner's manuals, canceled checks, credit receipts, bills, servicing agreements and even videotapes as proof of ownership.
Insurance companies also suggest videotaping your house before a loss.
Even though policies specify what is covered and what isn't, there are nuances. For example, if ice and snow build up on your roof and create "dams" that cause water damage on the outside or inside of your house, that damage is covered.
However, when the claim is evaluated, the insurance adjuster will look at the damage to the roof and will pay only for the area damaged in the loss. If further damage to the roof has occurred because of wear and tear, that part of the claim will be excluded.
If a tree in your neighbor's yard falls on your house during a storm, your policy covers such a loss. Your insurer may be able to recover the amount it pays you for the loss and your deductible from the homeowners' insurance that your neighbor may have, in the event that the loss occurred because of your neighbor's negligence.
Here's another situation: A storm knocks power out for 48 hours and the food in your freezer is ruined. Normally, homeowners' policies don't pay for the loss, but some insurers offer coverage for a nominal fee.
As mentioned earlier, flood damage is generally excluded on the basic homeowners' policy. However, some policies provide coverage for backup of sewers and drains that cause flooding in your basement, available for a nominal premium.
If you live in a flood-prone area, you should consider buying a flood-insurance policy--required by lenders who provide mortgages backed by the federal government or using money from Fannie Mae and Freddie Mac.
These policies have provisions that may limit recovery when you make the claim. For example, unless two or more acres are flooded, or your neighbor's house also is damaged, the National Flood Insurance Plan won't cover your loss. There also are limits to what it will cover in basements--generally, just a washer and dryer.
There is a 30-day waiting period before flood insurance takes effect.
Earthquakes also are rarely covered by standard homeowners' policies. Earthquake coverage is usually bought as an endorsement on a standard policy. On the West Coast, such endorsements can add 50 percent or more to the cost of a homeowners' policy, but for a typical masonry house in Philadelphia, it's just $47 a year.
Houses along the Atlantic and Gulf coasts, which are vulnerable to high winds, also may need separate policies.
If you operate a full-time or part-time business from your home, don't assume that your homeowners' policy covers it. It may, but probably only to a maximum of $2,500 for business equipment in the house, and $250 away from the premises.
What you may need is a small-business owner's policy, which includes liability coverage. You may be able to add an endorsement to your existing homeowners' policy.