Check Home Insurance Carefully

Covering a home's replacement cost is the key - then shop around for a good price

A HOMEOWNER in central New Jersey was shocked when he opened the bill from his household insurance carrier recently. The annual premium for his policy, which contains an escalator clause to offset inflation, had shot up about 10 percent. Yet, the cost of living was up only around 3 percent.

The homeowner immediately called his independent insurance agent. "Trim the premium back to more accurately reflect actual increases in inflationary gains or I'll switch to a different insurer," he said. The independent agent, who said he "thoroughly understood," called the national offices of the insurance carrier and had the premium reduced.

There are savings to be gained in homeowner and tenant insurance, financial experts say. The important thing is to tailor the policy to precisely meet your coverage requirements.

If you have a mortgage, your lender has most likely made you take out a homeowner policy as a condition of the loan. Lenders often ask that the policy at least equal the amount of the mortgage. But that dollar amount may be too little or too much.

"What a homeowner needs is coverage that offsets the current replacement value of the building, not insurance that just equals the remaining mortgage on the house, or the value of the house plus the land," says George Rosenthal, a consumer expert with the Insurance Information Institute, a trade group in New York.

To determine replacement cost, "bring in a building contractor or an appraiser," Mr. Rosenthal says. "Make certain to distinguish between the cost of rebuilding your home, which is replacement value, and your market value, which is the value you would get if you sold the home plus the land. For insurance purposes, you want replacement value." The assessment should be based on square footage of the house multiplied by construction cost per square foot.

"Guaranteed replacement cost" coverage is considered better than "replacement cost" coverage, experts say, since the former will pay for the full cost of rebuilding the house, even if there is a set dollar limit in the policy. Replacement-cost coverage is OK, but has a price cap. Replacement-cost coverage should never go below 80 percent of the actual current construction cost. The reason: At 80 percent or more, the insurer will pay full costs on a minor loss, such as a kitchen fire. If coverage is below 80 percent, the insurer pays a prorated amount.

Regarding household contents, experts say the best coverage is replacement-value coverage, which pays for the current cost of a household item, not the current cash value based on its original purchase price.

Policies are classified by coverage and degree of risk. "The policy usually sold to homeowners is called HO-3," which covers all perils not specifically excluded, says Joseph Aimi Jr., an independent agent with the Kenneth Bieber agency in Manhattan. And there are "deluxe policies" that add extras to the HO-3 policy, Mr. Aimi says.

For an added premium you can buy earthquake insurance. If you believe you are in a flood zone, check with your local city hall to see if the town participates in the federal National Flood Insurance Program. If so, you can buy this flood insurance through your dealer. Special riders can also be taken out for expensive jewelry or collectibles, as well as added liability insurance. Most basic policies limit liability coverage to around $100,000, far too little in our litigious era.

There are two basic ways of buying homeowner insurance:

1. Through a "direct writer." These are companies that deal with you on a one-to-one basis. Firms include Allstate, Liberty Mutual, State Farm, Nationwide, GEICO, Prudential, and Metropolitan.

2. Through an insurance broker. The independent broker usually represents more than one company. The broker will shop around, finding a company that meets your price and coverage requirements. Insurers dealing with agencies include Chubb, Travelers, Aetna, Kemper, Hartford, and CNA.

"Insurance is usually, but not always, cheaper by buying from a direct writer," says John Cucci, vice president of the Alliance of American Insurers, a trade group in New York. The reason is that there is little or no "acquisition expense" in the case of the direct writer. Basic commission charges tend to be lower.

Still, enterprising brokers will sometimes find a low-cost company, whose premiums can substantially undercut those of direct writers. Service is often more personal. Moreover, many agents have been deliberately cutting their commission charges to lure business. The reason: More people have been buying insurance through direct writers in recent years.

Between 1988 and 1992, for which full statistics are now available, direct writing property/casualty premiums grew by 41 percent; agency writing premiums grew by 5 percent, according to the Insurance Information Institute.

"If you have to choose between a well-known direct writer and a nondescript agency company that is very cheap, I'd go with the known quantity to protect risk," Rosenthal says. "If you do choose a little-known company, be sure you call the state insurance commission to get a profile of its financial well-being."

Experts' rule of thumb: Find a company rated no lower than A-plus from A.M. Best or AA-minus from Standard & Poor's Corp. "Shop around for the best value on your policy," Rosenthal says. And if the company boosts the premium sharply on an existing policy, find out why. Reduce the premium if you can, or switch carriers.

Condominium and co-op owners should be certain to get insurance covering the area between the "inside of the outside wall of their building, and the inside of the interior wall," Rosenthal says.

"Read your association bylaws to see what the association covers." Insure everything else. Similarly, renters should take out insurance covering all personal goods, plus personal liability.

Finally, explore ways of lowering premiums, such as installing smoke detectors and deadbolts or raising your deductible.

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