Read Those Homeowner and Flood Insurance Policies Before It Is Too Late
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People who do not fully understand their homeowner's or flood insurance
policies would be wise to invest in a good life insurance policy as well.
If a disaster strikes, the truth could kill you.
Even if you have both a homeowners' policy and a flood policy on your
home, you may be less protected than you think. There are restrictions that
can affect the amount you collect from either following a disaster.
The first loophole is the deductible. Most policy holders
are aware of this because they have to choose a deductible for their car and
health insurance as well as homeowners insurance and agents usually go to pains
to make sure customers fully understand the concept. A deductible is the part
of the loss or cost that the homeowner/car owner/unfortunate sick person must
cover before their insurance kicks in and pays even a cent of the casualty loss.
In the case of homeowner's insurance the deductible is usually $250 to $1,000.
The higher the deductible picked by the insured the lower the premium he must
pay. While a $500 deductible is insignificant in the face of the total loss
of a $200,000 home, it does discourage small claims. Insurance companies have
long understood that without deductibles a portion of the public will, given
the opportunity, file a theft claim when the next door neighbor's kid absconds
with their daughter's naked and bald Malibu Barbie doll. While the doll might
have an insured value of $4.50, the insurance processing costs (an
adjuster to check out the claim and the usual price of pushing forms and paper)
can run into the hundreds of dollars. Assuming you are not of the serial claims
mindset, picking a high deductible will save a lot of money during those multiple
years when, hopefully, you have no casualty losses. Still, it comes as a shock
to learn that as much as $1,000 of your loss is automatically excluded from
coverage.
Is your homeowner's insurance a "valued" policy? A valued policy
is one which pays the limit of liability in the event of a total loss. For example,
if your home were blown away (but not flooded) by Katrina, and it costs $300,000
to rebuild and your homeowners insurance is a valued policy with a $350,000
limit of liability, you would receive $350,000.
Is it a guaranteed "replacement cost" or an "actual cash
value" policy?
A guaranteed replacement cost policy is one in which you will
be paid the cost to rebuild your home in the event of total destruction regardless
of the limit of liability. If your home is totally destroyed by fire and will
cost $500,000 to replace, a guaranteed replacement policy will pay the $500,000
even if your home is only insured for $400,000. In such a case it is wise to
document with pictures any really special features in the home, just in case
an adjuster is a little suspicious of your claim for jade fittings in the master
bath.
Even short of a total loss, the replacement cost versus actual cash value is
a wrinkle that can throw policy holders into cardiac arrest. A replacement cost
policy will pay for replacement or repairs based on the real life, real time
price of materials and labor. For example, if a strong wind rips a large section
of 25 year asbestos roofing shingles from your house, under an RC or replacement
cost policy the insurance adjuster will process your claim as 20 squares (100
square feet each) of roofing shingles and roofing felt at $1,880 including labor.
Great, go out, hire a contractor, and get that roof patched or replaced (and
insurance companies will usually take into account the matching factor; i.e.,
if the repaired roof is going to look sloppy due to color match or aging, they
will pay to replace the entire roof.) However, if you have an actual
cash value (ACV) policy the bottom line will be quite different.
If the insurance company determines that the roof is 12 years old they will
figure you have had the companionship and protection of those 25 year roofing
shingles for close to one half of their useful life and would certainly have
to replace them in 12 to 15 years. Thus the insurance company is only to willing
to compensate for the remaining and assumed 13 years or so of life and will
discount their payout according to a formula that takes that age into account.
This could well result in a claim payment of $670 for replacement of that aged
roof rather than the $1,880 indicated above.
Replacement versus ACV applies to kitchen cabinets, furnaces, appliances, and
most household contents. It does not, however, apply to the cost of removing
and disposing of damaged materials nor does it apply to those portions of a
house that do not "wear out" such as framing, foundations, and other
more or less permanent pieces of construction.
Like a deductible, the choice of ACV as opposed to replacement cost will be
reflected in the annual price you pay for your policy premium. ACV is obviously
less expensive than replacement cost and the decision is yours; just make sure
you know what you are getting.
Back to flood insurance and what it will and will not do for
its policy holders
Flood insurance is not a valued policy. While homeowner's insurance pays up
to the limit of liability in the event of a total loss regardless of the actual
loss, flood insurance pays to the policy limit. Therefore, if your home is insured
for $150,000 and is lost to a flood, $150,000 is the most you could receive
in reimbursement even if it will really cost $300,000 to put your home back
together.
Policy holders must pick a deductible for flood coverage just as for almost
any other kind of insurance. The insured, however, can pick a different deductible
for the building and for contents coverage. Flood insurance can be obtained
as either a replacement cost or actual cash value policy; however personal property
and some building items such as carpeting are always adjusted on an ACV basis.
Most National Flood Insurance Program policies include Increased
Cost of Compliance (ICC) coverage which applies when flood damage is severe.
This coverage allows up to $30,000 to cover the cost of elevating, demolishing,
or relocating a property if the local community declares it is "substantially
damaged" or "repetitively damaged" by a flood. Such a payment will require that
the homeowner bring the house up to current standards and the award amount,
coupled with other claims cannot exceed the $250,000 allowed for maximum property
coverage.
Insured owners of what are called "severe repetitive loss properties,"
that is, properties that repeatedly flood (and there are several definitions)
may be eligible for grants to make improvements to their property that will
mitigate the likelihood of future flood damage. Homeowners who refuse this grant
money could be forced to pay increased insurance premiums.
There is an interesting little waltz going on in the wake of Hurricane Katrina
as happens after almost every storm-caused flooding at least as far back as
New England's Blizzard of '78. This time it may receive enough publicity
to shame private insurance companies into leveling the playing field.
After a storm it is, admittedly, difficult to know, particularly in coastal
areas, but levee waters in New Orleans will be contested as well, whether a
house was knocked off its foundations by hurricane force winds or by a tidal
surge; if wind damaged windows and roofs allowed water to pour in before the
flood waters actually rose over the thresholds. Private insurance companies
have, for years, insisted that as much damage as they can identify as being
in any way water-related is not their problem and should be covered by federal
flood insurance. How this plays out in the aftermath of the current disaster
may affect homeowners insurance coverage for years to come.
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