Do you know if you are underinsured

There are numerous fees and insurances to consider when buying a home. One of the most overlooked yet important aspects of buying a home is home insurance coverage.

You may be surprised to find out that your home is not insured for as much as you think.

M.P. McQueen, writer for The Wall Street Journal, explains why you should fully understand your rights and coverage stipulations in the August 26, 2006 article, “Housing Boom's Dark Side.”

“Home insurance exists to help owners repair or rebuild a home, and replace furniture, clothing and other personal property, in the wake of a fire, burglary or other calamity covered by the policy. Some risks, such as flooding or acts of war, are routinely excluded.”

As a result of the slowing from the housing “boom” over the last five years, many Americans will eventually find out that their home is significantly underinsured.

“Americans have been pouring money into their homes in recent years, adding everything from marble bathrooms to fancy backyard barbecues: Last year alone, spending on improvements like these hit an estimated $155 billion, up 27% from two years earlier. At the same time, the global boom in commodities prices -- lumber, copper piping and other necessities -- as well as rising labor costs has pushed up replacement costs by 7% a year since 2001.”

People who have not updated their insurance policies in the last few years may be underestimating what it will cost to rebuild their homes, especially in higher-priced markets.

“According to a survey to be released soon by Marshall & Swift/Boeckh LLC, a firm that supplies building-cost data to insurers, 58% of houses are undervalued for insurance purposes. Of those, the average homeowner has enough insurance to rebuild only about 80% of his or her house, according to the survey.”

Meanwhile, many insurers have been subtly cutting back on what their policies cover. For example, Allstate Corp. “recently stopped covering earthquake damage in most states.”

Several other insurers such as State Farm Insurance Cos. and Farmers Insurance Group have stopped offering wind damage coverage in some coastal areas that have been threatened by hurricanes.

But one of the biggest changes or cutbacks many insurers are making across the U.S. is removing "guaranteed replacement cost" coverage, which used to promise to rebuild a home exactly the way it was, no matter how much it cost.

“Now, most standard policies provide only ‘extended replacement cost,’ which offers up to 20% or so more than the face value of the policy if extraordinary events push up rebuilding costs.”

Homeowners must read and understand everything in their policies because insurers are continually messing around with the coverage. Even though insurers notify their policyholders about coverage changes in the annual policy-renewal statement, most homeowners do not read it in detail and only focus on their premium payment.

Understand your policy. There are numerous ways an insurance policy may benefit the insurer more than the insured. Like mortgages, there is a plan for everyone. Choose the plan that is most suitable for you and read your quarterly statements in detail.

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