One thing to seriously consider in these times of escalating values for our homes on the island is the adequacy of your homeowner insurance. Our homes have increased in value over the last few years and the cost to replace has increased dramatically, therefore, your coverage may not be adequate.
In the case of your Homeowner’s Hazard Insurance, it will cover replacement costs at the amount as defined in your policy. It may also cover contents, liability and rental loss, each policy will vary. These amounts may have been set many years ago.
Your home is one of your largest investments and you should make sure it is protected. Most lenders require that your insurance coverage is 100% of the estimated replacement costs value to repair or replace your home with like materials. You want to ensure that the coverage is adequate to properly rebuild your home if it is damaged or destroyed.
It is not the insurance firm or the lender’s responsibility to notify you in the event they believe the coverage is no longer adequate. If you just purchased a home, then you are most likely in good shape for a year, but if not, you need to review your coverage and should do so every year.
Of course, the land will not burn but everything else could be destroyed including the septic system, water source, landscaping, and any outbuildings.
Do Your Math. If you believe your home to be worth $700,000 in the current market and a similar lot has recently sold for $200,000 then you need $500,000 in replacement coverage, or more. To double check, Do More Math; new construction costs on the island are $500 to $600 per foot, but varies based on your description of materials. Most insurance policies include a percentage above your insured amount (typically 20-25%) for replacement costs which exceed your base policy amount. This may be enough to cover the additional cost for newer permitting requirements and higher costs for new construction, but you need to confirm.
Another option in determining the amount of coverage needed is to contact your insurance agent and ask them what the estimated cost to replace your home is. Further, you could obtain an appraisal based on the cost approach on the home. Unfortunately, real estate agents are not licensed to do this type of valuations unless it is your intent to sell the property. The DOL prohibits our participation in this type of valuation.
You are correct in assuming that your premium will be increased due to the changes in coverage, but this is about the big picture. Saving $500 per year versus having a disaster and your claim funding being inadequate by several hundreds of thousands of dollars is not worth it. An option for a little savings is to raise your deductible, as that may help offset somewhat.
I know we all feel great when our tax assessment comes out lower than the market value and we know we are saving money on real estate taxes. However, saving money on the premiums for inadequate insurance is too much of a risk. I hate paying insurance premiums as much as any of you but, I am very conservative and would not consider being under insured.
In the event of a disaster, if you have a lender, they are paid the monies from the insurance firm as they are named on the policy as loss payee. Then the lender will set up a plan with you to rebuild. They will fund the replacement costs; like a construction lender, based on draws and percentage of completion. If they determine that your insurance proceeds from the claim are inadequate, they will require that you
deposit with them the shortfall, then they fund it back to you as you rebuild based on the percentage of completion. The lender requires that their loan be adequately secured by the value of what exists or what is deposited into their account.
If the insurance claim proceeds are insufficient, the lenders other option is to use the claim funds to pay off their loan with you and give you back any unused claim proceeds. Then you are debt free, but homeless. If their loan amount is higher than the proceeds, they can seek a judgement for deficiency against your personal endorsement of the loan.
Dealing with the insurance firm adjusters, the lender, and the contractors after a disaster, is all very stressful, the last component you need to add into the equation is a funding shortfall.
Your umbrella policy will not fund the shortfall on a damage claim, just liability. The umbrella policies do not provide property protection, just liability. The umbrella will fund up to the policy limit, all amounts on a liability claim over and above your primary coverage for your home, vehicles, boats, and RV. Everyone should have an umbrella policy as they are inexpensive and if you are proven negligent, the settlement amounts, which may be a result of a lawsuit, are much larger than in the past. Your primary coverage may not be enough, umbrella policies are important.
Your flood insurance should also be reviewed as it should be based on replacement costs as well. The maximum replacement coverage for the structure is $250,000 as set by FEMA, so if you own a waterfront home with flood insurance in these islands, be sure that you have the maximum coverage allowed. Additional, increased limits (over $250,000) can be obtained through private insurance carriers, but it comes with additional costs.
Make sure the insurance firm doesn’t have any reasons for denial or cancellation. Was the home built with a permit and was a final occupancy certificate or building final obtained? Do you have copies in your records? Was the wood burning stove permitted and installed properly by a contractor? Do you have adequate smoke and carbon monoxide monitoring devises? The insurance firm will most likely fund a claim even with the deficiencies cited above; however, your cancellation notice may be forthcoming. Being cancelled by an insurer, may have an impact on the premiums with your next insurance company.
Review your type of coverage. My partner agent lost her home in one of the California fires. She was under-insured as a result of an ongoing major renovation project. Their homeowner’s insurance had not been increased throughout the construction period and then the fire destroyed the home and property. Therefore, if you are in the process or a major remodel or constructing an out-building, be sure to include your insurance agent in the conversation before the work is started. You can obtain Course of Construction insurance which is a one-year binder just for this purpose.
Additionally, you should consider coverage for the disposal fees, if available. There are cleanup costs and properties with numerous outbuildings and wooded properties will have a higher cost of clean-up. Dump fees on this island are extremely high. Many policies allow for these costs as a portion of the total limit, but you should check with your agent.
As usual, this article is written for informational purposes only and not meant to encompass the entire list of items you should consider about your Homeowner’s Hazard Insurance policy.If you have questions, you should contact your insurance agent.
Written by:
Merri Ann Simonson
simonson@sanjuanislands.com