How to Weatherproof
Your Home Insurance

September 23, 2004 -- Even if you don't live anywhere near Florida, all the whirl about hurricane damage lately probably has you thinking about insurance. It should.

As many as 60% of U.S. homeowners wouldn't be adequately insured if disaster struck and their home was totaled, some insurance-industry executives say. Consumer groups put the figure as low as 5%. But there's no doubt that some homeowners would face an insurance gap of more than 20% in what they'd need to completely rebuild and refurbish their homes.

Unlike a decade ago, most insurance companies no longer guarantee replacement of your home if you don't carry enough coverage; now, they generally shell out no more than 120% or 125% of the policy's face amount. So if you have a $200,000 policy on a home that costs $400,000 to rebuild, the insurer might pay out $250,000. You'll be stuck covering the rest -- or rebuilding a less-expensive abode.

How much coverage do you need?

Experts recommend getting a policy big enough to cover 90% to 100% of the estimated cost to reconstruct your home, assuming the 20% to 25% buffer provided by the insurer will cover any miscalculation.

How much you need often depends on where you live. "Unless you live on a barrier island or in a tornado zone," where entire neighborhoods could be wiped out in minutes, you probably only need coverage for about 90% of the cost of rebuilding, says Bob Hunter, director of insurance for the Consumer Federation of America. "If your biggest risk is fire and you're in a city with a good fire department, your risk of having a total loss is low."

However, if you live in a high-risk area such as a coastline or Oklahoma's tornado alley, you may want to get 100% coverage, since construction costs often rise sharply after a natural disaster because of a surge in demand.

Policies generally include up to 50% of your total coverage amount for contents inside the home. So unless you have many valuables, you don't normally need to worry about that.

And remember: The cost of rebuilding isn't the same thing as "market value" of a home, because you don't need to insure the value of the land.

"Too many people make that mistake" and end up buying more insurance than they need, Mr. Hunter says. Each extra $1,000 in coverage usually costs about $3 to $5 in extra annual premium.

Why the big gap?

The primary reason many people aren't adequately insured, says Robert Hartwig, chief economist of the Insurance Information Institute, is the refinancing boom of the past five years. In the past four quarters alone, Americans spent an estimated $126 billion on home improvement and repairs, according to the Joint Center for Housing at Harvard University. Many owners used thousands of dollars from refinancing and home-equity loans to remodel homes. But few people notched up their homeowners' coverage to account for the surge in replacement cost. "It's as simple as a phone call, and yet many, many people neglect to do it," Mr. Hartwig says.

What about inflation?

On top of the remodeling boom, building-material and labor costs have risen at an annual 2% to 4% clip. So if a policy's coverage amount isn't regularly adjusted for inflation, some policies quickly become inadequate.

Happily, most insurers now build inflation adjustments into policies, so coverage levels automatically increase each quarter or year based on construction-inflation estimates. But you'll want to make sure yours does, so you aren't underinsured if 10 years pass and you haven't changed your policy amount.

Of course, these inflation estimates also can be inaccurate. So you'll want to periodically double-check how much your policy is increasing, to make sure it's in line with building costs in your area.

Some insurers, including Chubb and MetLife, still sell "guaranteed-replacement" policies that cover the total cost of rebuilding a home, regardless of the policy's face amount.

However, these policies can be pricey -- costing up to 25% to 40% more a year than a normal policy. They often are marketed to owners of expensive homes. You'll save a good deal by simply getting an accurate estimate of how much replacing your home would cost.

How can you determine rebuilding costs?

A good first step is calling at least a few insurance companies to get estimates of how much insurance you need. Expect these kinds of questions: What is the home's total square footage? How many rooms are there? How many closets? Are there custom cabinets? Granite countertops? Any special design features?

Make sure to ask for each insurer's estimate of average construction costs per square foot, so you can see if they're using an appropriate figure for your area. To verify the insurance company's per-square-foot cost estimate, you might call a local builder or two and ask for estimates of average new-construction building costs.

They might give you a range, so you should then calculate your policy size based on whether your home's construction is average or high-end. An appraiser also can give you an estimate of rebuilding costs, if you're willing to spend a few hundred bucks.

Very important: Keep your policy updated as you make home improvements. But if you put in a $50,000 new kitchen, you don't have to bump up your policy by $50,000. Increase the value of your coverage by the cost of the improvements minus the original value of what you replaced.