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Homeowners Come Up Short on Insurance
Old 08-31-2004, 09:07 AM   #1
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Homeowners Come Up Short on Insurance

After reading some of the posts about dramatic real estate run-ups, this article seemed like it might be pertinent. Of course, most of you who live in areas where real estate runs up rapidly are probably already aware of this.



http://www.nytimes.com/2004/08/31/bu...insure.html?th

"Homeowners Come Up Short on Insurance
By JOSEPH B. TREASTER

Published: August 31, 2004

. . . In a move to cut costs from claims, insurance companies began in the late 1990's to phase out coverage that guaranteed the replacement of a destroyed home, regardless of the expense to the insurer. In place of that unlimited coverage, which had become nearly universal, insurers substituted a similar-sounding policy with a crucial difference: it pays only the amount stated on the policy plus, typically, an additional 20 percent to 25 percent.

For their part, insurers insist that it is the consumer's responsibility to acquire adequate coverage.

The old policy was called a guaranteed replacement policy. The new one, which most Americans now have, is called an extended replacement policy. . . . "

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Re: Homeowners Come Up Short on Insurance
Old 08-31-2004, 10:37 AM   #2
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Re: Homeowners Come Up Short on Insurance

Since I just did an insurance overhaul due to marriage...

Although we had the same insurer, my policy was still for guaranteed replacement while my wifes agent had indeed changed her to cash value without building code upgrades. What's really funny is my house is bigger and had a higher dollar value of more expensive coverage type, yet her policy was 20% more expensive than mine!

As far as the real estate 'run up', i'm not sure you need to carry more insurance. Just because my house is worth more this year than last doesnt mean it would cost more to rebuild it after a fire. That increase is speculative in nature, not physical.

Check new construction costs in your area, per square foot. Add about 10-20k for demolition and removal of whats left of your old house. That should be approximately what your worst case scenario is for replacement cost of the home.

I wouldnt carry a lot more than that.
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Re: Homeowners Come Up Short on Insurance
Old 08-31-2004, 10:41 AM   #3
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Re: Homeowners Come Up Short on Insurance

What I didn't see in the article was the fact that these homeowners are suing the insurance companies for letting them underinsure themselves. Only in America...
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Re: Homeowners Come Up Short on Insurance
Old 08-31-2004, 10:54 AM   #4
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Re: Homeowners Come Up Short on Insurance

Actually, some of the run-up isn't speculative. Prices for the basic materials of home building (OSB, plywood, lumber, etc.) have shot up in the last few years, no doubt due to the RE market frenzy and the resurgence in demand from the rest of the world. This is probably one of those things that is well worth discussing with your agent every 5 years or so.
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Re: Homeowners Come Up Short on Insurance
Old 08-31-2004, 10:57 AM   #5
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Re: Homeowners Come Up Short on Insurance

Quote:
. . .
As far as the real estate 'run up', i'm not sure you need to carry more insurance. *Just because my house is worth more this year than last doesnt mean it would cost more to rebuild it after a fire. *That increase is speculative in nature, not physical.

. . .
That's a good point. The drivers for new building costs are probably related in some ways to housing purchase costs, but not correlated completely.

As a side note concerning demolition. A friend of mine just had his house demolished so he could build a new one. He found that the local fire department was willing to do this for much less than he could get anyone else to bid provided they could burn it down and use it to practice. Of course, that requires that your house is not already burned to the ground.
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Re: Homeowners Come Up Short on Insurance
Old 08-31-2004, 11:01 AM   #6
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Re: Homeowners Come Up Short on Insurance

The drivers for the *profitability* of new home building are related to local cost runups.

There is some connection to construction costs over time though. As an area becomes more profitable to sell in, more builders move in, fewer tradesmen become available, and their prices go up accordingly.

Nowhere near the rate that homes have shot up here though. What I've seen is fewer guys returning phone calls or wanting to take on remodelling work as opposed to easier new construction work.

Of course it doesnt hurt that my new brother in law is a new home construction general contractor...
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Re: Homeowners Come Up Short on Insurance
Old 08-31-2004, 02:55 PM   #7
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Re: Homeowners Come Up Short on Insurance

You need to get the softwood construction lumber lobby off your back.
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Re: Homeowners Come Up Short on Insurance
Old 08-31-2004, 05:55 PM   #8
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Re: Homeowners Come Up Short on Insurance

Some insurance companies offer an "inflation guard" service that automatically increases the coverage on your dwelling by a certain percentage each year.

This also has the effect of increasing your premiums each year :-)
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