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All homeowners insurance policies are not created equal
When my staff talked to Rick Sovel about homeowners insurance recently, they learned that all homeowners insurance policies are not created equal.
Sovel, a certified and licensed insurance counselor and partner in the Michigan Community Insurance Agency, (800) 430-8070, is constantly amazed at the differences in prices and coverage for seemingly similar policies.
Since the homeowners policy of my editor at Master Handyman Press is coming up for renewal, we asked Sovel to run the numbers for what was basically the same policy with six different companies. The location, description of the house and coverage requested were identical, yet prices ranged from $956 to $2,589 a year.
The price differential is just the tip of the iceberg. "What buyers fail to understand, is that depending upon the wording, the actual coverage on a given claim could vary a $100,000 or more. It could even determine whether there is coverage," Sovel says.
Two weeks ago, I wrote about mold damage created as a result of a covered water damage loss. Several companies have decided that they will no longer cover mold damage when selling new or renewing homeowners' policies.
Several weeks ago, when my company made a brief survey of insurance agents, AAA and Allstate agents said that every case is different and coverage is provided on a claim-by-claim basis. The Farmers agent said his company was leaning toward no mold coverage. The Kemper agent would not answer the question. The independent Safeco agent said there was a $10,000 mold testing and remediation limitation. The Metropolitan Life agent said the company presently covered mold if the insured had used due diligence. Certainly you can't consider these policies equal. Choosing one company over the other because of a $100 difference in the annual premium would be fool hardy. Here are a few of the other policy provisions you should discuss with your insurance agent.
Different types of homeowners insurance It is very difficult for the average person to be able to read a policy and know what it means. For example, "broad form" sounds like it gives a lot of coverage. Actually "special coverage" gives broader protection.
Ordinance and law coverage "Ordinance and law is an option, which only costs $20 to $50 per year but could decide whether you can afford to rebuild in the event of a catastrophic loss," Sovel says.
"Let's say you have a very nice older house that was built in 1960 and insured for $300,000. A fire destroys 80 percent of the house. Since 80 percent of the house has been destroyed, the insurance company would write you a check for 80 percent of the total.
"Many municipal ordinances state that where only 20 percent of a house remains, the entire house must be demolished. Unless they have ordinance and law coverage, the home owner has to pay for demolishing, removing and rebuilding the remaining 20 percent," Sovel says.
Additionally, most homeowners' policies only require the insurer to bring the building up to its original condition. Without ordinance and law coverage, the homeowner will be required to pay the difference between old and new building code requirements.
Guaranteed replacement cost "Many policies used to have a guaranteed replacement benefit, which said that if it cost more than the policy limit to rebuild a structure, the insurance company would pay the additional cost subject to other policy provisions. This led a number of people to under-insure their houses.
"The insurance companies' response has been to change the name and limit the coverage. Depending on the insurance company, 'extended dwelling coverage' limits the percentage the insurer will pay over and above the face amount of the policy from 15 percent to 25 percent," Sovel says.
Finished basements at risk "Many insurance companies will not provide coverage for sump pump problems or sewer and drain back up, and severely limit coverage on finished basements. If you have a finished basement, are considering finishing the basement or even use it to store valuables, make certain your homeowners policy provides coverage in the event of a loss," Sovel says.
Policy limits "There is no correlation between the market value of a house and its replacement cost. Market value projects what you could buy a similar house for today. Replacement cost reflects the cost of tearing down and rebuilding the dwelling.
"Most of us live in subdivisions built by builders who constructed several homes at a time. The home buyer benefits from economies of scale on architectural plans, building materials and construction crew efficiencies.
"If you moved into a brand-new $400,000 house today. It would cost a good deal more to rebuild the house next week. In the event of a total loss, debris would have to be carried away, the architect must draw up plans to rebuild the house according to the existing footprint, and materials and crews have to be specially scheduled," Sovel says.
Note: This article was accurate at the date of publication. However, information contained in it may have changed.
If you plan to use the information contained herein for any purpose, verification of its continued accuracy is your responsibility.