Covered by homeowners insurance? Don't be so sure (pg. 3)

  @Money July 15, 2013: 2:09 PM ET

WIND: Insurers make use of lots of loopholes.

Homeowners' deductibles typically run $500 to $2,500 -- unless damage is due to a windstorm.

Special wind deductibles were first introduced after Hurricane Andrew in 1992, and they've now been extended to 19 states plus the District of Columbia -- and in some cases to tornadoes and hailstorms.

Instead of a set amount, you can opt for a percentage of your property coverage, typically 2% to 5%. Put another way, for a home insured for $400,000 with a 5% deductible, you'd be out $20,000 before your insurer forks over a dime.

Related: Hurricane deductible could cost homeowners thousands

Solution

Stay with a 2% deductible. Upping to 5% will offer only minimal savings on premiums, says agent Billy Wagner of Brightway Insurance in Florida.

Know where you'll get the cash. You need enough cash in reserve to cover the largest deductible you will incur if a windstorm hits. If it would take a while to save that much cash, open a home-equity line of credit to draw on when you need it, says Dallas financial planner Michael Anderson.

REBUILD: Your policy may not pay for an up-to-date dwelling.

Insurance is designed to rebuild the home you have. But especially with older homes, newer, tougher building codes can make an exact replacement impossible unless you pay more than the cost of your original home. Historically a typical policy allotted 10% of your dwelling coverage toward the extra expenses of satisfying modern building codes.

These days policies vary widely, Schwarcz has found. In his analysis, 20 didn't cover the extra costs at all unless you had added a rider on your policy; another eight offered coverage that wouldn't cover the full expense.

Solution

Opt for extra coverage for an older home. If your home is less than 10 years old, 10% of dwelling coverage for code updates probably suffices -- verify that your policy includes it.

For older homes, and in disaster-prone areas where codes change more rapidly, upgrade your policy to include 20% for "ordinance and law." Costs depend on location, says Kurt Thoennessen of Ericson Insurance; for a home insured for $400,000, going from 10% to 20% may cost $25 a year in Connecticut but $200 in Florida. The cost also varies widely by carrier; some price it high because they would prefer not to insure older homes, he says.

To help pay for this, you may want to increase your basic deductible. Going from a $500 to a $1,000 deductible will cut your homeowners premium at least 10% (it's not worth making a bunch of small claims anyway; you risk your carrier dropping your coverage).

FLOOD: Coastal dwellers are taking a big risk.

Private insurers long ago stopped covering flood damage, so homeowners have to purchase it through the National Flood Insurance Program.

There are two problems with that. One, many people outside high-risk zones don't have it -- including some who probably should. Two, the federal program maxes out coverage at $250,000 for the dwelling and $100,000 for your personal property, which could easily fall short of the amount needed to rebuild your home.

Flood insurance also has its own restrictions. Among them: It won't replace trees, decks, and pools, or help you fix your finished basement. It won't pay for personal property or for living expenses you incur while your home is uninhabitable. And as homeowners affected by storms Irene and Sandy in the Northeast have discovered, some claims are being denied if even an inch of the first floor is below ground.

Getting stuck with only $250,000 in coverage could happen more often than you imagine. When damage results from both wind and flooding -- as in most big storms -- insurers want proof that they, and not flood insurance, should pay. After Hurricane Katrina reduced thousands of homes to mere slabs, insurers simply denied claims because there was no proof the damage wasn't caused by flood (courts overturned most of those denials).

Solution

Pony up for flood coverage if you live near any body of water. Even melted snow can cause a flood, says the Insurance Information Institute. Rates depend on your home's age and location.

Live in a high-risk zone? Though expensive, you may want "excess" flood insurance, sold by only a few insurers. Another $250,000 in dwelling coverage and $100,000 in contents might run about $1,000, says Wagner.

Finally, be realistic. Before deciding to transform your basement into the man cave of your dreams, understand that you'll have to foot the bill for flood damage. Avoid keeping valuable belongings there if you live near the water, or at least plan to remove them before a storm, says the III's Jeanne Salvatore.

Looking to buy a coastal home? Keep in mind that by drastically cutting back coverage or refusing to write policies at all in some highly storm-prone areas, insurers have effectively declared these places too risky to inhabit. Says Salvatore: "Insurance costs are something people really need to think about to begin with when they buy a house."

HOW TO SHOP FOR A POLICY

The myriad ways insurers now offer homeowners insurance makes comparison shopping challenging—but critical. Use the four tips below to help you get the best possible deal.

Get five quotes. Agents may be tempted to quote cheaper policies in their eagerness to land the sale. So talk to three, including at least one who can give you multiple quotes. (Find one at iiaba.net; click on Contact Us.)

Compare. A few state insurance departments, such as Nevada's, post sample policies online; Texas has a policy comparison tool at opic.state.tx.us (click on Compare Policies). Your state's policies will be similar.

Ask the right questions. Your agent should give you a list of all the riders each carrier provides; bundling riders may earn you a discount. Ask how replacement-cost coverage is handled.

Request a sample policy. Many agents will provide them in advance, even though they don't have to. And once you buy, make sure you read the policy. You can always cancel and get a refund.

An earlier version of the story incorrectly stated that Hurricane Wilma occurred in 2006. The storm actually took place in 2005. To top of page



Why your insurance is weaker
Paring back on coverage is what has really helped insurers stay afloat.
Covered 10 years ago How it's less generous now
Most storm damage Insurers are pickier about causes of damage (wind is covered, floods are not)
Backup of drains and sewers Have to buy extra coverage, if it's even offered
Hidden water leaks Only leaks found in the first 14 days may be covered
Mold No coverage, or capped, typically at $10,000
Cosmetic damage to floors Capped at $10,000
Increased costs to comply with new building codes No longer covered, or limited unless you have a rider
Windstorm damage, after a deductible you chose You'll usually pay a percentage of insured value for windstorms
SOURCE: MONEY research

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