Homeowners, Renters Should Make Certain Insurance Is Adequate

When Joe Annotti bought a house for $170,000, he initially thought that he would have to get homeowners insurance to cover the entire purchase price. But his agent told him that would be too much, since there is no need to include the value of the land, which can’t be damaged by fire or stolen by a burglar.

“There is no sense in insuring dirt,” says Annotti, now public affairs vice president for the Independent Insurance Agents and Brokers of California.

The beginning of the year is a good time to review your homeowners or renters insurance--and not just to make sure you aren’t insuring dirt. You also should make sure you’re carrying enough coverage to replace your house and possessions and to protect you from possible liability claims. Many homeowners and renters are not adequately covered and could be in for rude and costly surprises from fires, baby-sitters’ accidents or mishaps when you are away from home.

Here’s a checklist to help you review your insurance coverage:

- Make sure your homeowners insurance covers at least 80% of your home’s replacement cost. Many homeowners are, in effect, insuring their land against hazards, in some cases because their lenders or mortgage insurers insist on it.

In fact, California law prevents lenders from requiring such coverage. Anybody harmed by a violation of that rule may sue for injunctive relief and can recover damages and reasonable attorney’s fees and costs.

Thus, don’t assume you need to insure for the full purchase price of your home or the full amount of your mortgage, suggests Gail K. Hillebrand, a staff attorney for Consumers Union, publisher of Consumer Reports magazine. Ask your agent what the cost to replace your home with a new one is, based on local construction costs and any special features that may be built in. If your insurance is for more than that, you have too much, Hillebrand says.

Experts say you only need to insure for at least 80% of the cost to construct a new home to replace your current one. As long as you meet that minimum, most policies generally will cover 100% of the replacement cost.

But if your policy covers less than that, you could be asking for trouble. Some policies limit maximum payments to replacement value minus a depreciation charge that can be quite large, depending on how old your home is. Some also may not cover your possessions for the full amount it will cost to replace them. So you could end up with a large out-of-pocket expense to cover the difference in a total loss.

So with construction costs increasing each year, be sure your coverage is increasing accordingly. Some policies guarantee that they will be adjusted annually to cover replacement cost. If you are not sure what your replacement cost is, or whether your policy automatically adjusts for increases in it, call your agent.

Also, be sure your coverage includes the value of any home improvements you have added.

- Make sure you are taking advantage of all available discounts. Proposition 103, the insurance reform initiative passed by California voters last November, is supposed to give you rate rollbacks in homeowners insurance of at least 20%. But implementation of the rollbacks is delayed pending a decision by the state Supreme Court on the proposition’s constitutionality.

But why wait for 103? Most insurance companies offer discounts of as much as 20% off premiums if you have such safety devices as dead-bolt locks, smoke detectors and burglar alarms. Some also offer senior citizen discounts or credits.

Many homeowners unfortunately don’t take advantage of such discounts, says Annotti of the agents and brokers group.

- Consider increasing your deductible. Raising it to $250, or even $500, from $100 could lop 10% to 20% off your annual bill.

“Getting a higher deductible can be one of your better investments,” says Hillebrand of Consumers Union. You can invest what you save in premiums and in effect insure yourself for the higher deductible, she suggests.

“Insure for a calamity, not a nuisance,” Annotti says. “By increasing your deductibles, figuring how much you can afford to pay for minor incidents, you can save money and protect yourself in the event of a major loss.”

- Make sure your possessions are sufficiently covered. Your policy should cover the actual replacement cost of your possessions, instead of their actual cash value, which can be a lot less for older belongings. Replacement cost riders typically run only 10% or 15% more than actual cash value coverage. “But the added protection is well worth it,” Hillebrand of Consumers Union says.

But even replacement cost coverage may not adequately insure expensive personal items such as jewelry, furs and watches, Hillebrand says. Standard homeowners policies generally cover the contents of your house up to a value of 50% of the insured value of the house itself. And policies may exclude certain unusual or one-of-a-kind items, such as rare art pieces.

Thus, consider getting a personal articles “floater” policy. They typically cost between $1 and $4 for each $100 of coverage and will insure all valuables you already own and possibly those you will acquire in the future. Such policies will protect your valuables from all risks anywhere, even outside your home, such as theft of a fur from your car or loss of a camera during a vacation.

- Consider renters insurance. If you are a renter, don’t assume that any losses due to fire or theft will be covered by your landlord’s policy. Such a policy typically covers only damages to the structure and the landlord’s possessions, such as stoves or fixtures. You will need to get renters insurance to cover your own belongings.

However, not all insurers offer renters policies, and they often cost almost as much as homeowners policies, because most of your premium dollars for homeowners or renters insurance go toward covering possessions and liability.

- Make sure you are adequately protected for personal computers or other business equipment at home. If you operate a home office or have personal computers or other expensive office equipment, you may need supplemental coverage.

While many insurance companies have expanded their regular homeowners and renters policies to include computer equipment, others require a special endorsement, at a small additional charge, to provide broader coverage. Read your policy or check with your agent.

- Take a written and photographic inventory of your possessions. If you lose most or all of your possessions, you may need proof to verify claims--as well as to help you remember exactly what you had that was lost.

Thus, make a list of all your key possessions, including model numbers, physical descriptions, purchase date and price and any other relevant information. Get appraisals of expensive items such as art and jewelry.

Then take photos of your possessions and photocopy receipts. Better yet, if you have a video camera, walk through your house and videotape your belongings, recording verbal descriptions of each item. Place the list, photos or tapes away from your home in a safe-deposit box.

Making a photographic record “is a real easy thing to do, but unfortunately a lot of people don’t do it,” Annotti says. “Doing so could save you thousands in the long run.”

- Make sure you are adequately protected for employees working at your home. If you have a live-in housekeeper or other full-time or frequent employees, your conventional homeowners liability coverage probably won’t cover accidents that may happen to them while on your property. You may need workers’ compensation insurance.

Even regular part-time employees, such as baby-sitters, may need such additional coverage. Many policies require it for employees who work at your home more than 50 hours every three-month quarter, Hillebrand says. Read your policy or check with your agent.

- Make sure you have sufficient general liability coverage. In our highly litigious society, being sued and losing much of what you worked for and will work for is a real danger. Thus, if you have, or expect to have, considerable income or net worth, consider getting a so-called “umbrella” policy that will cover all sorts of liability claims and legal fees for damages or accidents caused by you or your family, even including those outside your home and including such cases as slander, libel and discrimination.

Umbrella policies take off where your primary homeowners and auto liability coverage end. Coverage of $1 million may cost only $100.

“Umbrella policies are probably the best insurance investment that a homeowner or renter can make,” Annotti says.

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.