March 20, 2005
By JONATHAN D. EPSTEIN
News Business Reporter
Buffalo News

Take a close look at your home insurance policy. You may not be covered for as much as you think.

Over the last few years, home insurers have quietly, and almost universally, changed a clause governing how much they will pay to replace your home in the event of a total loss.

In the past, the policies used to guarantee full replacement, regardless of how much unexpected expenses might drive the final cost beyond the policy's face value.

Now, however, most home insurance policies put a cap on how much they will cover - often only about 20 percent or 25 percent over the face value of the policy, or the limit on it. And they may charge a nominal extra annual premium as well.

Either way, that's more than what your insurance policy says your home is covered for, so the difference may not seem like much at first. But the face value of a policy is only an estimate of how much it would cost to replace the house.

And particularly for older or historic homes with hand craftsmanship, or for homes in areas beset by regional natural disasters - where costs could suddenly soar - the change could mean the difference between getting back in your house without hassle or having to shell out tens of thousand of dollars yourself.

"It makes a huge difference and a lot of homeowners don't realize that they do have that cap in the policy," said Ron Papa, president of National Fire Adjustment Co. in Amherst, a claims adjustment company that works for homeowners and helps them deal with insurance companies. "It's unfortunate that they have to realize that after the loss occurred."

But insurers say such problems are rare and highly unlikely if the value of the home is properly calculated to begin with, and if the homeowner complies with all terms of the policy.

That means fully insuring the home to the replacement cost instead of skimping to save money on the premium. If you only insure up to 80 percent of what the company advises, you won't qualify for either the old guarantee or the new version.

It also means maintaining your home and repairing damages after previous losses. And it means telling your insurer if you do anything to the house that might raise its value by $5,000. Insurers will also annually reevaluate the replacement cost and automatically adjust the policy to keep it up to date.

If the consumer follows these requirements, he or she should have enough coverage, insurers say.

"I would say that for all intents and purposes, in practice what the customer has is not substantially different from what they used to have," said Bill Goff, New York field product manager for Northbrook, Ill.-based Allstate Corp., the state's No. 1 home insurer. "If we're pretty comfortable and the customer is pretty comfortable that the coverage amount is the right amount, then having another 25 percent is gravy."

Indeed, several insurers and independent insurance agencies said they could not think of many cases in upstate New York in recent years when a homeowner with a total loss has not been made whole, unless they didn't keep the insurer apprised of changes to the home. In part, though, that's also because total losses aren't common here.

"Not too many houses burn to the ground. The more likely scenario is a partial loss," said Donald Houck Jr., who owns an agency in Amherst.

Insurers say they notified consumers of the changes in their policies and have not heard of any complaints. However, they acknowledge that many consumers ignore such notices.

"I frankly think that most consumers aren't aware of it," said Bob Sauda, president of the Jacob Hauck Agency in Hamburg. "Some are a little more diligent about reading the policy than others."

"We've done a good job of notifying people of that change. (But) some people don't understand their policy," said Marc Firnstein, fire claims team manager for Rochester and Buffalo at State Farm Mutual Insurance Co., which has a 20 percent cap.

Insurers and agents advise consumers to at least review what coverage they have. "A lot of people may not know they're not as insured as they used to be. I think they would care," said Jo Ann Litwin, president of Litwin, Castle and Christ, an insurance agency in Orchard Park. "It will be an issue for the first person that has that problem."


Why the change?

Home insurers have been struggling for years to improve their profitability in the face of heavy losses from natural disasters. According to the industry-funded Insurance Information Institute, home insurers paid out, on average, $1.17 in losses and expenses for every $1 they earned in premiums from 1990 to 2002.

Since 1990, insurers have paid out nearly $150 billion in losses for catastrophes, equal to about $830 million per month, the Institute said earlier this month. Besides major events like Hurricane Andrew and the Northridge earthquake in California, such disasters include tropical storms, tornadoes, wildfires, hail and severe winter weather.

Between 2000 and 2002 alone, insurers shelled out $13.5 billion more in claims than they collected in premiums.

And last year, losses hit a new record of $27.3 billion for natural disasters, led by the four Florida hurricanes that accounted for 83 percent of the total. That's when many homeowners in that state learned they no longer had the full guarantee for replacement.

Such losses led to higher premiums, which have risen sharply over the last six years and are expected to rise again in 2005 by 2.5 percent to an average of $677, according to the Insurance Information Institute. But home insurers also have been seeking to control their risk by putting more exclusions into policies, and limiting their liability.

That's where the shift away from guaranteed replacement comes in. Insurers used to cover the full cost of replacing a home, as long as the claim qualified, but sometimes were hammered by excessive costs.


Rising building costs

The problem is that the face value of a policy doesn't take into account unusual and unexpected expenses, or sharp surges in building material or labor costs during a regional catastrophe when such things are at a premium. According to the insurer organization, the cost of lumber alone rose 20.1 percent from September 2003 to September 2004.

Also, with a potentially unlimited coverage, insurers couldn't calculate their maximum exposure. By changing the policy terms, however, they cap that.

"I don't think it's trying to avoid responsibility for losses. It's trying to get a better handle on what their loss exposure will be," said Ira L. Zuckerman, senior vice president and industry analyst for Stanford Group Company, a brokerage firm.

Today, the majority of companies cap replacement coverage at 25 percent or 50 percent over face value. Allstate, for example, charges $2 annually for up to 25 percent more.

"Obviously it's up to the consumer if they don't want the endorsement, but I can't imagine many instances where for $2 it isn't worth the extra coverage," Goff said.

Amica Mutual Insurance Co. of Rhode Island limits coverage to 30 percent extra. National Grange Mutual charges $3 a year for 25 percent, New York Central Mutual charges $5 for 25 percent, and St. Paul Travelers Companies wants $12 for 25 percent and $30 for 50 percent.

Buffalo-based Merchants Group charges $5 for 25 percent, and 6 percent extra premium for 50 percent.


Some offer full coverage

Only a handful of companies - most notably Chubb Corp. and MetLife Auto and Home - still offer traditional guaranteed replacement coverage, for a cost. Merchants also offers it, for 15 percent extra premium, as does Atlantic Mutual Companies and Fireman's Fund Insurance Co.

MetLife charges 4 percent more premium for guaranteed coverage, or 2 percent more for extra coverage with a 25 percent cap. An "overwhelming majority" of its customers choose the guarantee, said spokesman David Hammarstrom.

Chubb employs a few hundred home appraisers, who go into customers' homes, look at materials and workmanship, research local costs, and determine a replacement value. By contrast, many insurers do only external examinations, rely on customers' answers to standard questions, and use industry guides to calculate a value.

"We have been doing this for a long, long time. We know what we're doing," said Mark Schussel, spokesman for Warren, N.J.-based Chubb, which is known for insuring high-end homes with expensive but lavish policies.

"We have people who are trained in architecture, home construction, historic properties and preservation. They really have knowledge of these different types of materials."

e-mail: jepstein@buffnews.com

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