THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, October 1, 1994 TAG: 9409290357
SECTION: REAL ESTATE WEEKLY PAGE: 14 EDITION: FINAL
SOURCE: BY DAWSON A. MILLS JR., SPECIAL TO REAL ESTATE WEEKLY
LENGTH: Medium: 94 lines
Thanks to a feature in many homeowners insurance policies, some homeowners are unknowingly buying excess coverage. The cost, in some cases, may exceed 20 percent of the total premium.
Insurance companies offer riders that automatically increase the coverage and premium each year. Called ``inflation protection,'' or a similar name, some companies have even charged their policy-holders for the service.
But in the last decade, inflation has come under control. The soft building market lowered construction costs and reduced property values.
In short, the costs linked to losses covered by homeowners policies has begun to stabilize. But coverages and premiums driven by an inflation-protection rider continue to increase.
Homeowners insurance differs from consumer purchases. Few people compare prices regularly, and it's hard to find out what a home is really worth.
If there's a mortgage, the mortgage holder usually pays the homeowner's insurance premium. The homeowner never sees the actual bill.
Though the homeowner receives the policy renewal, it is routinely filed with other insurance papers. The astute homeowner may note that the premium is higher, but so is the coverage.
How can a homeowner find out if coverage is excessive? A good place to start is to check the appraised value of the structure on the property tax assessment.
Virginia requires that assessments be at 100 percent of fair market value, so it should be fairly accurate. If the value is sharply less than your coverage, contact your insurance company.
Also, contact several insurance companies to see how their rates compare. Some companies have been hit harder than others by recent natural disasters - and their rates reflect it.
Once you talk to an insurance agent, ask the person to figure out how much coverage you should have. It can't hurt to mention that you are checking with several companies.
To arrive at the recommended amount of insurance, the agent will ask you several questions about your home. Different insurance carriers may come up with different figures, but they should all be close.
In a recent case, a homeowner bought a home in 1978 for $62,200, and insured it through the same company since then with a policy including inflation protection. The homeowner received a renewal providing $124,500 of coverage, at an annual premium of $253.
Even so, the latest tax bill for the property listed the value of the structure at $106,580. After calling the insurance company, the homeowner received a new figure for the coverage he needed: $106,800, for an annual premium of $238.
Because many older policies include deductibles that seem low today, the homeowner also obtained quotes with a higher deductible. With the higher deductible, the premium dropped to $206 a year.
This seemed a drastic drop in coverage. The homeowner then asked the insurance agent a simple question: What if a loss proved that the newly revised figure is too low?
The answer: For an additional $16 premium, the homeowner could buy a rider that would guarantee the full replacement cost of the home, insured at the lower figure.
The total premium, now $232, was still lower than what the homeowner would have paid for the higher coverage without the guarantee.
The homeowner also obtained quotes from two other insurance carriers. One was lower than the homeowner's company.
Also, a helpful agent alerted the homeowner to another potential pitfall: If the home, built in 1950, was destroyed, changes to the city building code might boost the cost by rebuilding the home to comply with current standards.
Because these changes are not an ``exact replacement'' of the home, the additional expense would not be covered. But an additional ``laws and ordinances'' rider, ranging from $23 to $27 a year, would provide the added protection.
After considering the options, the homeowner decided to change to a different company. He reduced the amount of coverage from $124,500 to $106,800, but added the riders for guaranteed replacement cost and laws and ordinances.
The annual premium for the new policy came to $222, compared with the $253 proposed by his old carrier for renewal, for a savings of $31 a year.
Have you insured your home for several years with the same company, under a policy that contains an inflation-protection rider? If so, you may want to check the numbers yourself.
Do it well in advance of the policy renewal date. If your mortgage company pays the premium, it can take several months to complete the change.
Your insurance agent should notify your former carrier and mortgage holder if you decide to change insurance companies. The agent will send you the forms you need to complete and sign.
Even if you stay with the same company, it can take several weeks to issue a revised policy and change billing information. MEMO: Dawson Mills, a former personnel administrator, was responsible for
group insurance plans for more than 20 years. He lives in Norfolk.
by CNB