Replacement Cost - when it is just right!

What is the right amount of insurance for my house? I don't want to be underinsured... but at the same time, neither should I be overinsured... and pay more than necessary of my hard earned money to the insurance company!

And what about "Extended Replacement Cost"? This adds another 50% to my coverage. So do I really need to insure for the full value of my home? What if I go just a bit lower since this extra 50% will give me a lot more than I need? Makes sense - right!

It does make sense - but here is the question that you should ask yourself: Will any insurance company allow me to underinsure myself, let me pay less money and then pay my claim in full? Probably not - so let's take a closer look at the fine print.

The "Extended Replacement Cost" is an "endorsement" or a modification of the insurance contract. It gives you a whole lot of extra coverage for a small charge. However it also comes with a "condition" or a requirement that you have fulfill in order for the endorsement to be active. You guessed it - the requirement is that you insure yourself for a 100% to value at the "inception" of the policy. Remember the word "inception" as we will come back to it later.

Huh! If I was going to be insured for a 100% to start with, then why do I need the extra 50%?

That's a really good question.

Let's look at inflation, which has been quite low throughout much of the 90's and early 2000's. In the past 12 -18 months, it has really jumped. So if you were insured for 100% at the "inception" of the policy, you may be underinsured by the time you are halfway through the policy.

But why the 50%? We never have 50% inflation..

Yes & No. Let's consider inflation from a different point of view. The San Diego fires in '07 damaged hundreds of homes. What do you think happened to the rebuilding costs as everyone scrambled to get the licensed contractor to come fix their home first? An immediate spike of rebuilding cost anywhere from 10-30%. This is also inflation - though of a different kind.

So that's explains the rationale behind this endorsement - not to allow us to underinsure ourselves but to protect us from inflation of various kinds. Let's go back to our original question - how much insurance is right?

As insurance agents, we have tools at our disposal that allow us to come up with a reasonable "estimate". Some of the greatest cost variance comes in the upgrades of kitchens and bathrooms. We are all familiar with a home down the street that may have upgraded their kitchen, added granite counter tops and changed their cabinets. The bathrooms was remodelled with tiled shower and floor and other upgraded fixtures. A home with "Economy" kitchen and bathroom will be insured for a lower amount that a home with "Standard", "Semi-Custom", "Custom" or a "Designer" type kitchens and bathrooms. We can help you in identifying the type in your home. Pay careful attention to these classifications as it can mean a difference of thousands of dollars in your home's true replacement value.

Lastly, talk to your contractor or someone you know who is an architect and works on homes like yours. They have a really good idea of the actual costs in your area. Our tools are only "estimates" and are not necessarily always on the dot.

Oh! one more thing. Remember I said we will come back to policy "inception". Well here is why...

The extra 50% coverage is only available if you were 100% insured at the policy "inception". Each policy renewal is considered an inception. What would happen if your policy was not updated for 2-3 or more years? That's right - not only will you be underinsured at subsequent policy inceptions/renewals, you may also lose this valuable coverage. The Oakland fires in the early 90's was a startk reminder where some of the policies had not been updated for as much as 30 years. While the insurance companies will adjust the replacement cost upwards slightly every year, you should also take the time to review your policies with your agent at least once a year.

I hope this was helpful.

Homeowners Insurance - Different Flavors

Shopping for Homeowners Insurance?  Is the cheapest quote the best?  Maybe it is - then again perhaps not...

Here's why: 

With 5 different contracts available, Homeowners Insurance is more complicated than a plain old Auto Insurance policy. Some contracts do not cover theft of your personal property and can easily shave an eye popping 30-40% of the rate. These contracts are called DP1, 2 and 3 (DP stands for Dwelling Fire Policy).  I have seen these type of policies being sold primarily during escrow closes when the buyer is overwhelmed with paperwork and decides to use price as their primary guide when deciding on an insurance policy.  

A standard Homeowners contract is called a HO3.  The personal property in this contract is covered on a "named" peril basis.  The best contract covers your personal property on an "open" perils basis.  However it adds 10% to the HO3.  What's the difference?  It's subtle but important.  The "named" peril contract tells you what is covered while the "open" peril contract tells you what is not covered.  This difference becomes important when a claim is denied.  In the "named" peril contract, it is now up to the customer to show where coverage exists.  In an "open" peril contract, it is up to the insurance company to show where the coverage does not exist.  The burden of proof changes.  In addition there are a few coverage that are also added when going from a "named" to an "open" peril contract.   

So which quote did you get over the phone!

One way to tell is to check the percentage of Personal Property coverage to the Dwelling coverage. In a HO3 form, a typical policy will be quoted with Personal Property at 70-75% of Dwelling coverage.  As an example, if your Dwelling limits are quoted at $400,000, the Personal Property will be 70% or $280,000 . On the other hand, a DP3 policy will have the Personal Property at 50% of the Dwelling limits.

There is still more to it - endorsements, riders packages...  we will discuss in our next post.

Hello - first try at blogging

I told my wife that it felt like I was getting married all over again. The same tingling feeling in the pit of my stomach. It was only our new office but it had taken us over a year to get to this point.



My wife said it felt more like giving birth all over again. Or something like it!! So on March 1st, we have our own office - small with windows overlooking the Santa Monica mountains, but all our own. Did my wife mention having a baby - small and our own (for a while atleast)!



Photos coming soon...