Are you underinsured?

Castles in the Sand

My least favorite topic to talk about and write about is homeowners’ insurance. I’m not much for burying my head in the sand, but when it comes to insurance, I accept on blind faith whatever my broker tells me, something that I would advise clients not to do. So even though we’re already well into hurricane season, it can’t hurt to review a few basics.

The first big basic and to my mind, the most confusing is the 80 percent rule and replacement value. The 80 percent refers to the fact that most insurance companies will not fully cover the cost of damage to a house unless the homeowner has purchased insurance coverage equal to at least 80 percent of the house’s total replacement value. In the event that a homeowner has purchased an amount of coverage less than the minimum 80 percent, the insurance company will only reimburse the homeowner a proportionate amount of the required minimum coverage that should have been purchased.

For example, the replacement value of your home is $500,000, the insurance purchased is $395,000, a hurricane blows in and does $250,000 of damage. However, because you did not purchase the full 80 percent of replacement value, which should have been $400,000, you will not be fully reimbursed, and there is a specific calculation to determine this figure. This 80 percent rule is one reason why insurance policies should be reviewed by you and your insurance broker and company to adjust for improvements and escalating replacement costs.

Also, in Florida and other states that are under the threat of hurricanes, homeowners’ policies are written with an annual hurricane deductible. For most policies, this deductible is 2 percent. This, of course, is in addition to your normal homeowner’s deductible.

The other big factor affecting our area is flood insurance. If you don’t have it, get it, even if you are not mandated by a mortgage lender. Flood insurance is purchased from the National Flood Insurance Program through approved brokers and is subsidized by the federal government. The maximum amount of coverage is $250,000 for damages and $100,000 for contents. The federal flood insurance program has been in flux for several years. Even though the government is in a loss position for this program, it is still trying to find a way to increase rates without devastating homeowners’ and property values.

Finally, as I discovered last year after Irma, condos have an item in their homeowners’ policies called loss assessment coverage, usually on the back of the declaration page. Loss assessment covers an assessment of your condo association levies on homeowners to cover damage to the common areas of the association, which may be within the 2 percent hurricane deductible range of the association’s insurance. The caveat with loss assessment coverage is the maximum coverage is $2,000, as mandated by the state of Florida, generally with a $250 deductible.

Since usually, the worst months for hurricanes are September and October when the Gulf waters really heat up, you still have time to make some changes. Remember if there is a named storm that’s being tracked, you can’t purchase insurance or make changes until that storm has passed.

Bottom line is don’t follow my lead. Get your head out of the sand and read over your homeowner’s policy as tortuous as it is.

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