Saturday, April 4, 2009

HEY, I'M NOT PAYING THAT MUCH FOR THE HOUSE! WHY IS THE DWELLING COVERAGE SO HIGH?

With today's real estate market in delcine, many buyers are getting great deals on homes. Houses that were selling last year in the $200,000 price range are now selling for quite a bit less depending on your area.

Here is an example. I had a potential client call for an insurance quote. I got the property information form her, went through the nosy underwriting questions, and produced a quote. The property replacement cost was $130,000. She then asked if we could make the dwelling coverage the same as what she was paying for the house, $50,000. Keep in mind that the property is less than a 1,000 square feet and is an older home ( built in the 1940's).

Now what the home is worth on the market today, is not my area of expertise. I'm not an appraiser or real estate agent, but I do know that comparable sales play a role. If the house down the street has close to the same square footage as yours and is of similar construction, it is used as a comparable property and it's sales data is reviewed to determine it's impact on your property value. The real estate market value of a home fluctuates based on these comparisons, sales of homes in your area, homes in escrow and homes that are off the market might also play a role. When I looked it up on Cyberhomes (http://www.cyberhomes.com/), the property had last sold in 2006 for $275,000!

I explained that the replacement cost is determined by the underwriter and that they use a valuation service to provide them data from all over the country about what it would cost to rebuild a home in a specific area. I expressed my doubts that if the house burned to the ground with all of her belongings inside that she could rebuild her home, even as small as it is, for $50,000 from the ground up. Permit fees, debris removal, architectural plans, posts, beams, plywood, drywall, bath tub, sinks, plumbing, electrical work, fixtures, construction workers, and probably at at least a hundred other things I can't think of would all come into play. In addition, many insurance companies build in extended replacement cost which is a percentage of cost that they will pay for over and above the dwelling coverage. They want to be sure that the coverage is adequate to rebuild the house and any given point in time. Your neighborhood could be ravaged by fire. Costs for labor and materials could go up based on increased demand.

I know that especially in these hard economic times that all of us are trying to cut cost's and pay less for everything. Everyone I talk to, clients and colleagues alike, are trying to keep costs down. It does the insurance industry no good if clients can't afford their policies, and insurance carriers have to have money to pay out claims. You might save some money by going to a less expensive policy, but read it carefully and make sure you understand what is covered. I have heard from my colleagues the tales of woe that customers who went with a less expensive policy had no coverage for a claim that occurred. Everyone wants to talk about costs when they are shopping for insurance, but then they want to talk about coverage when something happens and they need coverage.

She thanked me for my time, gave me her e-mail address and I e-mailed her a copy of the quote. I hope she will choose my quote because I know she has a solid insurance company backing her up, but if she finds coverage elsewhere for less, I hope her agent takes good care of her and gets her appropriate coverage.