Understanding Homeowner’s Replacement Cost Coverage

If I were to be asked “What is the most common question you receive?” I would have to answer that question with the question “Why is my house insured for so much?” Since it definitely falls into the category of “Frequently Asked Question” – I thought it may be helpful to address this topic.

A typical homeowner’s policy is designed to “replace” your home and personal property. Admittedly, there can be a substantial discrepancy between what was paid for a home and how much insurance coverage is required. Especially since the economy has struggled in recent years hurting home sales and prices. The question you must ask yourself is “How much would it cost to rebuild this home?”. It has nothing to do with the “market value” of the home. It has everything to do with rebuilding a similar style home with similar features on the same lot.

Another concept customers question is that a new construction home is insured for more than it cost to build it. The primary reason for this difference is that your home was built on a “clean slate”. In the event of a total loss to your home, you must keep in mind that removing debris from the site and preparing the site for construction can be quite costly. Especially nowadays where environmental protection and handling of waste is certainly more closely monitored making debris removal and site preparation a more delicate and costly procedure than it used to be.

The expectation to meet and satisfy these ever increasing costs are a major factor in establishing replacement cost for a home. Again, you need to imagine a burned house in ruins when contemplating what it would take to “rebuild” that home. Not the vision of a clear lot and fresh lumber showing up immediately – a fair amount of work and effort will be needed in order to pound that first nail.

Lastly, I thought it may be helpful to offer some insight into calculating your replacement cost. The most basic recipe is to take your home coverage and divide that by your square footage. For example, a 1500 square foot home insured for $200,000 would equal a replacement cost of $133 / sq foot. That would be a bit on the higher side for today’s standards in Northeast Wisconsin. You could or should see your coverage range from anywhere from $110 to $120 / square foot for construction in our area.

There is no magic formula for “everyone”. Homes vary greatly and therefore the replacement cost can vary just as much.

You are the best resource to determine your home’s replacement cost. Is it older? Would there be new building standards to adhere to? Is the lot difficult to build on (protected by trees, sloping etc)? Do we have higher end fixtures? Do we have lower end fixtures?

All of those considerations should be discussed when trying to determine an adequate replacement cost coverage. Not to mention you may consider contacting local building contractors for their opinion on replacement costs for homes.

Hopefully this sheds a little more light on those insurance coverage amounts on your home policy.

Do You Have Water Backup Coverage?

Seems the weather is leaving no doubt as to what the next insurance blog topic should be about.  Water.  Many, not all, home and business insurance policies have water backup coverage for sewers and drains.  Most Wisconsinites are familiar with the concepts of drain tile and sump pumps and we typically rest assured that a quality sump pump with a back up power supply will adequately remove the water that collects through the drain tiles during the worst of storms.  However, even the most dependable system can be rendered obsolete when Mother Nature decides to throw “normal precipitation” out the window.  So lets start by considering the amount of precipitation we “normally” receive in the area versus what we’ve actually received. 

 

Locally, in Appleton, WI we have been receiving thunderstorms and heavy rain on what feels like a semi-daily basis.  While thunderstorms in our area certainly aren’t extraordinary, the amount of precipitation we have received is. 

Some brief research indicates that our average monthly precipitation for the month of July is 3.3 inches.  August is our “wettest” month of the year for precipitation at 3.9 inches.  These statistics can be found on the Weather Channel’s website here: http://www.weather.com/weather/wxclimatology/monthly/graph/USWI0020?from=tenDay_bottomnav_undeclared.  Our annual precipitation is approximately 30 inches.  Now, lets consider just July 2010 (which isn’t even over yet):  As mentioned our normal precipitation for the month is about 3 & 1/3 inches.  According to http://www.weather.com/weather/monthly/54915?role= our total rainfall thus far in July is 9.38 inches.  So in a little over 3 weeks of the month, we have basically tripled our normal precipitation for the month.  When compared to our annual average precipitation, we have received almost a one-third of our annual total in about 3 and a half weeks.  If we include June’s numbers from 2010, we’ll notice that we have received almost 1/2 of our annual precipitation in just under 2 months time.  Average for June = 3.56 inches while the actual figure for June 2010 was 5.27 inches.  Even our most reliable sump pump systems can simply have trouble keeping up with these figures.  

As water claims have poured (no pun intended) into our agency, it seems no one is exempt from the trouble that water can cause.  Power failures causing pumps to stop operating in addition to pumps running virtually nonstop unable to keep up with the heavy rains.  This leads to numerous water damage issues to property in the basements in addition to any finish items such as drywall and carpeting.  Typically a restoration company will become involved to dry out these items and there are costs incurred with their services in addition to the costs involved with simply replacing the damaged property itself.  High powered fans and dehumidifiers can sometimes be operated for days in order to achieve the drying necessary to avoid future moisture issues.  As these costs can accumulate quickly, lets consider the coverage that would apply.   

An “entry level” amount of coverage for these issues is typically $5,000.  This can cost anywhere from $35-$50 / year depending on the company and the policy (commercial or personal).  Coverage can often be increased to as much as $25,000 again depending on the company and type of policy.  Perhaps its never been a better time to make some serious evaluations about your sump pump system, the amount of property which may be affected and whether or not you are insured adequately.  Also keep in mind that in many cases, increasing your coverage may involve a waiting period possibly as long as 30 days.  This is done to avoid policy amendments after viewing the local forecast showing a strong thunderstorm for the evening.  With our “wettest month” of August not yet upon us, the timeliness of making water backup coverage choices is essential.  Considering the modest cost of the coverage compared to the dramatic effects water can have on your basement, it seems a no-brainer to make sure you have adequate coverage.  Not to mention, without this specific coverage, your “standard” insurance policies would exclude coverage for claims resulting from backup of water from your sump pump and/or drains.  Potentially, leaving you holding the bill for all these costs. 

Lastly,  as someone who has dealt with a wet basement many times in the past, let me offer a few basic tips that can help your basement stay dry without any major costs.  First and foremost, inspect your gutters and downspouts on a regular basis.  Although you may have cleaned them in the spring, leaves and debris can accumulate after our strong storms and its wise to check them as frequently as possible.  Also, upgrading and/or replacing your gutters and downspouts can be a relatively inexpensive home improvement when compared to the cost of water damage to your foundation and/or property.  Gutters and downspouts are a major factor in ensuring water is first being carried as far away from your house as possible.  Also, check the landscaping around your home and window wells.  Are there any low areas which feed towards the house rather than away?  Do you have window well covers?  Making sure the soil around your house slopes away from the basement in addition to installing window well covers can also prevent a fair amount of water from draining immediately to the basement drain tile.  Finally, please feel free to contact me and/or our office if you have questions or concerns regarding your current coverage (or lack thereof) and we can ensure your coverage meets your needs.  pteske@ademino.com

Do I need to purchase coverage from the rental car company?

Its that time of year when many of us are traveling and taking family vacations or moving.  As if you didn’t have enough things to prepare before departing on your travels, let me add one more thing to the list:  Call your insurance agent.  One of the more common and frequent calls I have taken over the years is “Am I covered if I rent a car?”.  Like many insurance related questions there really is no simple answer.  A number of factors will come into play in order to determine if you are covered in that rental car.  A few of these factors will include:  Do you have physical damage coverage on your current auto / auto policy?  Where will you be renting a car?  What credit card will you be using to purchase the rental vehicle?  Who’s driving?  What about moving trucks?  Lets address these few factors.  

Do I have physical damage coverage currently?  The first step in determining whether or not your current auto policy will cover your rental vehicle is to identify what coverage is on your current policy.  If you have “liability only” then you do not have any physical damage coverage for your vehicles and therefore would have to purchase coverage from the rental company.  If you do have physical damage coverage, that is a step in the right direction as that coverage typically will extend to any “temporary” vehicle provided for your use.  

Where will you be renting the car?  This is important because rules and guidelines can vary greatly from state to state.  This is assuming that we aren’t traveling out of the country in which case you would almost always want to purchase coverage from the rental company.  Some insurance companies may extend coverage in Canada but generally I would recommend purchasing the coverage while abroad as I would not count on any coverage over international borders.  Not to mention the fact that insurance claims can be challenging enough without dealing w/ potential language barriers and international laws unfamiliar to us.  That rental coverage should allow you to simply turn in your vehicle and walk away w/o having to deal w/ any headaches on that claim overseas.  That, in my opinion, is worth the price of the additional coverage.  Different states have different guidelines on handling rental vehicle claims.  Some states for example will recognize loss of use and/or diminished value claims in addition to just the physical damage coverage.  These two areas can prove to be problematic for personal auto insurance policies as they often do not cover these claims.  Loss of use is the daily rental rate of the damaged vehicle multiplied by the number of days the vehicle was in the shop and/or disabled as the rental company is essentially seeking lost income from the days they could NOT rent the car.  Diminished value isn’t quite as common as loss of use but has gained traction in a couple states.  In those cases, the rental company will claim additional compensation for the perceived loss of value of the car since it has been damaged.  No matter how good the repairs are, thanks to Carfax reports it will be documented that that vehicle was in for repairs and therefore has a “diminished value”.  Again – these two areas will often be excluded by your personal auto policy then you would be subject to that particular state’s guidelines as to whether or not it has to be paid (by you if your insurance doesn’t cover it).  Many times these specific areas of claims can be negotiated down but still can be quite costly for the average consumer.  You may be able to simply ask the rental company if their particular state will allow these claims.  If you believe you may have a loss of use or diminished value concern – then purchase the additional coverage to alleviate those concerns.  After all – it is a vacation right?

What credit card did you use?  Lets assume for a minute that you decided against purchasing coverage, what difference does the credit card make?  In numerous claims I advised clients to contact their credit card company as part of the process.  Many clients were delighted to find out that (at that time a few years ago anyway) their personal auto policy covered the damages to the vehicle but they had to deal with that pesky deductible which is typically more expensive than the additional insurance offered at the rental company.  Check with your credit card company – they may have language built into their agreement that will provide some coverage for the damaged rental vehicle.  Most often this was limited to the amount of the deductible or just a flat $500.  At any rate, many stressed out clients were eventually relieved to find out between their auto policy & their credit card they incurred zero expenses in relation to the damages.  However, this doesn’t always address those troublesome loss of use and diminished value claims mentioned above. 

Who’s driving?  Sometimes it may take a Seinfeld episode from nearly 2 decades ago to remind us that only drivers listed on the rental agreement are covered under the rental company’s insurance agreement.  So make sure to think twice before offering your rental vehicle to your travel companions if they aren’t listed as drivers on the rental agreement.  They may be very apologetic when returning your damaged rental car, but ultimately you are the one dealing w/ the rental company and these claims because your name is on the agreement.  Perhaps we recall that George Costanza was attempting to park Jerry’s rental vehicle while it was involved in a collision.  Jerry confidently returned to the rental facility knowing he had purchased the coverage offered by the company but when compared to the accident report – he was told he was responsible for the damages since George wasn’t listed on the agreement thereby nullifying the coverage he had purchased.  

What about moving trucks?  Some brief insight here is that the weight of the truck is a major factor in determining whether or not coverage will apply.  Therefore make sure to get the specs on the large truck you are renting to move and take the gross vehicle weight to your insurance company / agent.  Some of the larger trucks may be specifically excluded from coverage in which case you would be very wise to purchase coverage from the rental company. 

Oh, and by the way.  Be sure to carefully inspect your rental vehicle before and after use.   Make sure to note even the smallest dings and scratches as when you return the car, you want to be sure that even the smallest damages are documented as prior damage when you take the vehicle.  

Lastly – here is a link to an article from the Insurance Information Institute titled Do I need separate rental car insurance? further explaining the nuances of rental car coverage.  I believe the days of “beating up the rental car” are gone as the rental companies are seeking more and more damages for these claims (besides just the repairs) and it certainly is in your best interest to drive safely all the time especially while using a rental vehicle.  No amount of coverage will eliminate the lost vacation time and inconvenience of dealing with an auto insurance claim in some far away place unfamiliar to us.  Happy travels this summer.