By Anne Rand
© 9/00 Foreclosure News of NJ, Inc.

In the wake of the massive flooding in Bound Brook NJ last month, our hearts go out to the people affected while our heads take a moment to consider what we would do if we were in their shoes.

You may be inclined to think, "Oh the insurance will cover it"! But, the sad fact is, homeowners insurance does not cover floods. One must purchase a separate federal flood insurance policy. As of this writing, the damage estimates and amount of insured and uninsured losses are not tallied. My best guess is that much of the devastation will not be covered by insurance.

Before you rush out to purchase more insurance, spend your money wisely. Over insuring your property will not protect you from catastrophe. Understanding the homeowners insurance "packages" will help you select the best coverage for your needs and pocketbook.

TYPES OF HOMEOWNERS INSURANCE

The basic form is HO-1. Coverage is for losses to the structure and contents resulting from fire and lightning, smoke, windstorm and hail, vandalism, theft, explosions, riots and civil commotion, damage by vehicles and aircraft, glass breakage and volcanic eruption.

The broad form is HO-2. Coverage is for losses to the structure and contents, including all items in HO-1, plus damage from weight of snow, ice, sleet, surges or short circuits in electricity or problems stemming from improperly functioning plumbing heating and air conditioning systems or domestic appliances.

The special form is HO-3. This form provides more protection for the structure and belongings than what is provided under HO-1 & HO-2. It does not cover damage from floods, earthquakes, war nuclear accidents and similar catastrophes.

HO-4 is renters or tenants insurance which covers personal belongings.

HO-5 is the comprehensive form. It is the most complete coverage but not all insurers will offer it. Many insurer will offer supplementary insurance to the HO-3 to equal coverage in the HO-5 form.

HO-6 is condo insurance and covers the interior space plus personal property.

HO-8 is older homes policy. This is similar to the HO-1 but only insures the house for its actual cash (market) value not replacement value, since it can be prohibitively expensive to replace the construction details in an older home.

So, how much insurance should you have on your home? Most people will assume you should insure the home equal to the market value or the mortgage balance. Even some lenders will insist you insure the home equal to the mortgage balance.

The amount of insurance you should carry is not equal to the market value or the mortgage balance. As your home increases in value your mortgage amount decreases, and your potential liability would increase. Insuring your house based on market value can leave you over insured or under insured based on the house and its location.

The most important item to consider when determining the amount of homeowners insurance is the cost to rebuild the structure. The value of the land (and the foundation) is not included. The land is indestructible. Therefore, in the event of a total loss of the structure, the land remains. The estimate to rebuild should consider the square footage and the quality of the construction. To be safe, obtain estimates from more than one insurance agent. To be certain, contact local builders to determine the prevailing cost per square foot in your area and compare to your insurance estimates.

At minimum, your structure should be insured for at least 80% of its replacement cost. However, the homeowner will be liable for the difference if there is a total loss. Therefore, it is better to insure the structure for 100% of the replacement cost.

A key item to remember is to purchase guaranteed replacement cost homeowners insurance policy. This is usually an endorsement to one of the policy forms listed above. This endorsement provides the homeowner who purchases less than 100 percent coverage but more than 80% coverage with full replacement protection in the event of a total loss regardless of policy limits. A guaranteed replacement cost policy (not including the value of the land) will pay to rebuild a home even if it burns to the ground. The policy will not pay out anymore if the value of the land is included when the premium amount is calculated.

Most states have laws which prohibit insuring a property for more than the properties replacement value. The reasoning is to eliminate arson incentives.

Even though the land is indestructible, landscaping is not. Usually, landscaping is covered up to 5% of the coverage of the structure.

Personal property is covered based on a percentage of the structure coverage, usually 50%. However, there are limits on such items as jewelry, art, furs or other collections. Additional coverage can be provided for these items by purchasing a rider. Usually, valuable items covered under a rider will require a professional appraisal.

Liability coverage protects the homeowner from a claim or lawsuit resulting from someone getting injured on your property or your tree falling on a neighbors house etc.

Homeowners insurance does not cover floods. The Department of Housing and Urban Development Federal Insurance Administration has a program to make flood insurance available to designated flood prone areas. To qualify, your community must have a plan and carry out measures to reduce flooding. Your insurance agent can tell you if you qualify. Some flood insurance is provided through private companies with reimbursement by the US government.

If flood insurance is available where you live, buy it! Remember the pictures of Bound Brook and other flood victims in recent years. Pray that you don't ever have to use it.

Usually, a guaranteed replacement value policy based on the cost of rebuilding the structure is less expensive than a policy equal to the mortgage balance. There are other ways to save premium dollars without significantly effecting coverage in the event of a disaster.

The purpose of insurance is to protect one from major unpredictable losses. Small losses can be absorbed by the average homeowner. Consider raising the deductible on the policy. A small deductible of $250 encourages small insurance claims and raises the insurance companies overall costs. Raising the deductible on the policy can save you up to 50% of the premium. Deductibles can range from $250, $500, $1,000 or $2,000. Obtain several premium quotes at various deductible amounts. Select the best value. Remember, if you actually saved the difference in the premium over a number of years, you can accumulate the cash for the larger deductible. If you have no claims, you have the funds available for something else. If you pay the higher premium for a smaller deductible, the money is gone....

Another way to save premium dollars is to purchase an "umbrella liability policy" and reduce your homeowners and auto insurance liability coverage. This will provide more liability coverage at a lower unit cost. In order to avoid any conflicts and qualify for additional discounts, use the same insurer for all of your policies.

If your mortgage payment does not include escrow for taxes and insurance then you can save money on homeowners insurance by paying the annual premium in advance. Avoid monthly or quarterly premium payments. This allows you to save on finance charges or handling fees. If your insurance and taxes are paid into escrow, then the mortgage company will pay in a lump sum when they are due.

The coverage for your personal property is usually a percentage (50%) of the coverage for the structure. Additional coverage for personal property can be purchased. To determine if the coverage is adequate, you should prepare an inventory of all your belongings. This inventory is also invaluable if you should ever file a claim or negotiate a settlement with an insurance company.

Your personal property inventory should include a description of the item, when you bought it and how much it cost. Video tapes of the items with a voice description including the date purchased and amount is a great way to create the inventory. Even photographs can be used to create your insurance inventory. The video tape/photograph inventory and insurance documents should be stored in a safe deposit box or at an alternative safe site. Keeping receipts for purchases to substantiate your documentation is also a good idea.

When shopping for homeowners insurance or reviewing the policy annually, make sure you ask the agent what additional discounts are available. Some companies offer discounts for senior citizens, the theory being a retired homeowner will detect smoke from a fire and respond where as a worker would not be home. Other companies will offer discounts for security features included in the home, and discounts if all occupants do not smoke etc.

While the recent tragedies are fresh in your mind, NOW is the time to review your homeowners policy to protect yourself should tragedy ever strike your home.