Finance news

Wildfires are threatening homes in California, while East Coast residents brace for hurricane season. Judging by recent catastrophes, people should review their homeowners' coverage to make sure dollar amounts keep pace with current construction expenses.

About two-thirds of U.S. homes were underinsured in 2007 by an average 18 percent, according to data compiled by Los Angeles-based Marshall & Swift/Boeckh, which provides building-cost information for the insurance industry.

Owners often confuse the estimated resale value of their homes, which includes the value of the land, with what it costs to rebuild. The latter is determined by market prices for contractors and building materials, not the local housing market.

“Most policies used to be guaranteed replacement cost,'' said Robert Hunter, insurance director at the Consumer Federation of America in Washington. “That isn't true anymore. It puts people in a rather fragile situation.''

Insurance agents may provide a figure for coverage, but it's the responsibility of homeowners to make sure that's enough. Insurers generally pay up to a set amount, even if it's less than what it costs to restore a home. And, some homeowners mistakenly think they're covered for floods, earthquakes, mold, termites and water-line breaks, according to a 2007 survey by the National Association of Insurance Commissioners in Kansas City, Missouri.

“Companies are always looking at different aspects of homeowners' policies that they may exclude,'' said Marta Arrington, director of consumer services at Florida's Department of Financial Services. “Mold is a good example.''

Hurricane Andrew

While Hurricane Katrina added to pressures on insurers, it was Hurricane Andrew in 1992, which followed wildfires and earthquakes in California, that led to an overhaul of the way the industry wrote homeowners' policies, according to Hunter, who was the Texas insurance commissioner in 1993 and 1994.

Companies turned to consulting firms such as McKinsey & Co. and computer programs with names like Colossus to pinpoint where they were losing money. Results were dramatic, Hunter told Congress in October testimony. Even after record-setting amounts of damage by hurricanes, the insurance industry made $38.5 billion in 2004 and $44.2 billion in 2005, he said.

Thousands of homeowners battled insurers in court after Hurricane Katrina in 2005 on whether damage to their property was due to wind, which is covered by private insurance, or water, which would make the federal flood insurance program liable for repairs.

Inflation Adjustments

Allstate Corp., the largest publicly traded U.S. home and auto insurer, hasn't offered unlimited replacement coverage since the Oakland Hills, California, wildfires in the early 1990s, said Rich Halberg, a company spokesman.

The Northbrook, Illinois-based insurer paid $2 billion to victims of four Florida hurricanes in 2004. Afterward, it undertook a comprehensive review that resulted in new policy exclusions, the purchase of reinsurance to protect against catastrophic losses, and a move away from writing new policies in Florida, Halberg said.

Coverage for excluded items can sometimes be added at extra cost such as riders that automatically adjust for inflation. Customers also can add clauses covering expenses from tougher building codes following a natural disaster. For protection from floods, policies have to be backed by the federal government.

The insurance industry has moved away from a promise to rebuild to policies that stop at a set dollar amount, author Peter Gosselin wrote in his book, “High Wire: The Precarious Financial Lives of American Families.'' It's part of a gradual transfer of risk from companies to individuals, he said.

Hurricanes and Earthquakes

So-called extended replacement cost policies often will cap payouts at 25 percent over reconstruction estimates. This forces homeowners to keep up with local building costs, according to Gosselin's book.

Chubb Corp., which sells policies to higher-income families, said in May it would offer “unlimited replacement coverage'' in Texas. That now makes the coverage available in 41 states and Washington, D.C., said Peter Spicer, a spokesman for the Warren, New Jersey-based company.

States where the insurer maintains a cap are the ones most susceptible to hurricanes and earthquakes: Alabama, California, Florida, Hawaii, Louisiana, Mississippi, South Carolina, Utah and Wyoming, Spicer said. Chubb, the 11th-largest U.S. property insurer, interviews contractors, architects and builders year-round to keep up with building costs.

“In a down real estate market, you may not realize you need more than the market value of your house,'' Spicer said.

Fire Hydrants

In Texas, a homeowner with a $1 million house may pay $2,000 to $2,500 in annual premiums to insure a property with Chubb, according to Spicer. The actual cost depends on location, proximity of fire hydrants and fire stations, security systems and year of construction.

Policies are written annually so insurers can add exclusions. Consumers should talk to their agents at least once a year or when major improvements are made, said Jeanne Salvatore, consumer spokeswoman at the industry-backed Insurance Information Institute in New York.

A policy “may or may not'' cover the costs of rebuilding, Salvatore said. “You don't want to find out when you are filing a claim.''

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