Homeowners follow poor policy

If you recently upgraded your kitchen with maple cabinets and granite countertops, or built a whole new addition, it may be time to check in with your insurance agent.

Industry experts say remodeling mania and the rising cost of building materials are creating a gap between what some homeowners are insured for and the actual cost of replacing their homes.

“People don’t pay attention to their policies like maybe they should,” said Christy Marzetta, an owner of Spokane-based Andre-Romberg Insurance, who recommends that homeowners review their policies annually.

While total losses are rare, she said, the agency occasionally encounters people who are underinsured by as much as 30 percent.

According to Marshall & Swift/Boeckh, a business that supplies technology for determining residential and property values in 3,000 markets, an estimated 59 percent of homes are undervalued on their insurance coverage, by an average of 22 percent. That means the policies are based on a dollar figure that’s too low to rebuild the same house if a catastrophe struck.

“What’s interesting is that the statistics have improved over the past five or 10 years,” said Marsha Berenson, media coordinator for the Los Angeles-based company.

One contributing factor to homes being undervalued is do-it-yourself improvements including building decks, finishing basements and tacking on new garages. Overall, Berenson said Americans spent more than $200 billion on remodeling projects last year, but many may not have upgraded their policies to cover the value that was added.

Local real estate appraiser Randy Berg has worked on insurance cases and said problems can also arise when people bypass the permitting process. In the event of a fire or other loss, it can be tough to corroborate that improvements were made, he said.

“Insurance companies say ‘Show me the permits,’” Berg said.

Gary Brock, assistant vice president for Seattle-based Safeco Insurance, said people shouldn’t use their home’s market value as a guide when choosing how much to insure it for because the cost of reproducing their homes could be more or less than what it’s worth on the market.

While appraised values on real estate tend to factor in location — including nearby schools, parks and access to services — insurance policies look at what it costs to get homes back to their original state, he said.

For example, an older home in a modest neighborhood may need more coverage than a higher-priced, newer home because it could have items like historic wallpaper, crown molding, lathe-and- plaster walls or antique fixtures that are costly to reproduce.

New homes can also cost more to rebuild if they have custom features, Brock said.

While homeowners may think the underinsured statistics are a gimmick to squeeze higher premiums out of them, industry representatives say adding more coverage doesn’t cost a lot, but adds protection worth tens of thousands of dollars. The increase doesn’t necessarily mean policy holders will pay more because sometimes homeowners qualify for discounts based on having security systems, being a senior citizen and other factors. Increasing the deductible can also provide savings.

Marzetta, of Andre-Romberg, said some insurers offer extended dwelling coverage which provides an additional 25 percent coverage above the dwelling’s insured value to cover any gap between the insured amount and the actual cost of replacement.

A small number of companies still offer full replacement coverage as an endorsement to a policy holder’s primary coverage, she said, adding, “Most companies used to do that, but just a few do it now.”