Replacement Cost vs. Market Value: Why is my Dwelling Coverage so High?

One of the most common questions that we are asked in our office is “Why is my dwelling coverage so high?”  We all know that the housing market is not where it used to be. This has been the case for some time and probably isn’t changing any time soon. So why does the insurance company insure your home for more than it’s worth?

Amongst other things, home insurance is there to protect you in event that there is a complete and total loss. Regardless of whether you would purchase a new home or rebuild your home, it doesn’t change the fact that the company who is insuring your home is just that….insuring your home. They aren’t necessarily insuring you to go out and purchase another home, but rather are insuring the home that you currently live in and the coverage is determined by how much it would cost to actually rebuild your home from the ground up.

Here are a few things to keep in mind when considering the differences between Replacement Cost and Market Value:

1. The Market Value for a home generally includes the value of the land on which the home sits. The Replacement Cost of a home does not include any land values, but is only concerned with the home itself.

2. The Market Value for a home is affected by changes in the real estate market. When homes in a particular area are in high demand the Market Value of a home in that area will generally go up. In the same way, when demand for homes in a particular area is low, the Market Value of homes in that area may remain level or even go down. Replacement Cost is not affected by the real estate market but is instead affected by the fluctuations in material and labor costs to build a home. For example, if the cost of material such as lumber, concrete, drywall, and carpet are higher in a particular area, then the Replacement Cost of a home in that area will be higher than the Replacement Cost of the same home in an area where materials are less expensive.

3. The Market Value of a new home generally factors in the cost that was required to build the home new. Replacement Cost, however, is looking at the cost to re-build the home, if it were completely destroyed, using all of the same materials and construction techniques originally used to build the home. The cost to build a new home can be quite different from the cost to re-build a pre-existing home due to access issues, labor efficiencies, economies of scale, debris removal and higher price of materials that may no longer be in common use (such as lath and plaster vs. drywall).

When insuring a home, we always use the Replacement Cost of the home to determine the amount of insurance required as this is what it will cost to replace or repair the home should it be damaged or destroyed. Understanding your coverage and what it means for you is just one of the many things that we offer here at Canyon Lands Insurance. If you are interested in a free quote, please visit our website at http://www.canyonlandsagency.com or give us a call at 480-288-5900. Hope to hear from you soon!

 

Why You May Need to Remodel Your Homeowners Insurance

Are you properly insured if you’re considering a remodel? (Image via google)

You have a big remodel planned this summer that includes a revamped master bedroom and bath, a new kitchen, and a small addition that will create a family room off the back of the house.  You have been dreaming about cooking in your new kitchen and waking up in your new bedroom for months.  You have all the contractors you need lined up.  Your permits are in place and you feel like you have everything taken care.  But, have you called your insurance agent?

One mistake that many homeowners make is doing major improvements to their home without consulting their insurance agent.  There are several areas where this oversight can lead to problems with your coverage while the remodeling work is underway and after it is complete.   First, you need to make sure you have the right kind and right amount of coverage to protect you during the construction.   Don’t wait until work has already started as you don’t want to find out you are underinsured when it is too late to rectify that problem.  Second, your insurance needs may change based on the outcome of the remodel.

Here are some steps you need to take to ensure you have the coverage you need to protect you during the process.

1.     Call Your Agent

It is important to do this before work starts.  There may be additional coverage you need to secure during the remodel.  If you or a family member will be doing most of the work, you may need to boost or enhance your liability coverage in the event someone is injured.  Your agent can also advise you if there are additional coverage’s you need to have in place during the project.

2.     Increase Your No Fault Medical Protection

The medical payments portion of your homeowners insurance is likely very low as the primary concern under normal circumstances is liability.  However, if you or members of your family or even other people like friends are going to be doing some of the work, you should increase this limit.  In the event someone is injured during construction, any medical bills can be submitted to the insurance company for payment.

3.     Check Out You Subcontractors

While many homeowners think to check the references of subcontractors, they don’t always think to inquire about the subcontractors insurance and bonding.  If the person doing work at your house damages your property or injures someone, you need to know that they are carrying adequate insurance to cover those losses.  If they do not, the liability may fall on you and your homeowner’s policy may not cover these kinds of claims, leaving you to pay the bill out of pocket.  Verify coverage by asking for proof of insurance from any company or individual that will be performing work on your house.  If a subcontractor is unable or unwilling to provide proof of insurance, you may want to hire someone else.

4.     Consider Additional Coverage

If you are doing a large project, you may want to purchase additional coverage like a Builder’s Risk policy.  This type of policy protects you from any damage to your house during the course of construction including damage from wind or rain, theft of materials, and vandalism.

 

Related Articles:

•  What is Builder’s Risk Insurance? (canyonlandsagency.com)
• 5 Mistakes You Might Be Making with Your Homeowner’s Policy (canyonlandsagency.com)
• 3 Life Events That Can Change Your Insurance (canyonlandsagency.com)

 

When the Thunder Roars, Get Indoors!

How far away is the lightning you see? (Image via weatherwizkids on google)

Lightning Safety Week begins on June 24^th and runs through the end of the month this year.   Groups of all types from your insurance provider to the National Oceanic and Atmospheric  Administration (NOAA) will be spreading the word and making sure everyone knows how dangerous lightning can be and what steps to take when a thunderstorm rolls through.   The National Weather Service’s motto this year is “When the thunder roars, get indoors!” which is a reminder to everyone that in a thunder storm the safest place for people is inside of a building.

According to the National Weather Service, about 54 people are killed each year by lightning strikes.  There are also hundreds that are injured or disabled, sometimes seriously when they are struck.  For those that survive, symptoms like memory loss, chronic pain, dizziness, muscle spasms, and fatigue can persist for years after the initial injury.  This is why it is so important for everyone to be safe when lightning starts to strike.

How Close is Too Close?

New information into how lightning behaves in a storm and how far from the center of the storm it can strike has changed many of the safety protocols and concepts previously taught.  For example, children used to be taught that if you counted the number of seconds between the flash of the lightning and the roar of the thunder, you would know how many miles there were between you and the storm.  Each second equated to one mile so 10 seconds meant 10 miles.  Now, that formula is a little different.  If you count the number of seconds between the lightning and the thunder and divide it by 5, you know how many miles the storm is from you.  In the previous example, that 10 becomes a 2.  When you pair that with the new understanding of lightning’s range, it is easy to understand why the recommendation is to get inside as soon as you hear that first roar of thunder.

The Dangers of Lightning

Beyond the obvious physical harm people face of with a direct strike, lightning also poses other dangers.  One of the biggest is fire.  Lightning strikes can ignite forest and brush fires, especially in places that are very dry.  Lightning striking your home can also result in fire, which makes it even more important to have a family fire evacuation plan and fire protection supplies like fire extinguishers and smoke detectors in place.  If your home catches fire as the result of a lightning strike, it is very likely that the loss is covered by your homeowners insurance.  The next danger, power surges, may not be covered, which means you need to check with your insurance agent to determine if your possessions are protected.  When lightning strikes, it can cause power surges to race through the power grid, affecting homes far from the actual storm.   Make sure all electronic equipment, which is the most vulnerable to power surge damage, is plugged into a surge strip that protects against the type of surges caused by lightning.

Protecting Yourself

Although the safest place to be in a thunder storm is inside a building like your home, this won’t keep you 100% safe from lightning strikes.  When a building is struck by lightning, the electric current can travel through the building in a number of ways.  It can use the electrical system, the plumbing system, and even the metal bars used to reinforce the building.  These currents surging through the house can hurt you if you are not careful.  During a thunderstorm, stay away from all electronics including computers and appliances.  Don’t take a shower or come in contact with water from your plumbing system.  Don’t talk on the phone unless you are using your cell phone.  These steps will help keep you safe if the house or building you are in is struck.

Take some time over the next week to help educate others about lightning safety and spread awareness for lightning safety week.  Just remember, if you hear the thunder roar, get indoors.

Related Articles:

• 3 Things You Probably Think Your Homeowners Policy Covers That May Not Be Covered (canyonlandsagency.com)
• 5 Mistakes You May Be Making with Your Homeowner’s Policy (canyonlandsagency.com)
• Is Your Homeowner’s Insurance Up to Date? (canyonlandsagecy.com)

 

Hidden Home Hazards

Do you know where the hidden dangers in your home are located? (image via google)

When it comes to keeping our homes safe and secure, we all know the basics.  Don’t leave candles unattended, test your smoke detectors, and clean out the lint tray in the dryer.  But there are many other dangers lurking in our living rooms and cavorting in our kitchens that can be even more dangerous because we don’t think of them and therefore, don’t take the steps to protect against them.  June is Home Safety Month and to help you create the safest and most secure home possible, here are some of the most common hazards that may be hiding in your home.

Smoke Detectors without Batteries

It is great to have smoke detectors, but they need to be operational.  More than two-thirds of all home fire fatalities occur in homes without working smoke detectors according to the Consumer Product Safety Commission.   Note: this fact doesn’t say homes without smoke detectors; it says homes without working smoke detectors.  Check your smoke detectors to ensure that they contain batteries and that the batteries are working.

Clutter

Clutter can drive you crazy but it can also endanger your life.  It might sound strange but there are several ways that living in a cluttered environment can pose a danger.  First, you increase your risk of tripping and falling when the pathways through your home are not clear.  Second, clutter can provide a great source of fuel for home fires.   Third, clutter can make it difficult to navigate through your home in situations with poor visibility.  This can impede your ability to evacuate in the event of a fire or find a flashlight if the power goes out.

Blocked or Permanently Closed Windows

Take a minute to look around your house from the perspective of having to get out of the house in the event of a fire.  Pay particular attention to the windows.  Could you get to at least one window in every room, get it open, and get out of it if there was a fire?  Blocked windows and windows that have been nailed or painted shut can pose a danger by blocking an intended evacuation route from a room. Make sure each room has an accessible window that provides an exit in the event of a fire or other emergency.

Frayed Cords on Electronic Equipment

When was the last time you routed around behind your entertainment center to ensure that all the cords coming out of your various pieces of electronic equipment are in good working order?  Odds are the only time you think about the cords plugged into your outlets is when you plug something in or unplug it.  Unfortunately, cords can become frayed over time which creates a very dangerous situation.  Add checking your cords to your annual safety check.

Combustible Kitchens

Stand facing your stove and look at what is within 3 feet of the heating sources.  If your house is like most houses, you will see paper towels, pot holders, recipe cards, magazines, papers from your child’s school, and several other combustible materials.  This may explain why almost half of all home fires start in the kitchen.  Keep a combustible free zone around the stove and oven to decrease your risk of becoming a fire statistic.

Dirty Dryers

Everyone knows that cleaning out the lint tray in the dryer helps prevent house fires.  However, just cleaning the lint tray isn’t enough.  Dirt and lint still builds up inside the machine increasing the risk of fire.  Clean this out at least once a year and have it professionally cleaned on a regular basis.

Related Articles:

• Why You Need Renter’s Insurance (canyonlandsagency.com)
• 3 Life Events That Can Change Your Insurance (canyonlandsagency.com)
• Is Your Homeowner’s Insurance Up to Date? (canyonlandsagency.com)

 

Homeowner’s Insurance 101: Actual Cash Value vs. Replacement Value

If your home were destroyed, is your insurance policy enough to rebuild and replace your possessions? (image via Delaware state fire school)

When was the last time you looked at your homeowner’s policy?  If you are like most homeowners, you looked at it when you bought it and then you filed it away in your filing cabinet or fireproof box for safe keeping.  But like the other insurance policies you have to protect you, you need to review and reassess your homeowners policy on a regular basis.  June is Home Safety Month which provides a great opportunity to review everything related to the safety and security of your home, including your homeowner’s policy.

Start by reading through your policy to make sure you understand all the terms and conditions and any exclusions.  Don’t hesitate to ask your insurance agent to explain anything that is unclear or answer any questions that come up during your review.  One of the most important things you need to understand about your policy is the type of replacement coverage that it provides.  This makes a big difference in determining the amount of coverage you need and explains how the insurance company will assign a value to your home and its contents if you experience any losses.

There are two primary types of replacement coverage, actual cash value and replacement value.  If your policy provides actual cash value for your losses, the insurance company will value your possessions and your home at the actual cash value minus any depreciation.  If your policy provides replacement value coverage, the insurance company will value your possessions and home at the current cost to replace them.  Understanding the difference between these two types of coverage is critical to understanding how much protection your homeowner’s policy is actually providing.

Let’s look at how the amount the insurance company would pay differs for the same loss under each of these coverage types.  There is a fire in your home that causes damage to the kitchen and the living room.  Both rooms have extensive damage and will require significant work to repair.  The fire destroys your stove, refrigerator, television, couch, and an antique desk.  Here is how the payout would differ.

If you have actual cash value coverage, the insurance company would use the value of the home to calculate the value of the portion of the house that was damaged.  Once that value was established, any depreciation would be subtracted from that value and that is the amount the insurance company would pay out for the damage to your home.  If your policy provides replacement coverage, the insurance company would get an estimate from a contractor on the cost to repair the damage and the payout would cover the cost of the repairs regardless of the value of the home or any depreciation.

The same process would be applied to the possessions damaged in the fire.  If your policy provides actual cash value, the current value of your stove, refrigerator, television, couch and antique desk would be determined and if appropriate, any depreciation would be subtracted in order to determine the payout.  If your policy provides replacement value, the cost to purchase comparable items to replace those that were destroyed would determine the amount of the payout.

As you can see from these examples, if your policy provides actual cash value coverage, you may not receive enough money from the insurance company to repair your home or replace your possessions.  Since most people don’t have the cash on hand to make up the difference in costs, most homeowners should consider having a policy that provides replacement value coverage.

Related Articles:

• What is the Difference Between Actual Cash Value and Replacement Cost Coverage (homeinsurance.com)
• How a Home Inventory Helps Protect You (canyonlandsagency.com)
• 3 Life Events That Can Change Your Insurance (canyonlandsagency.com)

 

The Case for Earthquake Coverage

Are you protected in the event of an earthquake? image via martinluff on Flickr

No matter where in the U.S. you live, there is a chance that there could be an earthquake in your area.  Of the 50 states, there are only 8 that haven’t experienced a single earthquake in the last 30 years according to the United State Geological Survey (USGS).  But even those states that have been safe the past thirty years are not immune from quakes or from damage caused by quakes occurring in adjoining states.  The simple fact is, if you live in the U.S., you run the risk that an earthquake will cause damage to your home.   If that happens, the only way that your insurance company will pay for the damage is if you have purchased additional coverage specific to earthquakes.

For those living in Hawaii, Alaska, and California, the three most seismically active states, earthquake insurance may seem to be a requirement.  However, even in those states, many homeowners haven’t purchased the extra coverage that would protect them from large losses.  According to the California Earthquake Authority (CEA), which provides the majority of earthquake coverage to California homeowners, only 12% have purchased earthquake coverage.   In Alaska, which is one of the most seismically active areas in the entire world, this number is only a little higher at about 33%.

Why Don’t Homeowners in High Risk Areas Buy Coverage

There are several reasons that even homeowners in Alaska and California don’t have earthquake insurance.  Unfortunately, one of the main reasons is that there are still people who believe that their homeowner’s policy will cover any losses resulting from an earthquake.  In almost every case, this simply isn’t true.  Other homeowners have made the conscious decision not to purchase this additional coverage because they feel the cost of the coverage plus the high deductible that is standard on earthquake policies makes the coverage unaffordable.  Still others believe that if there is a disaster, the government will be there to help make them whole and help them rebuild their house.

So, Why Do I Need it?

There are four reasons that every homeowner should look into purchasing an earthquake policy, even those who live in states that are not high on the earthquake risk list.

1.     If you live outside the big three, coverage is likely much less expensive than you think.

2.     Houses outside of the big three are rarely built with earthquake resilience in mind.  This means that if there is an earthquake, there is likely to be more damage to structures and property than there would be in California, Alaska, or Hawaii.

3.     It doesn’t take a catastrophic quake to cause catastrophic losses.

4.     Between 2001 and 2011, the USGS reports that there were more than 40,000 earthquakes in the U.S., almost 5,000 of which did not occur in the big three states.

5.     FEMA estimates that a major earthquake in a city with a large population could result in damages exceeding $200B.  Without insurance, you will be completely reliant on federal and state disaster relief for any assistance.  As the average award individual/family falls between $2,000 and $4,000 per family and the maximum grant is less than $15,000, you will be hard pressed to rebuild and recover.

Earthquake insurance is the kind of thing that it is easy to convince yourself you don’t need… until you do.  Then, it’s too late.

Related Articles:

• 3 Things You Probably Think Your Homeowner’s Insurance Covers That May Not Be Covered (canyonlandsagency.com)
• 4 Common Insurance Mistakes 20-Somethings Make (canyonlandsagency.com)
• How a Home Inventory Helps Protect You (canyonlandsagency.com)

 

5 Mistakes You May be Making with Your Homeowners Policy

Is your homeowners insurance enough to replace your home and possessions? image via Flickr

Homeowner’s insurance can be the best money you have ever spent if fire destroys your home or a home invader takes some stuff and trashes the rest.  But many homeowners’ make critical mistakes when purchasing their policies that only become apparent after a loss, when it is too late to do anything about them.  Mistakes like these can cost a lot of money and may leave you with an unpaid mortgage, an unusable house, and nowhere to call home.  Make the most of the protection homeowner’s policies offer by avoiding these 5 common mistakes.

1.     Not Reading the Policy Documents

This can be a costly mistake as the policy document outlines exactly what is covered and not covered by the insurance company.  The discussion you have with your agent may leave out important considerations and it is likely that you believe you are covered for things that are not actually covered by your policy.  Before buying a policy, ask the agent for a sample of the policy documents that mirror the policy you are considering.  This will give you the chance to read through the policy and ask any questions you need answered before you are committed.

2.     Not Scheduling High-Value Property

Another very costly mistake that many homeowners make is not scheduling property that falls outside the individual property limits of their policy.  If you are surprised that your policy has limits on specific kinds of property, you haven’t read your policy.  Almost every homeowner policy includes limits on the loss of specific types of property like computers, jewelry, stamps, coins, and firearms.  If the value of your property in that category exceeds the policy limit, you need to ensure that your policy has a rider that will cover the excess value if there is a loss.

3.     Not Understanding the Difference Between Actual Value and Replacement Cost

This mistake can leave you with a mortgage on a house you can’t live in and can’t afford to rebuild.  According to the National Association of Insurance Commissioners Consumers Guide to Home Insurance, actual value will only pay for your loss, which is the value of your house and property at the time of loss and includes considerations for age, wear and tear.  This means that if the value of your house is less than what it would cost to rebuild it, you will have to come up with the difference on your own.  It also means that if the actual value at the time of the loss is determined to be less than your mortgage, you will still owe the mortgage company that difference.  Replacement cost, on the other hand, pays to replace the house and property, regardless of the actual value at the time of loss.

4.     Not Having Coverage for Specific Perils

Many people think that their homeowner’s policy covers damage to their house no matter what causes that damage.  Unfortunately, this is not true on most homeowner’s policies, as any homeowner who has survived a hurricane only to find out that water damage is not covered, can attest.   While it is common knowledge that floods are not covered by homeowner’s insurance, many people don’t understand that flood and water damage are generally considered the same thing.  Unless you live in California, it is unlikely that you know that most policies exclude damage from specific perils like earthquakes, nuclear accidents, and war.  The best way to protect yourself and your property is to understand what your policy covers and purchase additional coverage for perils that could happen but are excluded.

5.     Underestimating Everything

Another costly mistake is underestimating things like how long it would take to rebuild your house, the value of your personal property, or the value of your home.  In the event of a loss, all these can seriously impact your financial well-being.  If your policy only provides for a year of additional living expenses and it takes 18 months to rebuild your house, you will have to pay for the additional 6 months out of pocket.  If you underestimate the value of your personal property, you may be unable to replace what is lost.  If you underestimate the value of your home, you may be saddled with mortgage debt for a house you can’t live in and can’t afford to repair while paying to live somewhere else.

Related Articles:

• Homeowners Insurance Information (canyonlandsagency.com)
• How Much Insurance Do You Need? (wallstreetjournal.com)

 

5 Tips for Preventing a Homeowners Policy Loss

Is your home protected?

No homeowner wants to have to file a claim against their homeowner’s policy.  Whether the claim is a result of Mother Nature or a stroke of bad luck, filing a claim means you have suffered some kind of loss.  Even something that seems superficial can impact our sense of security and if there is any place on the planet where we should feel safe, it is in our own homes.  Our homes hold more than just our possessions.  They also hold the memories of days gone by and dreams of days yet to come, none of which can be replaced by an insurance company, no matter how great a policy you have.

As a homeowner, there are steps you can take to minimize the risk of loss and safeguard the safety and security of your family.  While some seem like common sense, we often overlook the most common things that would keep our homes whole and our families safe.  For example, everyone knows that it is very important to have a smoke detector on every floor of your house and to check the batteries regularly.  However, according to the National Fire Protection Association, two-thirds of the deaths caused by house fires in the years between 2005 and 2009 occurred in houses without a working smoke alarm.  Additionally, the majority of smoke alarm failures can be tied back to missing or dead batteries.

Below are 5 tips all homeowners can take to safeguard themselves against loss.

1.     Assess Your Risk of Water Damage

Many people think the only cause of water damage is flooding but water damage caused by plumbing problems, leaking roofs, broken pipes, and other non-flood related events is far more common.   If you have a basement, make sure you have a floor drain or sump pump to remove any unexpected water.  If you use the basement for storage, make sure valuables are stored in such a way that unexpected water will not cause damage.  You should also have your plumbing inspected annually.

2.     Check Smoke Alarms and Fire Prevention Equipment

Verify that all smoke alarms are working and that fire extinguishers are easily accessible throughout the house.   Keep track of fireplace, wood stove, chimney, and heating system inspections and cleanings so you know they are occurring on a regular schedule.  Replace any frayed or damaged cords and be sure you know how to shut-down the power in the house if there is an emergency.

3.     Be Prepared for Storm Season

Here in Arizona, monsoon season brings high winds that can cause serious damage.  Minimize the risk of tree damage by inspecting your property and taking care of loose limbs and dead trees. Make any necessary repairs to siding, windows, and roofs to prevent further damage from high wind and torrential rain.  Create an emergency plan and stock emergency supplies to ensure your family’s safety in an emergency.

4.     Deter Would-Be Home Invaders

One of the best ways to prevent a break-in is to make your home unappealing to thieves.  Installing a home alarm system, exterior motion-sensor lights, and deadbolt locks are all ways to make it harder and therefore less appealing to get inside.  Keep track of all house keys and make sure windows and doors are locked when you leave and when you settle in for the night.

5.     Complete a Comprehensive Home Inventory

In the event that you do experience a loss, it can be very challenging to remember exactly what was lost and to be able to establish the value of all possessions.  Completing a home inventory prior to experiencing a loss ensures you will have the information if it is ever needed. Be sure to include receipts, appraisals, pictures, and video with your inventory and store the physical inventory offsite.