Personal Business: Insurance
ARE YOU PREPARED TO WEATHER A DISASTER?
Even though his $600,000 home was two blocks from the earthquake epicenter in Northridge, Calif., and has been declared unsafe, Mike Kessler considers himself lucky. The steel executive purchased earthquake insurance in 1991 after remodeling the house. At the time, it seemed like a big nut to carry: The annual premium is $1,300, and Kessler must pay the first 10% of damages. But now his insurer, Farmers Insurance Group, may pick up more than $400,000 in repairs. "If we didn't have insurance," says Kessler, "we'd have to walk away from the house."
Thousands of other property owners in the Los Angeles area weren't as lucky. Only about one-third of the homes damaged by the Jan. 17 quake were adequately insured.
DON'T SKIMP. With meteorologists predicting an upswing in natural disasters during the next decade, the California experience underscores the need for all homeowners to review their insurance coverage--before the next one strikes. Although basic policies cover losses from hurricanes, tornadoes, and firestorms, many homes still aren't properly insured--that is, folks just don't buy enough coverage. Special policies and riders guard against floods and earthquakes, and yes, the coverage is expensive. Yet experts say it is often worth the cost.
Insurers won't accept changes when a hurricane watch is in effect or when fires are blazing out of control. Nor will they write new earthquake coverage until the aftershocks have ceased. "It's kind of like asking someone to insure a burning building," says Jim Armitage, an insurance agent in South Pasadena, Calif.
If you live in a disaster-prone area, you should keep crucial documents in a safety deposit box. Some financial planners also recommend setting aside money in a disaster-relief account.
DAMAGE CONTROL. Remember to keep abreast of tax implications. If you live in a federal disaster area, the Internal Revenue Service lets you deduct the loss in value of your home or the cost of improvements, whichever is greater. You'll need IRS Form 4684. Hire an appraiser to compute the decline, says Nadine Gordon Lee, a partner with Ernst & Young in New York. An insurance reimbursement reduces that loss, but structural weakness may not show up immediately, so your claim may linger for years.
Updating coverage for windstorms is easy. Just ask your agent to make sure your existing policy covers the current value of your home. Miami homeowners were done in by Hurricane Andrew because they hadn't added the cost of improvements made since they purchased their policies.
Make sure riders cover valuables such as jewelry and silver. You should also record a visual inventory of your belongings with a camera or camcorder, including contents in closets and drawers.
Homeowners' insurance covers either the actual cash value or replacement costs of your possessions. A TV bought for $700 five years ago may now be worth only $300, and to replace it would cost $900. If you are insured for cash value, the insurer will pay $300. A replacement-cost policy, which has slightly higher premiums, will reimburse you for the full $900.
FLOOD FACTS. Other coverages are more complicated. Flood damage is specifically excluded under all homeowner policies but is available through the federal National Flood Insurance Program (800 462-9029). It pays for direct losses from flooding or erosion. Buildings are covered for replacement value, contents only for their current worth.
The most Uncle Sam will let you buy in flood insurance is $185,000 on a house, $60,000 on the contents. In flood-prone Missouri, annual premiums run about $760. However, only about 20% of homeowners living in eligible flood plains have bought it. Some lenders require the insurance. "A lot of people around here didn't have adequate coverage," says Robert Meers, an insurance agent in St. Charles, Mo. "The people who did buy flood coverage didn't include their personal property."
Regular homeowner policies exclude earthquake coverage in every state. In California, it is sold separately, but elsewhere it's attached as a rider to the regular policy. Insurers are required to offer it to California residents every two years, but consumers do not have to purchase it. There's talk in Washington of making earthquake coverage a federal program similar to flood
It's no surprise that earthquake coverage is most expensive in California. Deductibles typically run 10%, compared with 5% in Missouri, the second-most likely place to get struck. In the rest of the country they typically range from 2% to 5%. Premiums will be about 50% less for frame houses than for brick structures. In California, earthquake policies normally place a limit on what they will pay for all losses combined, including structural damage, personal property, and living expenses. Elsewhere, this coverage has separate limits for each category. For example, typical policies in New York limit the structural damage payout to 20% of the worth of the house.
Even if you don't buy earthquake coverage, your homeowner policy will pay to repair damage caused by fires, explosions, and broken glass. Damage by looters or stolen property is also covered under most standard plans.
No matter what disaster you're protecting against, make sure your policy covers living expenses. If you can't stay at home, insurers will pay for lodging, meals, and storage. Major catastrophes don't come along often. But when they do, it's a relief to know you've prepared for the worst.TABLE: KEEPING HOMEOWNERS FROM QUAKING
The following are annual earthquake insurance premiums for frame houses built after 1950. The deductible is equal to 5% of the damage costs. Coverage for masonry homes and those built prior to 1950 will run more.
Annual Premium for Home Valued at
City $100,000 $300,000 $400,000
LOS ANGELES $169.00 $361.00 $457.00
SACRAMENTO 108.00 262.00 339.00
MEMPHIS 59.00 177.00 236.00
ST. LOUIS 34.00 102.00 136.00
CHICAGO 23.00 69.00 92.00
NEW YORK 30.00 90.00 120.00
DATA: STATE FARM INSURANCE COs.
Chris Roush EDITED BY AMY DUNKIN