AMG: I have worked with a lot of first time homebuyers in the past and I know they always have lots of questions. It often comes as a surprise to them that they will need to obtain homeowners insurance as part of the purchase transaction. That is when I hand things over to Jim Kreisman, my personal agent and good friend. He has written a very good primer on homeowners insurance. Something worthwhile even for existing homeowners, because lets be honest when was the last time we took time to understand our homeowners policy.

Here is what Jim writes:

1. Replacement Cost Of Home (Dwelling Coverage) – This is the amount that your insurance company estimates it will cost to replace your home in the event of a total loss. That includes bringing equipment to remove the mess, digging up the foundation if necessary to get to the plumbing, etc.

The insurance company normally uses in-house or purchased software to accomplish this. Some agents take a wild guess and multiply the square footage by a fixed number per square foot. This is a good way to check the computers estimate, but it is crazy to rely on the simple calculation alone. Why? Cost factors change based on market costs of resources, location and the type of home being built. In the end, if the homeowner does not have enough coverage, they are usually responsible and may be surprised when they have to pay out of pocket.

2. What is extended replacement cost? Most tier one insurance companies offer an extended replacement cost which is simply a percentage of additional coverage above the stated dwelling amount on the policy. For example at our company, they offer up to 125%. So if the home is insured for $100,000, you really have coverage for $125,000.

3. How often should I check with my agent to go over my home information? I recommend every one to two years. Let’s face it, we are all really busy and going over the home is usually low on the priority list for most. Again the homeowner is responsible for the replacement cost amount. Some agents find time to call their clients, but most do not. Agents rely on the automatic increase the computer will put on annually.

The problem you run into is that many companies continually update their software and add new fields/categories to their software to better understand the configuration of the home. For example the type of flooring percentages for hardwood, tile (standard/imported), carpet (standard/upgraded),… In our company, they recently added 10+ new fields. What if a client upgrades their kitchen and never notified the insurance company? The list goes on and on. Best thing to do mark your calendar 90 days before renewal and call your agent. This will allow time to update the system and receive one correct bill.

4. What should my deductible be? My philosophy is “Buy Insurance for something that ruins your life financially, not your day, week or month!” Each client is different when it comes to his or her financial status. When you have a loss, it is an emotional decision to put a claim in. Having the right deductible will help you avoid the mistake of putting a small claim and getting surcharged for three years.

God forbid you then have real claim and now you have two on your record. The price of insurance goes way up and you may be non-renewed. When you have many losses, you end up finding someone like me that has access to companies that specializes in insuring clients with losses. I know a guy that was paying $5,000 a year for a $275,000 home. Work with your agent and make sure to check with the mortgage company as to the max deductible they will allow. Some mortgage companies are strict.

5. Why should I have an agent instead of an 800 number? This one is simple. You get to talk to a local professional that can give you advice. It you call an 800 number, you may end up talking to someone in another country and you will most likely not talk to the same person twice. In addition think about what happens when you call in. They do not know you by name.

When you call in, everything is logged into the computer. So if you call in on, lets say missing shingle on the roof (which you should never put a claim in, call your roofer or handyman), and say “a shingle came off my roof, is that covered?” They will most likely say no and document it in the system. This could end up showing up later your loss history.