Time to reassess your homeowners policy

• Jennie L. Phipps
• On 6:00 am EDT, Tuesday October 27, 2009

Home prices have declined -- in some markets as much as half what a property might have sold for two years ago. So why haven't homeowners insurance bills fallen as well?

Insurance experts are quick to point out that insurance is not based on the market value of property, but on the cost of rebuilding the property after it is destroyed. That cost includes not only labor and materials to rebuild, but also the cost of demolition and the removal and disposal of things that can't be reused.

"Market values are decreasing, but the cost to replace has gone up," says Elaine Baisden, vice president of national property for Travelers Insurance.

That said, homeowners insurance might not have to be as pricey as your insurance agent would like it to be. Consider these homeowners insurance basics, as well as some ways to trim its cost.

3 types of coverage

Guaranteed replacement coverage, which insures payment of 100 percent of your repair or rebuilding costs without limits, is the holy grail of homeowners insurance. Your agent will likely recommend it, and so does most consumer advice. You may have to buy it if your mortgage lender requires it. And you may want it if you would replace your home -- should it be destroyed -- exactly the way it is now, and you can't afford any economic disruption. But this kind of insurance is very expensive.

Replacement cost coverage isn't quite as good or pricey, but it is the best some homeowners are able to buy because of their home's location or condition. And it is probably good enough for many people. In these policies, the maximum the insurer will pay if your home is destroyed is stated in the policy.

A cash-value policy will cover the cost of the house's replacement cost minus any depreciation or wear and tear. You can count on not getting enough money to completely rebuild with this type of policy.

Figure out replacement cost

If you want or need replacement cost homeowners coverage, then you must insure for a minimum of 80 percent of the cost of replacement as determined by your insurer. This is an industry standard.

Travelers' Blaisden points to AccuCoverage.com as a good source for determining your home's replacement cost as calculated by your insurer. All insurance companies use software from AccuCoverage or a competitor to calculate replacement costs.

For $7.95 per property, you can fill out AccuCoverage's questionnaire on the size and amenities of your home. When you are finished, you'll get an analysis of the cost of rebuilding the exact property in your location. Compare it to what your insurer estimates to be your replacement cost. If it is more -- because you haven't reported improvements to your insurance company, for example -- you should do that. You don't want your insurer to find out about these improvements after a disaster and use your negligence as an excusive to avoid payment.

If the calculator says the replacement cost is less than your insurer calculates (or about the same), go back to your insurer and ask for a recount. "I challenge the replacement value every time I'm billed," says Jay Henry, an exclusive agent for Allstate in St. Louis Park, Minn.

Henry says the annual bill an insurance customer receives in the mail is almost always the product of a computer analysis. The insurer calculates that the replacement cost has gone up an average of X percent across the board in the previous 12 months and the computer adds that percentage to every customer's renewal bill.

"Challenge it. More than likely, they'll back down from that increase," Henry says.

What coverage do you need?

For some people, the question is, "Do I really need replacement cost insurance?" The answer could be "no," says James Walsh, co-author of "How to Insure Your Home" and an editor at Silver Lake Publishing, which specializes in insurance topics.

Walsh points to several scenarios where cash-value policies may be good enough.

• If you don't have a mortgage or much of one and you can buy an acceptable replacement property for significantly less than the insurer says your home will cost to replace.
• If you own a small home where the replacement costs tend to be driven by the location -- a lakefront property, for instance.
• You own an older home whose architectural details will be costly to replace -- hardwood floors, plaster walls -- but if the worst happens, you're unlikely to replace them.
• If you have a simple property in an area where substituting a mobile home would be a perfectly acceptable solution.
• If you can afford to self-insure a portion of the potential loss on any property.

If you have a mortgage that is close to or greater than the market value, the lender may balk at a cash-value policy. But if you have a small mortgage, chances are the lender won't care, Walsh says.

The risks of not insuring

Are there situations where a homeowner should just "go bare" by dropping homeowners insurance altogether?

Probably not. Homeowners insurance generally provides liability insurance as well as covering the structure. If you own a property, having liability insurance is important because if someone has an accident on your property, or some other legal issue that causes them to sue you, you'll need money to defend against the suit and money to pay if you lose. A homeowners policy will cover that and likely prevent the court from taking your property or garnishing your savings or income (even Social Security), Walsh says.

You could buy just liability insurance, but it will probably be more expensive than a homeowners policy, he says, advising buyers in this situation to ask for minimum structure limits -- even if the agent is reluctant to sell that policy. Minimum structure limits refers to the minimum property valuation that the company is willing to sell. For example, it might be $50,000/$100,000 -- giving you $50,000 on the structure and $100,000 liability.

Walsh says if you have a beat-up old house and you're trying to save money, demand the least structure coverage, but don't scrimp on the liability because that could be the big risk.

In any insurance negotiation, don't let the salesman intimidate you, Walsh advises. Insurance companies are loathe to see homeowners renegotiating to lower-cost policies because it reduces the company's cash flow.

"Don't be intimidated even if they act like you're stupid. Renegotiating your insurance policy isn't stupid. It's entirely reasonable," Walsh says.

You can compare home insurance quotes at Insureme.com, a Bankrate company.

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