In Hindsight: Home Insurance

May 2011 will go undoubtedly go down as one of the strangest 30-day stretch of weather patterns in the city’s history. Perhaps that’s why many homeowners are learning from their mistakes, preparing for better protection for Mother Nature’s next episode.

Earlier this month, I wrote about how despite 96 percent of Americans having homeowner’s insurance, 64 percent of U.S. homes are undervalued for insurance purposes.

The only way to decrease that total is through education and awareness, and the Detroit Free Press does a good job of explaining the three ways homeowner’s insurance coverage typically comes:

  • Replacement cost: While this covers the cost of repairing or replacing a home, based on a set dollar limit, it may not reflect increases in the cost of construction and labor since the policy was taken out. Translation: if a disaster strikes an entire community, higher demand could push up the cost of building materials and labor.
  • Extended replacement cost: The insurer agrees to pay a certain percentage above the replacement cost to account for inflation. But even with this adjustment, homeowners could come up short, especially if it has been a long time since their coverage was updated.
  • Guaranteed replacement cost: The good news is this coverage will pay the total cost of replacing a home, no matter how much prices have increased since the homeowner took out the policy. The bad news is this type of coverage is more expensive and increasingly difficult to obtain because insurers want to control costs.

Most standard home insurance policies also include an “inflation guard” provision, which automatically adjusts the coverage limit when a policy is renewed, but some coverage may charge extra for this.