Hurricanes. Wildfires. Floods. Tornadoes.
There are lots of reasons — natural and man-made — to make sure your homeowner's insurance is current, adequate and economical. But chances are, like many Americans, you have little idea or interest in the best way to buy it.
"Most people don't understand much about homeowner's insurance," says industry veteran Robert Hunter, now director of insurance for the Consumer Federation of America. "They have a combination of fear and boredom."
Underscoring that emotional knot is a 2011 Deloitte survey showing 60 percent of the respondents said they never or rarely shopped around when their policy was up for renewal, even though a larger number, 75 percent, said price was either very or extremely influential in decision-making.
Yet you probably should shop around because there's a decent possibility you are under-insured when it comes to replacing your home.
[Think you might be under-insured? Click to get home insurance quotes now.]
Adding to the confusion, say industry players and consumer advocates, is that some people think the sharp decline in home prices of recent years merits a commensurate reduction in their replacement cost coverage and thus their premium.
"With the market depressed, some people may think they are over-insured," says Christopher Hackett, personal lines policy director at the Property Casualty Insurers Association of America. "There's a difference between the market value of the home and the replacement cost."
"Your home value may have dropped 30-40 percent, but the cost of rebuilding your home that burned down may have gone up 40 percent," adds Scott Mallasee, property casualty staff product director at Nationwide.
That's the least of it, according to industry experts, who attribute the insurance muddle to a variety of factors: insurance regulation (and thus coverage and price) varies by state; consumers rarely research their options and/or comparison shop; and insurance agents omit information or explain it poorly to customers.
"People tend not to understand what the coverage terms mean," says Douglas Heller, executive director of Consumer Watchdog, who maintains that the burden of education and communication is on insurers.
There are essentially two types of property coverage: actual cost value (ACV), and replacement cost, though the language may vary among insurers. Both include contents (up to a point) and related structures, such a fence or unattached garage.
ACV costs less and thus provides a lower coverage ceiling. It covers the cost of the house, essentially on an "as-is" basis, including depreciation of its parts.
The replacement is of a "like kind and like quality," says Hackett, citing the example of a 12-year-old roof, an important part of a house's structure.
Most experts say avoid it, except perhaps during the first year of a new home. "Depreciation happens quickly," adds Heller.
Replacement cost policies are by far the norm, but that's where things can get complicated.
These policies are based on a detailed and complex formula using a number of data sources from specialized subcontractors. This is why insurers ask you all sorts of questions about the size, structure, materials and contents of your house.
"The information collected gets pretty granular," says Hackett. (Think boredom!)
Replacement cost policies exclude depreciation and provides for comparable material and quality.
The average consumer thinks if a fire destroys my house the insurance company will pay to rebuild it," says Heller. "But that's up to the coverage amount on the policy."
The cost of materials and labor change over time, usually for the worse, based on market forces and inflation.
So does your house, as a result of improvements, renovations and/or additions. Experts say this is just one reason to review and update your policy every couple of years.
Changes in local or state building codes can sometimes add to the cost.
"There are limits on replacement costs," warns Hunter, a former insurance director for the state of Texas, who also worked for insurers.
And this is where the industry divides.