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Is Your Home Underinsured?

The recent hot, dry summer in our area served forcefully to remind us how vulnerable any homeowner is to a sudden disaster. The Eastridge fire in wooded areas near Rapid City destroyed several homes, though incredible efforts by firefighters saved many others. Prairie fires burned homes and threatened many ranches and entire towns in northern Nebraska—a strong reminder that even homes built on the prairie, without a tree in sight, are at risk from wildfires.

Besides fire, there are a number of other disasters that can happen just as quickly to almost any homeowner in the Northern Plains. These include high winds, tornadoes, heavy snows, flooding, hail, freezing, and even earthquakes. About the only things we’re exempt from are hurricanes and tidal waves.

The good news is that most of us have home insurance to cover such losses. The bad news is that most of us don’t have enough.

According to a Wall Street Journal article that appeared August 26, 2006, 58% of all homeowners are underinsured. They do not have enough insurance coverage to replace their homes. Most only have enough to pay for 80% of the cost of rebuilding. An average home in Rapid City would cost about $200,000 to rebuild, so a homeowner with 80% coverage would need to come up with $40,000 out of pocket in order to rebuild. Most of us don’t have that much spare cash.

The biggest reasons for such widespread underinsurance are the recent appreciation in property values and the skyrocketing cost of building materials. In Rapid City, for example, house prices have increased by 50% just since 2000. And since building material prices have escalated at an even faster rate, the cost of rebuilding the average home would probably take most homeowners by surprise.

Last week, I contacted my insurance agent to review my coverage. I had $298,000 in coverage with an additional 25% cushion to take care of cost overruns. Basically, I had $372,500 of insurance. My agent did a quick calculation and determined it would cost $450,000 to $525,000 to rebuild my home. That meant I was among the 58% of underinsured homeowners, with only had enough insurance to pay 71% to 83% of the cost of rebuilding. If my home burned I would be writing a check for $75,000 to $150,000.

I strongly suggest that you do a similar review of your homeowners insurance. Don’t limit it to the cost of rebuilding the house, either. A complete loss will also mean you need to replace all of the personal items in your home. The cost of replacing everything in your home will probably be as surprising as the cost of rebuilding it. Experts suggest you should insure your personal property for 50% of the coverage on your home. If you own such things as antiques, valuable collections, or fine jewelry, ask your insurance agent whether you need to list those specifically as additions to your policy.

In addition, be sure that you have photographs or a videotape of your home’s contents as proof of what you own. The importance of having such a record was underscored by the experience of one couple who lost their home in the Eastridge fire. They had intended to videotape the contents of their home, in large part because they were going to rent it out during the Sturgis Rally. Their home burned the weekend before they planned to do the taping.

Their unfortunate loss prompted me to videotape my home the next day. I also have increased the coverage on my home to $450,000. Sometimes writing columns has personal benefits, too.

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