Storms Hit Homeowners Insurance Coverage

June 09--The sad sight of houses pulverized by a tornado in St. Charles should get us thinking about homeowners insurance. Insurance company executives are thinking hard, and some are pulling back coverage.

Higher deductibles and limits on coverage for roof damage are among the nasty changes. Premiums are up nationally by 4 to 6 percent nationally, according to the Insurance Information Institute, an industry trade group. That is two to three times consumer inflation.

"Historically, you've been able to buy replacement cost coverage that would include the roof. Even if it's 20 years old, if it's hit, you get it replaced," said Larry Case, executive vice president of the Missouri Association of Insurance Agents. Lots of companies still offer that, but some are limiting claims on older roofs to their "actual cash value." That's a lesser level of coverage.

Under "replacement value" coverage, the insurer pays to repair the damage fully with new material. Under cash-value coverage, the insurer pays only up to the depreciated value of the roof.

If a roof has been up for half its expected life, the insurer may pay only half the repair costs. "If it costs $8,000 to fix it, they may only give you $4,000," says Case.

Tom Wilson, CEO of Allstate Insurance, created a kerfuffle in the insurance business last year when he defended such a policy in a conference call with investors.

"People just don't get their roofs fixed and then a hailstorm comes and we replace a $20,000 roof when we're getting a thousand bucks from the customer and it's obviously not a good trade," Wilson said.

Allstate is rolling out new policies that fully replace roofs that are less than about 10 years old. Then it goes to a schedule that pays less. A spokeswoman said the average roof it insures in Missouri is five years old, so most homeowners aren't affected.

Insurers are also getting more reluctant to replace areas that aren't damaged, even if they look strange after repairs. A 2001 hail storm in north St. Louis County damaged 70,000 homes and provided a classic example.

The hail often ripped up siding on one side of a house, but not the others. Many homes were old, and insurers couldn't find new siding that matched the color of the other sides.

Some companies wanted to pay for only one side. More than 500 homeowners complained, and the Missouri Department of Insurance made insurers replace siding all around. However, the department revoked that ruling in 2008, and insurers have been changing policies to allow them to limit repairs to damaged areas.

Some companies are limiting what they'll pay when houses are leveled and a homeowner decides not to rebuild, says Case. Suppose a house is insured for $200,000. If it were burned to the ground -- a total loss -- Missouri law would require a $200,000 payment should the owner want to walk away, he said.

But the law doesn't apply to wind damage, he says The insurer might decide that the home was worth only $150,000, and pay that amount.

To lower claims, but keep premiums affordable, more companies are pushing to raise deductibles -- the amount the home owner must pay for repairs before insurance kicks in. "No more $250 and $500 deductibles. It is $1,000 to $1,500," says Doug Clift, president of Bowersox Insurance Agency on Kingshighway.

The Missouri Department of Insurance says it has seen some companies raise deductibles, add percentage deductibles and add separate deductibles for wind damage. But the department notes that raising a deductible is a way for consumers to hold premiums down.

Some companies are pushing "percentage deductibles." Instead of a dollar amount, the deductible is a percent of the insured value of the house. A 1 percent deductible on a house insured for $200,000 would be $2,000.

Clift says State Farm is moving toward percentage deductibles. A State Farm spokesman didn't confirm or deny that. "I wouldn't be able to get into that level of detail," Jim Camoriano said. State Farm holds about a quarter of the Missouri insurance market.

The reasons for rising insurance costs all have names. Joplin, Mo.; Tuscaloosa, Ala.; and Moore, Okla. -- all were walloped by tornadoes. Hurricane Sandy swamped the New York City area.

"Nationally, the cost of homeowners coverage is rising in response to some of the most expensive years in history," says Bob Hartwig, economist and president of the Insurance Information Institute.

Insurers paid out a $1.6 billion in Missouri in 2011 -- the year of the Joplin tornado -- and $1.3 billion last year, according to the Missouri Department of Insurance. Both were records.

RISING PREMIUMS

Although Hartwig sees a 4 to 6 percent rise nationally, Clift says he's seeing premium hikes of 5 to 10 percent in St. Louis.

That follows a 6.7 percent increase recorded last year, as measured by the Missouri insurance regulators. Regulators in Illinois say they don't track premiums.

All this means that homeowners should pay closer attention to their policies, along with the change notices that arrive when policies renew.

The most important thing is to buy enough coverage to replace the home if a tornado lifts it off to Oz. Don't look at how much the home is worth on the real estate market. Look at how much it would take to rebuild it.

Often that's less than the market value: After all, your land won't disappear. But sometimes older homes in less desirable neighborhoods will cost more to replace than their market value.

Insurers are good at estimating this, but they sometimes goof. You can get a quick-and-dirty guess for free at www.building-cost.net.

The gold standard in coverage is "guaranteed replacement." That means the insurer will replace the damaged property no matter what -- even if it costs more than you're insured for. If you have plaster walls today, you'll have plaster, not wallboardv, in the new home.

Guaranteed replacement coverage can be hard to get, and it's expensive. A reasonable step down is "extended replacement cost" coverage. The insurer agrees to pay a certain percentage -- often 20 percent -- over the limit in the policy if needed to get the job done. That's important in major disasters, when sudden demand for repairs can send prices soaring.

Avoid "modified replacement" coverage if you can. It's often offered on older homes and doesn't promise to put things back the way they were. Plans known as HO-8 coverage give you today's cash value, after deducting for depreciation. That's bad news.

You'll also want replacement value coverage for your personal property, which is covered under homeowners policies.

The purpose of insurance is to protect you from losses you can't afford. So, get a deductible that you can afford to pay without too much pain.

Homeowners insurance is an extremely competitive business. The Insurance Department counts nearly 140 companies selling homeowners coverage in Missouri.

That puts customers in the catbird seat. If your company does something you don't like, shop your business around.

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