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16 August 2004
What is homeowner�s insurance?
It is insurance that protects a homeowner against loss from fire and other
hazards that may impair the value of their home.
"Is homeowners insurance a
settlement cost?"
Yes, it appears on the Good Faith Estimate as
an estimated amount, and the actual amount is shown on the HUD1, which is the
closing document that lists all settlement costs.
It is not a mortgage cost, but lenders
require that their "minimum insurance requirements" be met before they will fund
a loan. The house is their collateral, and they don�t want to lose it to a fire
or other catastrophe.
The insurance requirements vary from lender
to lender but on a house purchase, most require that the premium be paid for the
first year at closing. If the borrower is maintaining an escrow account, an
additional amount equal to several months of premiums must be paid to fund the
account.
Can I shop for homeowners insurance
on my own?
You can and you should. Homeowners insurance
is a lot easier to shop for than a mortgage because premiums change only
occasionally, so the price you are quoted is very likely the price you will pay.
Shoppers should be aware that carriers today
have access to databases that combine claims data from many companies. If you
have been making numerous small claims, all the carriers you shop will likely be
aware of it. It is still worth shopping, however, because the carriers use
different risk evaluation systems.
In shopping for the lowest premium, you must
be very careful to compare apples with apples. The principal factors you must
hold constant in soliciting quotes from different carriers are the deductible
and the coverage.
The deductible is the loss amount that is the
homeowner�s responsibility, e.g., $1,000. Only losses above that amount are
insured. Higher deductibles carry lower premiums.
The coverage dictates the maximum loss the
policy will pay. There are four levels of coverage, called "actual cash value"
(lowest coverage), replacement cost", "extended replacement cost", and
"guaranteed replacement cost" (highest coverage, but not necessarily available).
Higher coverage carries higher premiums.
"Consumer Reports suggests carrying
a high deductible. Do you agree?"
Yes. I have the highest deductible my carrier
offers, and if they offered a larger one, I would take it. I live in a heavily
wooded area, and every other year or so, a large tree falls that I must have
removed. Even if the cost exceeds my deductible, I don�t make a claim because it
will raise my premium. The number of claims a homeowner makes figures
importantly in premium setting.
Homeowners insurance should not be used as a
way to budget expenditures for minor mishaps, such as my falling trees. Even if
small claims did not impact the premium, the carriers price deductibles so
advantageously that it pays homeowners to self-insure.
If the typical homeowner took the largest
deductible, banked the saving in premium, and used the account to pay for what
would have been claims under a smaller deductible, the account would grow over
time. The saving in premiums using the large deductible would more than cover
the claims under the small deductible.
"�my premium just jumped 160%, even
though I have had no claims. Why is this? What can I do?"
Welcome to the club, more homeowners than not
have had their premiums raised over the last three years, and some have lost
coverage altogether. Insurance carriers have been getting tough because they
have suffered unexpected losses. Wildfires and mold have caused losses over
large groups of houses in the same areas, as opposed to the randomized
individual losses that carriers expect.
In addition to general increases in premiums,
the carriers have become more discriminating. In setting premiums, carriers
today use industry-wide data on claims experience, and credit scores, which they
have found are related to claims experience. The result has been larger premium
spreads between individual homeowners.
A premium increase of 160% probably means
that you have been shifted into a higher-risk category. Given your record, ask
your carrier to explain the premium increase. Sometimes they will retreat. If
they don�t, shop a few other carriers and see if they have you categorized
similarly.
If all the carriers have you labeled as high
risk, you may want to explore the possibility that the information they are
using to make that judgment is in error. Credit information is known to be
error-prone, and it is likely that insurance claims information is as well. Web
sites that you can use to check it out are
www.choicetrust.com and www.myfico.com.
Copyright Jack Guttentag 2004
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