Dear Kari,
We made a low offer on a property and the seller said yes, much to our surprise. The only thing that was changed was a quick closing of the escrow.
Things went so fast that we forgot we needed homeowner’s insurance, so we just used the insurance company that held our renter’s policy.
After we closed escrow we found out how much more we paid for our policy. Why is there such a big price difference?
Answer:
Homeowner’s insurance is often purchased in haste and needed only when a rare calamity strikes. Consequently, some homeowners may be unaware that their home and its contents do not have adequate insurance coverage.
It is important to keep your homeowner’s insurance policy current by updating and increasing its value as you change, modify, or make additions to your home. The building block of any homeowner’s insurance policy is the amount of coverage on the house and its contents. This figure should be based on the replacement value or what it would cost to rebuild the structure. The replacement value often changes over the years.
Insuring for less than the full value is false economy, and refers to valuation no longer available in most policies. Nearly all insurance companies now require homeowner’s policies to be insured at 100 percent of actual replacement cost in order to cover a loss completely. Most companies also offer at least “extended replacement costs” to cover inflationary cost increases for construction and the added costs of loss clean up. Choosing an inflation guard clause for your policy that automatically raises your coverage in step with a rise in price is another way you can protect yourself.
The way to obtain proper coverage begins with determining (as precisely as possible) the true value of your home and its contents. You can reasonably arrive at an approximate replacement cost (the amount you want to insure) by taking some measurements and doing your homework on local building costs. It is important to have replacement cost coverage; otherwise any loss claim may be limited to depreciated value.
After calculating your insurance needs, carefully shop for a reputable insurance provider. Get answers to the following questions. How does the insurer rate in customer satisfaction? What special features or limitations does the policy have? Is the underwriter financially sound? Is flood insurance needed in your neighborhood? Comparison shopping will allow you to obtain the maximum coverage at the best price.
Many home buyers are concerned about whether they have an insurable interest in the property before the actual closing. The answer is an unqualified “yes.” The buyer may not be the record owner of the property yet, but he or she has an insurable interest in the property as soon as the agreement of sale is executed.
So should you get hazard insurance before the closing? It depends. Buyers do not usually insure a property until the title passes to them from the seller. You should know what the agreement between you and the seller stipulates.
This is very important to both parties. From the buyer’s point of view, however, it is critical that an adequate sum or full replacement value be stipulated. Watch out for agreements which read “as now insured.” This is an all-too-common practice which usually indicates that the seller does not want to increase inadequate insurance coverage.
Kari McCoy owns the Kari McCoy Group, residential real estate at Coldwell Banker. She can be reached at (916) 941-9540.
