By Starrla Cray
COKATO, DELANO, NORWOOD, WINSTED, MN Although insurance can’t undo the damage of a house fire, local agents agree that having adequate coverage can help homeowners piece their lives back together.
Winsted resident Allan Debner, of Allan R. Debner Insurance Agency in Norwood, compared insurance companies to the famous 1940s movie, “It’s a Wonderful Life,” because at the end, lives are returned to normal.
“That’s what the insurance companies do,” he said. “They put things back the way they were.”
Although most people have insurance for their homes and personal property, some don’t know enough about their coverage, local agents said during a discussion at the Herald Journal April 21.
Peter Bortnem of Peter Bortnem State Farm Insurance and Financial Services in Cokato, said people should ask their agents if they have any questions.
“Don’t ever assume,” he said. Each company does things a little different, Debner added, and it’s important to know what is covered before it is too late.
“You don’t want to find out at claim time,” Bortnem said.
“Replacement cost” and “actual cash value” are two phrases policyholders should understand, agents said.
Replacement cost on a home insures people for the amount it would cost to rebuild a new house. Actual cash value, however, takes depreciation into account.
Mortgage News Daily gives the example of 12-year-old shingles that have been destroyed. With replacement cost, the homeowner would be insured for the amount that new shingles would cost. Assuming a 25-year lifespan for the shingles, actual cash value would only pay for half the replacement cost, because the used shingles are not worth as much.
The type of coverage a homeowner should choose depends on the home, Dan Faust, of Faust Insurance Agency in Cokato, said, but it’s a good idea to strive for a replacement cost value.
“A used shirt is hardly worth anything,” he said.
Although replacement cost provides better coverage, the tough economy has some people opting for less expensive policies.
“People want to save money,” said Ben Cade of Crow River Insurance Services, Inc. in Delano. “People are changing coverage.”
“We’ve seen higher deductibles,” Debner said.
“We’re always fielding questions, ‘how can I lower my insurance?’” Faust added.
The current low housing market also creates interesting scenarios, agents said.
A home’s market value might be $120,000, for example, while the cost to rebuild that home could be $275,000. According to www.Insurance4USA.com, the home should be insured for the replacement cost, or $275,000.
“That makes it real hard right now,” Faust said. “Insure it to value.”
According to the US Fire Administration, insurance companies fear that the current mortgage crisis will spark an increase in arson for profit. However, the number of arson cases dropped in the US during the first six months of 2008. The only population group with more arson cases was cities with 250,000 to 500,000 people, with a 2 percent increase.
Over-insured homes create a “moral hazard,” Debner said.
“It’s an incentive to have that loss,” Bortnem explained. “We really try to avoid that.”
Before issuing an insurance policy, an agent will use underwriting to determine the amount of risk the company is taking on.
“Pride of ownership is something we look at,” Faust said. “Insurance is always based on the hazard.”
Bortnem said he is often asked why insurance costs as much as it does.
“They’re not understanding how much risk the company is taking on,” he said.
If a home is destroyed by fire, Faust said, the owner should hire a local contractor to rebuild.
Sometimes, contractors from other states will come out to do large projects, but when the contractor leaves, there is often no one to contact if something goes wrong.
“We don’t guarantee the workmanship,” Faust said.
Having a local insurance agent is also important, Bortnem said, because someone can go to the house to help the owner decide the amount of insurance that is needed.
Anything that is of high value should be scheduled, Debner said. Belongings such as expensive jewelry, firearms, or collectibles can be listed, or “scheduled” with the insurance company so that they have proper coverage.
Although insurance agents can help homeowners choose a policy, it is the client’s responsibility to keep the policy updated.
“It’s up to them to talk to us,” Bortnem said. “They’re in charge. We’re the advisors.”
“If the insured makes a life change, the agent should be contacted,” Debner said.
“That’s where people get into trouble,” Bortnem said. “We can’t adjust anything on the policy without them telling us to do it.”
“The main thing is to stay in constant contact with your agent,” Faust said.
People should also go through each room and take note of everything they own, Debner said. This can be done with photos, video, or a written list. The documentation should be kept in a safe place, so that it will be available for reference if a fire destroys everything.
“If your house burned down tonight, what did you have in it?” Debner asked. “Insurance is here because we want to make you whole, like before the loss occurred.”