We expect our homeowners insurance policy to help us recover from a catastrophe by providing us with enough cash to replace anything damaged or destroyed in such an event. As we found after hurricane Katrina, all was not as people expect. You need to read your policy very carefully and fully understand what you have paid for. You may not have the protection you think. It is standard for most homeowner policies to cover the structure of the house for replacement-cost value. But what coverage do you have on your contents? Are you covered only for actual cash value or the replacement cost? What's the difference? If you are only covered for actual cash value then the company will deduct for depreciation on those items. That could be significantly less than the cost for you to restore, repair or replace the item. Check your policy to see if you chose the option of replacement cost coverage. You may save money on the front end by having actual cash value coverage but it could cost you dearly in the long run. The longer you own your house or personal property, the more depreciation becomes an issue and replacement cost coverage becomes more critical.
Replacement-cost coverage varies. Different insurers offer varying levels of replacement-cost coverage, so you need to check your policy or with your insurer to see what is covered in your area and what the limits are. Some companies add maximums to replacement-cost coverage policies, to protect themselves from overexposure in the case of loss. For example, some insurers limit the amount payable on replacing a roof, especially when it is over a certain age.
Remember, you are insuring your home and your possessions -- not your land. Think about what it would cost to rebuild your house and replace its contents, not what the market value of the house is.
Next, you need to see if you are adequately insured. We personally buy flood insurance for our home in Baton Rouge, even though we are not in a flood hazard area. That decision was based on a flood that occurred in New Orleans about 10 years ago- homes that were over 40 years old and not in a flood hazard area were flooded. Now I think that it is even more important to consider purchasing flood insurance even for areas that do not require it. Of course, you need to know what you are getting coverage for, since it seems even flood insurance doesn't cover what we expected! Remember, your basic homeowners insurance will not cover you or your contents for flood. And a flood isn't always a river or body of water overflowing. Several years ago a tornado came through Baton Rouge and debris stopped up a drainage ditch, causing a house to flood during the storm. The house was not in an area that required flood insurance, and therefore, the damage was not covered by their insurance company.
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