Sunday, February 5, 2023 Feb 5, 2023
44° F Dallas, TX

THE CONSUMER String of Perils

How to get a homeowner’s insurance policy that actually gives you some protection.
By Tom Peeler |

What a pitiful sight. Stately magnolias and gnarled live oaks, broken by the weight of the ice. And contrary to some radio and TV reports following the New Year’s ice storm, the damage was not covered by homeowners’ insurance. If the trees had exploded, they would have been covered, as they would have been if they’d collided with a Concorde, been wounded in a demonstration against the Shah, or carried off by the Midnight Skulker. But if your trees are felled by ice, you’re out of luck. Maybe next time.

The Texas homeowners’ insurance policy is a bizarre mishmash of confusing provisions pieced together over many years of court battles, with a new provision added every time an insurance company lost. You can wade through the fine print and sift out the exclusions if you like, but here are the things you really need to know about homeowners’ insurance.

The ABC’s. Unlike most states, the state of Texas decides which policies companies can sell and how much they can charge. There are three basic homeowners’ policies in Texas, called Forms A, B, and C. Form A is a dog-it covers only a few perils and pays for depreciated value rather than replacement cost. No homeowner should seriously consider buying Form A, no matter how cheaply he can get it.

According to Jack Jones of the State Board of Insurance, 91 percent of Texas’ homeowners select Form B, so it’s probably what you have now. Form B insures your house against all risks except a few of the real biggies, like earthquake, flood, and nuclear war. The policy protects personal property against the things that are most likely to go wrong, such as fire, hail, windstorm, theft, and malicious mischief. The insuror agrees to pay you enough on the house that you can replace it, but pays off on personal property only after deducting depreciation. The state-approved rate for a $100,000 policy in the Dallas area is $596.

Form C has a distinct advantage. It costs a little more than Form B ($101 more on a $100,000 policy), but its coverage against all but major risks applies to personal property as well as to the dwelling. So Form C insures against that old bugaboo, mysterious disappearance: If you lose your $2000 Rolex in Lake Tex-oma while wrestling a striper, the standard Form C pays, while the standard B doesn’t. Form C also has an unlimited payoff provision for losses away from your abode, while B has a $1000 limit.

So why aren’t more folks buying C? “People are having to pay more every year for insurance just to keep up with the increased values of their houses,” says Bill Peavy, president of the Texas Association of Insurance Agents. “They’re just not thinking in terms of spending even more on top of that.”

The Insurance Board permits some companies to offer cut rates. GEICO offers the lowest homeowners’ rates in Dallas, 35 percent off the state rate. State Farm and Allstate offer 25 percent discounts; Aetna, Employers Casualty, INA, and Hartford, 15 percent. Other companies offer discounts ranging from 10 percent to 20 percent.

What the contract gives, the contract takes away. The State Insurance Board has shown little regard for the harried homeowner while drafting its approved policy forms: They have no logical organization and almost every provision is contradicted, at least in part, elsewhere in the policy. For example, the first paragraph of Form B limits the scope of the policy to the homeowner’s house and lot. The sixth paragraph expands personal property coverage to “anywhere in the world.” The seventh says that may be true, but only up to $1000. And under “Exclusions,” we learn that anywhere in the world doesn’t include a separate dwelling owned by the insured. Unless, as provided under “Automatic Removal,” the homeowner intends to move into the second dwelling, and it’s located in the continental United States or Hawaii. Conclusion: Reading your policy hastily can hurt more than it helps. If you read it at all, read every blessed word.

The deductible. The standard policy has a deductible equal to one percent of its face value. Normally, it’s sound practice to carry a relatively high deductible- if you insure against calamity rather than nuisance, you secure a cheaper rate. But $1000 losses (one percent of our hypothetical $100,000 policy) do not feel like nuisances. And it will get worse. Two or three years from now, minimally adequate coverage on our hypothetical house will probably be $125,000, and the deductible, $1250. Using the State Farm/-Allstate rates (25 percent less than the state rate), here are the prices for alternative deductibles on a $100,000 Form B policy: standard one percent, $447; one half percent, $487; $250 deductible, $496; and $100 deductible, $590. The $250 deductible stands out as the best deal at only $9 more than the one half percent ($500) deductible. The $100 deductible is a loser-for the extra $150 in coverage over the $250 deductible, you pay $94.

Catch 80. Suppose you bought a $50,000 house a few years ago, with a $40,000 mortgage. At the closing, the mortgage company required you to take out a $40,000 policy on the house. Your house is worth $100,000 now (not including the lot), and you’ve been meaning to call your agent about increasing your coverage. Then you have a fire in the kitchen and suffer a $10,000 loss. You figure you’re lucky, because you’re still well within the $40,000 policy limit.

Think again. You’ve just been zapped by the 80-percent rule: If you don’t keep your house insured for at least 80 percent of its replacement cost, you have to share the loss. Since you carried only half the coverage required by the rule, the company has to pay only half the loss. You pay the other half, or $5000. It takes only two or three years of inattentiveness to fall below 80 percent.

Easy riders. To keep from falling foul of the 80-percent rule, especially if you have a three-year policy, it’s a good idea to get an inflation guard rider. For a small additional premium, the rider will automatically increase your coverage every three months, by up to 3 percent. Even if you renew your policy every year, you and your agent need to take a hard look at your coverage before each renewal. Some companies automatically raise the coverage annually, based upon the Consumer Price Index or some other indicator of inflation. A rare instance, here: The best interests of the insurer and the homeowner are the same.

Another important rider was approved by the State Board of Insurance last December. You can now buy coverage on personal property which pays off in replacement rather than depreciated value. Take clothing, for instance. A suit purchased three or four years ago for $200 will get you about fifty bucks from your standard policy if it is destroyed in a household fire. The sum is called “actual cash value.” But on today’s market, you’ll pay $300 for a garment of like quality, and you’ll be out $250. Alas, even with the replacement-value rider you get no more than four times actual cash value-in this case, $200. It’s something to think about, though.

To get the rider, you have to increase your personal property from the standard 40 percent of dwelling coverage to 60 percent. Then a five-percent surcharge is added to your full cost; rather peculiar since you already have replacement cost coverage on the dwelling in the standard policy. All in all, the extra cost on a $100,000 policy is $72 at standard rates, less on discounted policies.

Scheduling. The standard policy covers “unscheduled” personal property, but only up to a point. Coin collections are covered to $100, stamp collections to $500. There’s a $500 limit on theft losses of gems, watches, jewelry, and furs. The thing to do with these items is to schedule them. For an extra fee, you can list your valuable items on a special schedule which knocks out the dollar limitations on coverage. The deductible in your policy does not apply to scheduled property, but perhaps the greatest advantage of all is that you and the insurance company agree before the loss on the value of the property. The company will probably require a bill of sale or a qualified appraisal to establish value.

In addition to coins, gems, watches, jewelry, and furs, you can schedule cameras, musical instruments, silverware, golf equipment, and fine art (including antiques). The extra premium (discounted) ranges from $20 for $5000 worth of fine art to $95 for a $5000 coin collection. The rate gets cheaper after the first $5000 in coverage for each item.

Liabilities. This is an often neglected but very significant element in the homeowners’ package. If one of the neighborhood urchins sneaks up to your swimming pool in the middle of the night and dives in before noticing that you’ve drained it, you’re covered by homeowners’. It will also take care of you if one of your drives goes astray at the country club and beans a bicycler wheeling down Mockingbird Lane. The standard policy has a $25,000 liability limit, but the price for raising it to something reasonable is amazingly low-you can increase your liability limit from $25,000 to $300,000 for about $5! If your agent hasn’t told you this, he’s due for a scolding.

Other oddities. Here is a compendium of quirks that are scattered about in the policy, some semi-logical, some not.

The replacement cost coverage on your dwelling does not apply to wall-to-wall carpeting.

The tree coverage against certain named perils (not ice!) is limited to $250 per tree.

If your house burns or becomes otherwise uninhabitable as a result of a named peril, you’re entitled to hotel and living expenses up to 20 percent of the face value of the property.

There’s no payoff for the loss of animals or golf buggies.

You’re covered against sonic booms. Boom damage used to be excluded, but now that air-speed limits have eliminated the risk, your policy kindly insures you against it.

There’s no coverage for losses resulting from smog or industrial smoke.

There’s no coverage against damage to TV antennas caused by wind or hail.

There’s no personal property coverage in Form B for damage from rain, snow, sand, and dust, if they enter your house through a door blown open by a storm. If the storm blows a hole in your wall or roof, take heart: You’re covered.