HOME BUYERS FAIR : Insurance Coverage : How Much Homeowner Insurance Is Sufficient? : Policies: The amount of protection should be based on replacement value. It makes no sense to have too little or too much coverage.

Just how much homeowners insurance coverage you should have is a good question for all homeowners--and renters--to ask themselves ever so often.

If you have too much insurance, you’re wasting your money. If you have too little, you’re risking financial havoc along with the physical destruction.

To obtain full replacement payment for any partial loss or damage under a homeowners policy--with the exception of a special policy for older homes--the owner must insure the dwelling for at least 80% of its replacement--not market--value, according to the Los Angeles-based Western Insurance Information Service.

Say your house has a replacement value of $200,000 and it’s on a lot valued at $75,000. Since the lot won’t be destroyed in case of a fire, insurance coverage of $160,000 (80% of $200,000) meets the requirements and you’ll get $200,000 if the house burns to the ground. You’ll also get the full amount of the damage, less the $250 deductible, if you have, say, a $10,000 loss.

If you have only $100,000 of insurance on the $200,000 house, a total loss would result in a payment of $100,000 and a $10,000 loss would result in a payment of 10/16 of $10,000 or $6,250.

Insurers caution that the market value of the house in most cases is not a proper basis for determining the amount of insurance to buy, according to David Crocker, area manager at Western Insurance Information Service.

Insurance companies or agents can assist you in figuring out how much insurance coverage is needed, based on replacement costs in your area. Remember to check with your insurance agent or company when you remodel; a new bathroom or a second-story addition can substantially increase the replacement value of the house.

About 90% of all homeowner policies have built-in “coverage escalators” that automatically increase coverage each year based on increases in construction costs.

But relying on such escalators can be risky, according to Gail Hillebrand of the San Francisco office of Consumers Union (CU). She advises homeowners to check with the company or the agent periodically to make sure you have enough coverage--and if you’re the kind of person who doesn’t want to take a chance--buy a guaranteed-replacement-cost policy.

Companies that offer such policies usually require that you insure your house for its full replacement cost. The company will adjust the amount of insurance each year, based on construction cost increases.

With such a policy, the company guarantees that you will receive full compensation on any claims, even if replacing your house costs more than the face value of the policy.

She advises homeowners to shop around, based on price. As an article on homeowners insurance published last September in CU’S Consumer Reports magazine shows, the identical house in Denver insured for $94,000 could have a premium as low as $257 a year or as much as $536 a year.

“We at CU caution homeowners not to underinsure, but also, not to overinsure,” Hillebrand said. “Because a big chunk of the cost of a home is in the land, not the house, too many homeowners base the amount of coverage on the market value of the house and overpay millions of dollars in premiums as a consequence.”

Bob Hunter, president of the National Insurance Consumers Union, an Alexandria, Va.-based nonprofit group that tracks insurance, recommends that you check out some of the direct-writing insurance companies such as 20th Century, Amica and USAA when you’re shopping for insurance.

“As the Consumer Reports article shows, you don’t have to give up service if you get a company with lower premiums,” Hunter said. “Amica, for instance, rates very high in the consumer satisfaction survey, but its rates are very low.”

Once you get a quote from two or three direct-writing companies, you can go to an independent agent and see if he or she will be able to match or better the quote, he said.

Hunter said that when you get your quote, get it for very comprehensive coverage, at least HO-2 or HO-3 (see below). He said that you should mention any improvements in your house that would reduce the rate, including smoke detectors or alarms; a fire sprinkler system or a burglar alarm system.

Homeowner insurance premiums are calculated on a number of factors: location, with premiums based on police and fire protection and local loss statistics; the age of the house, with discounts of up to 20% offered on newer houses; type of construction, with brick houses--at least in areas not afflicted with earthquakes--more resistant to fire and storm damage than wood-frame ones, Hillebrand said.

About half the states have Fair Access to Insurance Requirements (FAIR) plans for homeowners in high-crime or hillside areas subject to brush fire threats, Crocker said. FAIR plan insurance often costs much more than regular insurance, and the coverage is often limited. It’s the homeowner insurance equivalent of assigned-risk car insurance, he said.

By law, all companies licensed to sell homeowners insurance in California must also offer earthquake coverage. Only about 20% of the homeowners in California have earthquake insurance, Crocker said.

Earthquake coverage is expensive, about half again as much as the homeowner insurance premium, and typically has a deductible of 10% of the face value of the policy, he said.

If you have $200,000 in earthquake coverage, for example, the first $20,000 of damage is paid for by the homeowner.

Late in April, Gov. George Deukmejian proposed a plan that would provide $15,000 of mandatory earthquake insurance for about 6 million houses in 40 of the state’s 58 counties, including Los Angeles County.

Deukmejian, who said the proposal was prompted by the Oct. 17, 1989, Bay Area earthquake, said mandatory earthquake coverage is needed because of the high cost and high deductibles of regular quake insurance.

The earthquake coverage would add an average of $36 to insurance premiums of affected homeowners and the deductible would range from $1,000 to $2,500, depending on the value of the house.

Crocker said the proposed legislation was a good idea, but the limited coverage would give homeowners a false sense of security: “If you have a $200,000 home, what’s $15,000 going to do for you?”

State Sen. Cecil Green (D-Artesia), who has been advocating his own earthquake insurance proposal, said Deukmejian’s plan--which has been introduced as SB 2902 by State Sen. Frank Hill (R-Whittier)--is inadequate: “It’s too little, too late. The average loss in the (Oct. 17) quake was $50,000. I can’t support something that mandates purchase of a policy that won’t provide the coverage.”

There are 6 types of homeowners insurance policies, formally called multiple peril-homeowners insurance covering in one contract the basic basic fire and windstorm, as well as theft and burglary, bodily injury, property damage, vandalism and malicious mischief: The basic policy (HO-1) covers 11 specified perils (fire or lightning; windstorm or hail; explosion; riot or civil commotion; aircraft; vehicles; smoke; vandalism or malicious mischief; theft; damage by glass or safety glazing material which is part of building, and volcanic eruption), while the broad form (HO-2) covers these 11 and six others (falling objects; weight of ice, snow or sleet; accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning or automatic fire protective sprinkler system or from within a household appliance; sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot water heating system, an air conditioning or automatic fire protective sprinkler system or of an appliance for heating water; freezing of a plumbing, heating, air conditioning or automatic fire protective sprinkler system or of a household appliance; sudden and accidental damage from artificially generated electrical current (does not include loss to a tube, transistor or similar electronic component)); a special HO-3 policy provides the broadest insurance coverage on the house and other structures, but limits personal property coverage to that covered by the HO-2 policy; the HO-4 or contents broad form policy is for those who rent an apartment or house or own a cooperative apartment, insuring household contents and personal belongings like an HO-2 policy, but relying on the landlord’s or community association’s policy for coverage of the structure; an HO-6 policy is similar to the renter’s (HO-4) policy, but it also covers any additions or alterations not covered by the association’s policy; finally, an HO-8 older home policy is designed to allow owners of ornate Victorian or similar houses that would be expensive to replicate to carry coverage tied to the market value rather than the replacement value of the house.

SOURCE: Western Insurance Information Service.