photo illustration - home supported by cash - homeowners insuranceThe market value of your home may have fallen as much as 50% over the last five years, but your homeowner's insurance bill has probably risen. Why is that and what can you do about it?

Like it or not, the insurance industry is firm about the answers to these questions. They say the cost of insurance is based on how much money it takes to rebuild your home to its current condition. That number, they insist, hasn't dropped and in some places has risen because the cost of demolition and the removal and disposal of things that can't be reused is rising due to environmental concerns. You can argue the accuracy of this until you are blue in the face, but your mortgage company sees it in much the same way and will require you to carry at least as much insurance as the value of your mortgage. If you let the policy lapse, they'll place your insurance with an insurance company themselves and send you the bill.Elaine Baisden, vice president of products and services for Travelers insurance says, "The actual cost to rebuild your home and what you can sell your house for are two totally different things. While market values may be decreasing, the cost to replace your home has gone up because it is contingent on materials and labor costs."

Baisden says that Travelers relies on computer modeling to determine replacement costs. With help from the homeowner, it plugs in the basic information about the home, like number of bedrooms, baths, room sizes, etc., then it factors in the extras like whether you have a fireplace or a hardwood floors, etc. Then it calculates what it would cost to rebuild the home from scratch and bases the cost of insurance on that amount.

You can replicate this calculation by using a similar online tool. It costs $7.95 for an AccuCoverage report, but it will reassure you that your insurance company is charging you an appropriate amount. If the replacement cost from AccuCoverage is radically different from that calculated by your insurer, go back to your insurance company and insist on an explanation. This is also a good reason to shop around.

Flood and wind insurance are other factors that can drive up the cost of insuring a property. The U.S. government underwrites flood insurance and you can get the maximum $250,000 coverage in a preferred-risk area for about $350 a year. Similar coverage costs about $1,500 in a moderate-risk area and more than $2,600 in a high-risk area. Your mortgage company will almost certainly require you to cover the replacement cost of your property up to the $250,000 maximum.

Wind and earthquake insurance are handled differently in the various states that are most affected. Check out what's available by contacting your state's insurance commission through the National Association of Insurance Commissioners. Or an independent insurance agent, located through the Independent Insurance Agents & Brokers of America can sometimes help you find a good deal.

Even if you don't have a mortgage and if losing your property wouldn't devastate you -- it's a second home, for instance -- James Walsh, co-author of Insure Your Home and an editor at Silver Lake Publishing, says carrying the liability portion of homeowner's insurance is still very important. "If you have some crazy, unforeseeable kind of liability -- somebody comes on the property and your dog bites -- and you owe somebody a court judgment, your homeowners insurance will probably pay it," Walsh says.

Under those circumstances, he suggests negotiating a policy that includes minimal property damage coverage -- $10,000, perhaps -- and a meatier liability policy. "The broker may be cranky, but insist that he give you the minimum-limit quote anyway."

Other circumstances where you might want to negotiate what's known as a cash-value policy -- a flat amount of money that will be paid even if the property damage is much greater -- include:
  • You own an older home where architectural details will be costly to replace -- hardwood floors, plaster walls -- but if the worst happens, you're unlikely to replace them.
  • If you have a simple property in an area where substituting a mobile home would be a perfectly acceptable solution.
  • If you can afford to self-insure a portion of the potential loss on any property.

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