By contributor
updated 9/21/2005 12:47:39 PM ET 2005-09-21T16:47:39

Evalisse Ramos, a 40-year-old hotel manager, recently renovated her Tampa home, adding a new roof, an extra bathroom and upgraded kitchen appliances.

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She thought everything was taken care of when the construction team put away their tools — until her contractor mentioned how the price of concrete was skyrocketing. Then she decided to call her insurance agent to make sure she had enough coverage to rebuild her home as it is today. 

“With hurricanes hitting and the cost of building materials going up, I just knew that my policy needed to be upgraded,” Ramos says.

She’s right: Homeowner policies just don’t cover as much as they used to. Insurance rates are rising, especially for the cost of rebuilding after a hurricane or other disaster, because of rapidly increasing costs for building materials and stricter construction codes.

In fact, the cost of lumber alone increased 17 percent from 2003 to 2004, according to the U.S. Department of Labor.

Many homeowners have failed to notice that their coverage needs adjusting, or they just can’t afford to take on the extra costs. The result: Many homes are woefully underinsured. A 2005 survey by Marshall & Swift/Boeckh, a building cost information company in Los Angeles, found that 59 percent of American homes are undervalued for insurance purposes by an average of 22 percent.

Some homeowners simply purchase enough insurance to satisfy their mortgage lender.  Others confuse the real-estate value of their home with what it would cost to rebuild it.  In reality, you should have enough insurance to rebuild your home in the event it is completely destroyed. Some steps to ensure you’re fully covered:

Review policy limits annually. Making sure your home has sufficient insurance coverage should be a periodic exercise. Jeanne Salvatore, senior vice president of public affairs for the Insurance Information Institute in New York, recommends that homeowners contact their insurance agent at least once a year.  “Other events that should trigger a call to your insurance company are if you’ve made a major alteration or addition to your home, or received an expensive gift, say a plasma TV for Christmas,” she says. “Also let your agent know if you’ve made a lifestyle change, such as getting married or taking in an elderly parent who has lots of valuable family heirlooms.”

Know what is included and not included in your policy.  It’s up to homeowners to know which policies cover what structures. For example, a swimming pool or detached greenhouse might be require a separate policy. Most policies cover replacement costs, which pay for the repair or replacement of damaged property with similar materials. Insurers also offer “inflation guards” that automatically adjust your home’s rebuilding costs annually to reflect changes in construction costs, but you should check if your policy includes this coverage or you need to  purchase it separately. A homeowner’s policy also covers your home’s contents, usually up to half or 70 percent of the coverage amount on the house itself. For some people, that’s enough, but you’ll need to buy more if you want to cover high-priced jewelry and artwork.

Consider extra protection. Standard policies provide coverage for disasters such as fire, lightning, hurricanes and winter-related damage such as burst pipes. They don’t cover flood damage, including flooding from a hurricane. For that, you must buy federal insurance, which can be purchased through insurance agents. It’s not just for those living in flood plains — about a quarter of recent flood claims come from areas where the flooding risk is low to moderate. To check your risk of floods, go to the government program's Web site. And consider purchasing it well before the rainy season — it can take up to 30 days before coverage kicks in.

Homeowners living close to fault lines should also consider earthquake insurance, which is available through private insurance companies or in California through the California Earthquake Authority. Only 13 percent of Californians carry earthquake insurance, but Tully Lehman, a spokesperson for the Insurance Information Network of California, recommends quake zone residents think again. “You may think the additional coverage isn’t worthwhile, but if your home is entirely ruined by earthquake or flood, you’ve just paid a 100 percent deductible.”  

Tell your insurer about major home improvements. Homeowners spent nearly $12 billion on home additions and $82 billion on alterations in 2004, according to the Census Bureau. It’s great to take advantage of record-low interest rates and upgrade your house, but if you don’t let your insurer know about the improvements, you’re likely to be underinsured. Bob Dowdell, Chairman of Marshall & Swift/Boeckh, advises homeowners to be very specific about the improvements they have made. “Go to your carrier with the specific characteristics you’ve made to your property that you want covered. If you’ve added a room, tell them how much more square footage you have now. Tell them what type of roof you’ve added, whether it was a hot tub or a standard tub you put in your bathtub, and that you installed high-quality marble counters in the kitchen. Generic information is too vague to ensure proper coverage.”

Homeowners also should make sure they’re on the same page as their insurer about rebuilding costs. A rule of thumb is that basic inland homes should cost about $150 per square foot to rebuild (up from $85 to $90 just five years ago). Luxury homes, especially those on the water or steep hills, are more costly to replace and can cost $250 or more per square foot.  It’s a good idea to consult a contractor familiar with your neighborhood for a per-square-foot estimate. An inexpensive alternative is Marshall & Swift/Boeckh’s AccuCoverage Web site, where homeowners can enter information about their home and neighborhood and get an estimated home-replacement cost for $20.

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