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Home prices are down, so why not insurance?

The average cost of insuring a home has been rising in recent years, even as home prices have fallen sharply in the wake of the severe housing bust.
Katrina Santos stands near a 40-foot tree that hit her Central Kitsap, Wash., home during a wind storm in November. The tree missed her living quarters, but damaged the garage.Larry Steagall / AP

If you’re a homeowner, chances are your house is worth less than it was five years ago. But you could still be paying more to insure it.

Despite the deep housing bust of the last few years, the cost of rebuilding a damaged home — in other words, what you pay insurance for — has not changed much, according to industry experts.

That means that unless you have reduced coverage or increased your deductible, chances are you are paying as much or more to insure your home as before the housing bust.

“The price of homeowners’ insurance is based on the cost to repair or rebuild your home. The price of a home is based on the market value of that home and the land upon which it sits,” said Robert Hartwig, president of the Insurance Information Institute.

Although the recession has been particularly brutal for the construction industry, Hartwig said that hasn’t necessarily meant the overall cost of labor and materials needed to rebuild a home has gone down.

After rising nearly 62 percent between 2000 and 2007, the average premium for homeowners insurance did dip by nearly 4 percent in 2008, to $791, according to the most recent data available from the National Association of Insurance Commissioners.

But Hartwig said that dip was not due to a drop in the cost to insure a home. Instead, he said many homeowners did things like increase their minimum deductible or drop extra coverage options in order to save a little bit of money on their premium.

“We saw people do things to pinch pennies any way they could,” Hartwig said.

That’s not surprising. Amid high unemployment rate and other economic woes, it can be tough to justify paying more and more to insure a home that is losing value. Between a peak in mid-2006 and October 2010, home prices fell nearly 30 percent, according to the most recent data available from the Standard and Poor’s/Case-Shiller Index of home prices in 20 metropolitan areas.

Although it’s tempting to try to reduce your coverage amount when your home price falls, that can be a costly mistake, said Tobie Stanger, senior editor at Consumer Reports.

“This is one thing we always say to the consumer: When you see your home value going down, don’t assume that you can drop the value of your homeowners’ insurance,” Stanger said.

In addition, some people may find that the only way to reduce their premium cost is to accept a higher deductible, Stanger said. But that can be a risky proposition if you do have a claim and have to come up with more cash yourself.

Even if you do try to reduce your homeowners’ insurance coverage, you may find that your options are limited.

In a topsy-turvy housing market like we’ve seen in the past few years, it’s possible that the cost to rebuild your home is actually more than you could sell it for, said J.D. Howard, executive director of the Insurance Consumer Advocate Network.

The insurance also usually must be enough to cover how much is owed on a person's mortgage, even if that is more than the value of the home. These days, it’s also possible you owe more on your house than you could sell it for.

Very regional
It may be particularly tough if you live in an area such as Louisiana that has been hit by natural disasters in recent years. Hurricane Katrina and other weather disasters have been a major impetus for the overall increase in the average premiums homeowners pay nationwide, experts say.

The Insurance Information Institute estimates that the premiums written rose by nearly 76 percent between 2000 and 2009, to $56.9 billion. In a presentation, the group said that’s in part because of rate increases in coastal areas that are prone to natural disasters, and partly because of the housing boom.

These days, Florida, Texas and Louisiana are among the most expensive states to buy homeowners insurance.

But you may find that rates are much lower, or rising much slower, in other parts of the country, Stanger said. Rates can vary widely even within the same state, depending on whether you live in an neighborhood that is prone to weather damage, or one that is not.

“It’s very, very regional,” she said.

Hartwig said some insurers also used to see homeowners’ insurance as a loss leader — something that is sold below its cost — and were willing to charge a lower rate if they could make more on the auto insurance or other policy. But that’s less frequent these days.

Check your bill, shop around
Still, experts say that doesn’t mean you should accept a big jump in your insurance rate when you get your next bill. After all, a big factor in rate increases could just be the inertia of simply accepting the new premium each year.

Stanger recommends that consumers look carefully at the bill to see why it has increased. You also might want to check if you can reduce your rate by making home improvements such as adding a better fire prevention system, or making lifestyle changes such as stopping smoking.

Stanger said it’s also a good idea to shop around to see if another provider can get you the same coverage for a lower price.

A 2008 survey of Consumer Reports subscribers found that about half of those who switched insurance carriers in the prior four years were paying less for coverage.

While a really great insurance rate may be alluring, you should be cautious in accepting a new policy purely based on price. Howard recommends checking consumer websites and your state department of insurance website to make sure that your insurance carrier will treat you well in the event of a claim.

“When you’re buying insurance, all you’re buying is a promise,” he said.

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