As Tropical Storm Ida works its way north, it's a good reminder to
check your homeowners insurance and make sure you have the proper
coverage. After all, you don't want to end up like Daniel Zwerdling and
Barbara Zwerdling-Rothschild.

On a stormy night six years ago, Hurricane Isabel was rampaging up the
Eastern Seaboard. The Zwerdling-Rothschilds had retreated to the first
floor of their 100-year-old house in Chevy Chase, Md., for some
nerve-soothing yoga when a century-old oak slammed into the house. The
tree crashed through the roof, the third floor, then the second, finally
coming to rest on the yoga mats the couple had abandoned only moments
before.

"We couldn't have known it at the time, but the tree crashing through
the roof would turn out to be the easiest part of this ordeal," says
Daniel, a senior correspondent at National Public Radio. For the next
two years, the couple was locked in a battle with their insurance
company. By the time their claim was settled, the house had been open to
the elements so long it had deteriorated beyond repair — despite every
effort to protect it — and they had to tear it down. It would be a total
of five years before they were back in their own home again. (See Money
Watch sidebar, "How
to File a Homeowners Insurance Claim.
")

"We had what we were told was the Cadillac of insurance policies,"
Daniel says, who assumed their house would of course be replaced. What
they didn't know was that policyholders have very little recourse if
their insurance company simply refuses to pay enough to cover rebuilding
costs. "In our case, State Farm offered $120,000, which was about a
third of what every contractor we consulted said it would cost,"
Zwerdling says.

(When asked about the Zwerdling-Rothschild case, Maria Jackson, State
Farm spokeswoman for the Maryland/D.C. area, said, "While we do not
comment on customers' claims for privacy reasons, we make every effort
to resolve their claims to their satisfaction under the terms of their
policies.")

After two years, two law firms, a formal complaint filed with the
Maryland Insurance Administration, a year of arbitration, and finally
hiring a consulting firm that specializes in fighting insurance
companies (and collects a fee of 8 percent to 10 percent of the
settlement), the Zwerdling-Rothschilds got most of what they'd asked for
in the beginning — but they lost their beloved house where they'd lived
for 23 years and raised three children.

You probably took out a homeowners policy as one step in your mortgage
application, tossed the policy into a desk drawer, and never thought
about it again. After all, the premium is usually paid through your
mortgage, and until a tree comes slamming through your roof, your to-do
list is dominated by other concerns. "Too many people are not adequately
insured, and they don't know it until it's too late," says Amy Bach,
executive director of United Policyholders, a nonprofit consumer
education organization. An estimated 66 percent of American homes are
underinsured by an average of 18 percent (that's $90,000 for a $500,000
house), according to a 2007 survey by Marshall & Swift/Boeckh, a
company that provides data to the insurance and building industries.

So as Ida supplies us with one last reminder of the Atlantic Hurricane
season, it's time to dig out your policy and perhaps pay a visit to your
insurance agent to negotiate some changes.

1. Close the Loopholes

A standard "all-perils" homeowner policy will replace or repair your
house and personal belongings if they are damaged or destroyed, cover
additional living expenses if the damage makes your house uninhabitable
for a period of time, and provide liability coverage should someone be
injured while on your premises. Sounds great on first reading, but most
policies are rife with loopholes. All of the coverage is limited by
specific dollar amounts, and many "perils" are explicitly excluded. For
example, flood damage is never covered, and some companies exclude such
things as earthquakes sewage backup, or acts of terrorism. Most policies
also have separate limits, usually in the neighborhood of $1,000, on
how much they'll reimburse you for certain individual items, such as
jewelry, artwork, firearms, and electronics — even if the overall limit
on your policy is much higher. To protect yourself, make sure to:

Customize your perils: If you live in Chicago, you
probably don't need earthquake coverage. But suppose you live in an old
house. If the house is damaged in a fire, say, not only would you need
to get it repaired, you'd need to get a building permit and likely have
to make changes to meet current building codes. Make sure your policy
covers those extra costs.

Itemize valuables: You can boost coverage for specific
items like computer equipment or jewelry in two ways. You can add a
rider, which is, in essence, a small supplementary insurance policy that
pays for a specific item's loss, usually with no deduction. Or you can
raise the limit on coverage for that item's category — jewelry and furs,
for example — in your existing policy. This higher limit, though, will
be subject to the policy's overall deductible and could result in
limitations on your coverage. It will not, for example, cover an item
that has been misplaced, whereas a rider often will. With a typical
policy from a large insurer like Allstate, a rider covering a $5,000
engagement ring would cost about $50 a year in increased premiums in,
say, Iowa, while raising the overall jewelry limit to cover an item
valued at $5,000 would cost about $128. (These rates vary from company
to company and state to state, but not wildly.)


2. Cover Your Replacement Cost

Since the insurance company will not pay one penny more than is clearly
required under your policy's limits, it's up to you to make sure those
limits accurately reflect what it would cost to rebuild or repair your
home and replace its contents. Bear in mind that these costs have
nothing to do with the real estate market; it's all about construction
costs.

"The law is that the homeowner has the duty to set his own limits, but
when you walk into the insurance agent's office, he's never, ever going
to ask you how much insurance you want," says United Policyholders's
Bach. Instead, he's going to ask you what kind of house you have and
what the square footage is, and then will calculate your costs and
coverage based on an industry computer model."If that turns out to be an
underestimate when you make a claim, the agent can throw up his hands
and say it's not his responsibility to set your limits," Bach says. "And
the courts have backed up the insurance companies."

The value limit on your dwelling is the amount of money it takes to
rebuild your house. It does not include the value of the land, nor is it
equivalent to your house's market value or the amount of your mortgage.
Although lending institutions often require that the face value of the
insurance cover the mortgage, some states mandate that mortgage lenders
allow the amount of insurance to reflect only the cost of rebuilding.

With the current upheaval in the housing market, this is a particularly
difficult number to get a handle on. Construction costs have not fallen
as fast as housing prices in many places, and the market value of some
houses may have slipped below what it will cost to rebuild. In some
communities, on the other hand, your mortgage may be significantly
higher than the cost of rebuilding, and you may be paying for more
insurance coverage than you will be able to use. "With the current
changes in housing values and construction costs, it's a good idea to
revisit the cost of rebuilding every few years," says J.D. Howard,
executive director of Insurance Consumer Advocate Network (iCAN). Here's
how to get an accurate estimate of rebuilding costs:

Hire a contractor: The very best method is to hire a
local contractor to inspect your house and come up with an estimate of
how much it will cost to rebuild. The fee will fall roughly in the range
appraisers charge — 0.1 percent of the estimate— but if you find
yourself in Zwerdling's position, you'll be glad you paid. "If there's a
discrepancy between your numbers and the insurance company's, you must
insist that yours are the correct ones," Bach says. If your insurer
resists, find another insurer.

Go online: The next best method is to use a computer
model similar to those used by insurance companies. Bach recommends two
online programs that you can download for a small fee — Accucoverage
($7.95) and HomeSmart Reports ($6.95).

Take inventory: You'll also want a careful accounting
of the contents of your house. To make the process easier, download
inventory worksheets from United Policyholders, or use online forms from
the Insurance Information Institute. In addition, take pictures of
every room and e-mail them along with a copy of the inventory to a
friend or relative so there's a backup that won't be destroyed along
with your house. One of your obligations in filing a claim is to provide
a thorough accounting of your losses within a designated period of
time, usually 30 days. "The burden to prove your loss falls on the
policyholder," says iCan's Howard. Failure to meet your obligations
gives the insurer cause to exclude or reduce coverage.

3. Add a Buffer

In general, replacement-cost coverage — abbreviated as RCV in insurance
lingo — is designed to get you back where you were before your house was
damaged or destroyed. Stay away from actual cash value coverage, or
ACV, because the payout includes a deduction for depreciation. Say you
have an 8-year-old refrigerator that has a depreciation life of 10
years. ACV would pay only 20 percent of the cost of a new refrigerator
of comparable quality.

For added peace of mind, consider purchasing an "extended replacement
cost" policy, which adds a buffer, usually 20 percent to 25 percent,
beyond your limits. The extra coverage will increase your premiums by
about 10 percent, according to the Insurance Information Institute. But
with the average homeowners insurance premium running $764 a year, the
risk/reward calculation can be attractive. For example, if you find
yourself in a widespread disaster such as a wildfire or hurricane, local
builders will be in great demand, and that can drive up construction
costs.

4. Shop Around

Insurance is a competitive industry, and companies will often fight for
your business. Once you've figured out exactly what coverage you want,
present your needs to different agents and get competing quotes. Be
warned: Not all companies exclude the same perils from their basic
coverage, so you will need to carefully compare policies. Check your
state insurance department's Web site for results of customer
satisfaction surveys and premium comparisons on their Web sites; the
National Association of Insurance Commissioners maintains a list of
every state's site.

Why It Matters

"We've found that homeowners are inclined to accept the policy with the
lowest premium," Bach says. "But your home is your biggest asset, so
don't skimp on protecting it." When disaster strikes, finding out that
your coverage is inadequate can be devastating. "You'd be a lot better
off when something like this happens if you've examined every word in
your policy and made sure you understand it," Daniel Zwerdling says.
"When we discovered we'd been misled, it was more than just a financial
thing. We felt like somebody we knew and trusted had turned on us."