For many people, the largest single investment they ever make is in their home. Homeowner's insurance is a way to protect the house and its contents should they be damaged by fire or storm.

One common mistake made by many homeowner's insurance buyers is not purchasing sufficient insurance to have full coverage under the insurance policy. The coverage amount is stated on the "declarations page" of the policy. The policy will require the homeowner to purchase a specific percentage of the replacement value of the home. That percentage will be at least 80% but could be as high as 100%. For example, let's say that the amount of coverage stated on the declarations page of the policy must be no less than 80% of the replacement cost of the house, in order to have full coverage under the homeowners insurance policy. If less than 80% of the replacement cost of the house is covered, then the insurance company is not obligated to pay the total cost of a loss to the house, even if it is only a small loss.

Do not confuse replacement cost of the house with the market value of the house. The market value of a house describes its current value if it were sold (including the land). The replacement cost of a house is the amount it would take to replace the house if it were completely destroyed, and it does not include the value of the land. It is therefore very important that people with homeowner's insurance obtain coverage for at least 80% of the replacement cost of the house when they buy homeowner's insurance.

It is also important to keep track of a house's replacement cost over the years. For instance, the addition of a room, new insulation, or just yearly inflation all increase the replacement cost of a house, while the actual cash value of the house may decrease over time. At least annually, check with the insurance agent who sold the policy, or, if the policy was purchased directly from the insurance company, check with the insurer to make sure the policy provides adequate coverage.

When policyholders file a claim, the last thing they want to have happen is to have the claim reduced because they did not buy or maintain adequate insurance to receive full coverage. Those are the kind of surprises to avoid.

The Office of the Commissioner of Insurance (OCI) publishes a pamphlet on homeowner's insurance that contains valuable information about this very important insurance coverage. It's called the Consumer's Guide to Homeowners Insurance. This pamphlet can be obtained on OCI's website at http://oci.wi.gov. For those who do not have access to the Internet, they can write to the OCI at Office of the Commissioner of Insurance, P.O. Box 7873, Madison, WI 53707-7873 or call toll-free 1-800-236-8517. Insurance agents are also a good source of information for the policyholder.

By Guenther Ruch
Division of Regulation and Enforcement
Wisconsin Office of the Commissioner of Insurance