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Shouldn't homeowner's insurance go down too?

A recent article pointed out that despite the southward slide of home values, by and large, the cost of homeowner's insurance in the United States has remained stubbornly in place. That’s because premiums aren’t tied to how much you could get for your home if you sold it today – they’re based on what it would cost to rebuild the house if it were destroyed. And locally, it’s extra costly: New York State has the sixth most expensive homeowners’ insurance rates in the nation, with an average premium of $983 for 2008, the most recent data available from the nonprofit Insurance Information Institute -- and Long Island has a number of factors that drive premiums up.

“Long Island is a unique situation in that we’re a high-cost area in general,” says Aaron Stein, who owns the insurance agency Norton & Siegel, Inc. in Babylon and serves on the board of the Independent Insurance Agents & Brokers of Suffolk County. “Rate-wise we tend to be higher … We live in a litigious area, a high-cost area, the value of homes are higher, labor costs are high, a carpenter costs more down here,” compared to one in upstate New York, he says.

“And problem two is it’s a storm-prone area,” Stein says. “One good storm can wipe out two decades worth of profits.”

Worsening credit scores drive up premiums as well, he says. “Mathematically they’ve established that better credit means fewer insurance losses,” Stein says. In other words, people who pay their bills on time have been shown to stay on top of household maintenance, as well – but the economy has made both of those things harder for homeowners to manage, and the result is higher insurance rates.

But it’s not all bad news: There’s a common misconception that homeowners’ insurance has to cover the amount you owe on your mortgage – a distasteful prospect for borrowers in the familiar predicament of owing more than their homes are worth. But here’s where the argument that your insurance has to cover rebuilding costs can actually work in your favor, Stein says. “The banks are not allowed to make a person buy more than it would cost to rebuild their structure,” says Stein.

That cost doesn’t include the land, and that can make a big difference. For instance, a high-ranch in a mid-island location might sell for $350,000 and cost $300,000 to rebuild, so you’d have to insure for the $300,000. But put that same structure on a waterfront property with bay views – the market value might become $650,000, but the rebuild cost would remain at $300,000, so that’s all you’re required to cover.

“If the house burns to the ground, the land is still worth what the land is worth. You owe what you owe, but that’s a combination of price and land,” Stein says.


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