Home prices are lower in many area, but it doesn't necessarily mean that owners should cancel a common provision in many insurance policies that protect against the rising cost of rebuilding after a fire or other calamity.DEAR MR. MYERS: I purchased my home six years ago, when prices were going up fast. Of course, the bank required that I purchase a hazard-insurance policy to get the loan. I chose a plan that includes an "automatic escalator" that increases my coverage amount each year.

Now I am thinking about canceling the escalator - which would save me about $75 on my annual insurance premiums - because prices in my neighborhood have dropped about 15 percent in the past year or two. What do you think I should do?

ANSWER: I think you need to talk to your insurance agent before making such a major change to your insurance coverage.

An escalator provision, sometimes called an inflation-guard endorsement, allows your insurer to automatically boost your coverage each year based on increases in local labor costs, prices for materials and the like. The cost of the additional coverage is automatically added to your annual insurance bill.

With home values in your area dropping, I can understand why you're considering canceling the auto-escalator provision in your homeowners policy in order to save money. But before you do, it's important to realize that a decline in local sales prices rarely triggers a similar decline in construction costs.

For example, your letter states that home prices in your area have fallen 15 percent. But statistics show that rising inflation has pushed the cost of building - or repairing a home after a fire or other disaster - has increased about 7 percent in the past 12 months because most builders and contractors are paying more for materials and their workers than they were just a year ago.

Canceling your auto-escalation or inflation-guard endorsement might save you $75 a year, but could cost you tens of thousands of dollars if you must eventually rebuild after a fire or other catastrophe.

Send questions to David Myers, P.O. Box 2960, Culver City, Calif. 90231-2960, and we'll try to respond in a future column.

comments powered by Disqus