Looking to purchase homeowners insurance and feel lost? You are not alone. Purchasing homeowners insurance can be an overwhelming task, especially considering your home is most likely your biggest investment. Many people rely on agents and brokers to guide them through the purchasing process, but many don’t understand what they are purchasing and ultimately choose policies based on price.
When it comes time file a claim, do you know what your policy covers? Your shed? A flood? With a basic understanding of what your policy covers, what type of damage you and your property are protected against, and how much is covered, you can be better protected if you must ever file a claim.
A standard homeowners insurance policy has six types of coverage
Typically, a homeowners policy has six types of coverage. You must check your policy to check that these are covered. These includes insuring the building structure, a detached structure, personal belongings, additional living expenses if your home becomes uninhabitable, liability against lawsuits for bodily injury or property damage, the medical expense for someone injured on your property.
1. Dwelling: Coverage A protects the structure of your home if it is damaged. This includes repairing and rebuilding your home if it is damaged by a covered peril in the policy. The standard policy will not cover damage resulting from an earthquake, flood, or normal wear and tear. You may be able to purchase separately an endorsement on your policy to cover earthquake damage. Flood coverage is provided by the federal government’s National Flood Insurance Program. Check their website to find agent who sells a flood policy. Depending on whether you live in a flood zone, your mortgage lender may require you to purchase flood insurance.
2. Other Structures: Coverage B usually covers structures that are not attached to a house, such as a shed or gazebo. It is wise to confirm that your policy covers detached structures. If you have a shed, and you store your lawnmower, snow blower and family bikes in there, you’ll want to confirm that these high priced items are covered. These detached structures and their contents are replaced at a specific percentage of the insurance that you have on your home. For example, if your detached property is covered at 10% and your home is insured at $300,000, then your policy limit would be $30,000, less the deductible. Be aware if you have a detached garage or barn, this percentage may not be high enough if you sustain damage to it.
3. Personal Property: Coverage C protects personal items, such as furniture, clothes, appliances and other personal items that may become stolen or damaged by a listed disaster within your policy. Depending on your insurance company, your insurer may protect your personal belongings up to a specific percentage of the amount of your home’s structure listed in Coverage A. For high priced items such as furs and jewelry, you may want to purchase additional insurance in the form of a floater or endorsement to protect these items for their full value. This will involving having these items appraised.
One great thing about this part of your policy is that it provides off-premises coverage. Assuming that you haven’t opted out of this portion of the coverage, this provides added protection for your personal property when they are damaged or stolen while you are away from your home. For example, if your family is vacationing in Disney World, and your new double stroller with the car seat attachment is stolen, off-premises coverage will protect you. This coverage also includes your personal property that you store elsewhere, e.g. in a storage facility. Be aware that insurers may limit the amount of protection it provides. So check your policy before storing too many expensive items off-site. Lastly, many policies also provide an additional amount of coverage for unauthorized use of your personal credit cards.
4. Loss of Use: Coverage D covers the additional costs of living expenses if a home is uninhabitable due to damage caused by an insured disaster. These expenses may include hotel accommodations, pet boarding, laundry bills, additional meals over and above the regular cost of living, etc. Once the home is rebuilt, then the homeowner must return to the premises.
5. Personal Liability: Coverage E protects the homeowner against lawsuits for property damage that policyholders or family members cause to other people. This coverage also protects against damage caused by the family pet. This will cover defending the policyholder in court and any losses that the homeowner incurs, up to the preset limit. For example, if your kids are outside playing baseball and your daughter hits a grand slam through your neighbor’s window and into their home, you’re covered. However, if she breaks your window, you are not covered. Other typical situations that are covered include a dog bite, slip and fall injuries or damaged personal property.
6. Medical Payments to Others: Coverage F covers the medical expenses of any person who does not live on the insured’s property who is accidentally injured on your property. This coverage extends to adjoining property. For example, if someone is accidentally injured after falling on your property resulting in medical attention, and ultimately medical bills, these medical expenses are covered by this section of your policy. Check your policy to determine the pre-set limit of coverage. Remember, this is for accidental injuries only, not intentional acts.
What type of damage does my homeowners insurance policy cover?
There are usually 16 types of perils found in a homeowners insurance policy. If damage occurs due to a peril listed on the policy, then the damage is covered. If damage occurs due to a peril not listed on the policy and is not specifically listed as an exclusion, then the structure is covered, but not its contents. As a result, a homeowner should consider an “all risk endorsement” in addition to their basic policy to cover the personal property in the event damage occurs outside of the listed 16 perils.
- Lightning or fire
- Hail or windstorm
- Riot or civil commotion
- Damage caused by aircraft
- Damage caused by vehicles
- Vandalism or malicious mischief
- Volcanic eruption
- Falling objects
- Weight of ice, snow, or sleet
- Overflow or accidental discharge of steam or water from an appliance, heating, plumbing, air conditioning, or automatic fire-protective sprinkler system.
- Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, an air conditioning or automatic fire-protective system.
- Freezing of a heating, air conditioning, plumbing, or automatic, fire-protective sprinkler system, or of a household appliance.
- Sudden and accidental damage from an artificially generated electrical current (not including loss to a tube, transistor, or similar electronic component).
These 16 perils do not include damage caused by floods, earth movement, earthquakes, sinkholes, mudslides, landslides, war, nuclear hazard, power failure, neglect of property (e.g. failing to protect your property at the time of loss or soon thereafter), intentional loss or destruction of property, normal wear and tear of the property, government action, damage caused by birds, vermin, rodents and insects. Check your policy for a complete list of perils that are excluded.
One caveat to flood damage is that although damage caused by flooding is not covered, damage caused by a named peril that results in flooding is covered. For example, if a pipe bursts and floods a home, that type of flooding damage is covered up to the policy’s limits.
Additionally, sewer and sump pump backups due to a runoff of water from major downpours are not typically covered under a homeowners or flood insurance policy. An additional endorsement to a homeowner’s policy must be purchased to covers this peril.
What type of homeowners insurance policy you have can affect what you're covered from. For instance, there are important disctinctions between an HO-3 insurance policy and an HO-5 insurance policy. An HO-5 policy offers more protection, but it costs more as a result.
How much does my homeowners insurance policy cover?
When determining how much of your property is covered, you must first determine what your deductible is and what level of coverage you have.
A deductible is the amount that is “deducted” from the final amount of the claim owed by the insurance company. It is the amount that the homeowner is responsible for. Deductibles do not apply to liability coverage or medical claims e.g. if someone is injured on the insured property. Rather, deductibles apply to damage to the structure of the home or personal possessions.
A deductible can either be calculated as a specified amount or as a percentage. For example, if your deductible is a specific amount, say $500, and the damage that is covered by your policy is $5,000, then the homeowner is responsible for the first $500, and the insurance company is responsible for paying the remaining $4,500 of the claim.
If instead you had a percentage deductible, then the homeowner’s deducible would be a percentage of the home’s insured value. In the above example, if your home is insured for $100,000 and the policy has a 1% deductible, then the homeowner would be responsible for the first $1,000 on a claim. The insurance company would be responsible for the remaining $99,000.
*Tip: if you are looking to save a few dollars, then increase your deductible amount, the amount that you will be responsible for if you have a claim. The premium is partially based on the amount of the deductible. If your deductible (the amount that you are responsible for) is higher, then the premium will be reduced. If your deductible is lower, then you will pay less on a claim, but the annual premium cost will be higher.
2. Levels of Coverage
A homeowner must then determine what level of coverage that he wants to cover his belongings, either by actual cash value (ACV), replacement cost coverage or guaranteed/extended replacement cost.
A. Actual Cash Value: If the homeowner files a claim, the ACV coverage will only cover what the value of the damaged property was worth at the time it was damaged or stolen, up to a preset limit. For example, if you purchased a new bike for $1000 three years ago, that bike would be worth less today. Although you may need to spend $1000 to replace the bike, the ACV coverage would only pay what the bike is worth today, less the amount that the homeowner owes on the deductible and up to a preset limit.
B. Replacement Cost Coverage: Replacement cost coverage pays what it actually costs to replace the items that you lost, less the deductible, up to a preset limit. For the above example, the insurance company would pay however much it costs to replace that same bike, less the deductible and up to a preset limit.
C. “Guaranteed/Extended Replacement Cost”: Depending on your state, the insurer may offer guaranteed replacement cost policies or extended replacement cost policies. These policies offer the highest level of protection, but the annual premium will cost more. A guaranteed replacement cost policy pays the costs to rebuild the house as it was before the disaster occurred, regardless if the cost exceeds the policy limit. For example, if there is an increase in the cost of building supplies due to the disaster, and the cost to rebuild the home suddenly increases, the cost will be covered. However, the cost associated with updated building codes will most likely not be covered. The homeowner should seek an additional endorsement to cover these costs.
Another option that may be offered is an extended replacement cost policy. This option extends the homeowner’s current policy by a certain percent to rebuild the home. For example, if the percentage is 20% on a $100,000 policy, then in addition to the $100,000 to rebuild the home (less the homeowner’s deductible), the insurer will pay up to an additional 20% or $20,000 in this example, to rebuild the home.
*Tip: ACV will cost less in annual premiums. Replacement cost coverage will result in a higher annual premium. Remember however, if you ever need to file a claim, the insurance company will pay out a higher amount on the claim if you have replacement cost coverage. Additionally, for any valuable items, contact your insurance company or agent, as they may only be covered up to a certain amount. For example, you will likely need an additional rider for an engagement ring or expensive electronics. Check the policy’s limits on specific items.
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