What is and is not Covered in a Homeowner's Insurance Policy
Imagine if everything inside your home (clothes, furniture, appliances, children’s toys, CDs, DVDs, etc.) suddenly vanished. How much do you think it would cost to replace those things if they were destroyed in a fire? What if a thief took just one valuable possession, like a laptop computer or stereo? If your home is not protected by insurance, where will you get the money to replace its contents, or a whole new home, if disaster strikes?
You are also at risk of being asked for money, or even sued, by someone claiming to have been physically or financially hurt by something you own, or something you’ve done. A stranger who falls on your front steps may blame you, claiming that you ignored a loose brick or a dangerous crack in your sidewalk. Your next-door neighbor may demand money if your sewer pipe breaks, pouring waste water into his garden or home.
Even if you think you already have adequate insurance coverage for these misfortunes, chances are you have no coverage for other disasters. For example, ordinary home insurance policies will not pay for anything damaged or destroyed in a flood.
Before buying a homeowner’s insurance policy, it is important to:
- Understand the way homeowner’s insurance works.
- Identify the kind of policy and coverage you really need.
- Avoid paying for coverage you do not need.
- Compare policies from different companies to find the best values.
- Protect yourself from improper sales practices.
There are a few things you should know about how insurance companies work before you begin contacting companies. For the most part, insurance is sold either directly by a company or through an agent or broker. A company that deals directly with its policyholders is referred to as a direct writer. Agents and brokers are referred to collectively as insurance producers and may represent only one company or several.
When you first talk to an agent or company, you should be prepared to discuss your insurance needs and answer questions about your home or property. Have pertinent information, such as the size, age, and construction type of your home ready beforehand. You should also prepare a list of any questions you wish to ask.
A homeowner’s insurance policy is a legal contract. It is written so that your rights and responsibilities (as well as those of the insurance company) are stated clearly. When you purchase homeowner’s insurance, you will receive a policy contract. Read the policy carefully, and make sure that you understand it. If you have any questions, contact your agent or insurance company for clarification. Keep your policy in a safe place and know the name of your insurance company in addition to your agent or broker.
What is Covered by a Homeowner’s Insurance Policy?
There are four types of coverage contained in the homeowner policy package:
- Household furnishings
- Clothing and personal belongings
- Detached garages or tool sheds
Property damage coverage helps pay for damage to the structure of your home or other buildings on your property, or for the loss of personal property.
Typical coverage for “other structures” (structures other than the home itself) is 10 percent of the coverage limit on your house. The personal property coverage limit is typically 50 percent of the dwelling limit, but more can be purchased. Personal property coverage pays the actual cash value (ACV) of item(s) destroyed unless replacement cost coverage was purchased.
Actual cash value is the amount representing the current value of the item — as is. Replacement cost is the amount it would take to repair or rebuild your home or to repair damages with materials of like kind and quality at today’s prices.
Your policy may also include one or more of these six options:
This protects your belongings when they are not on your premises, and replaces lost or stolen items with items of similar age and condition. For example, you may be reimbursed for the cost of replacing your suitcase and its contents with items of similar age and condition if lost or stolen while on vacation. If personal items are stolen from your vehicle they are covered only if there is proof of forcible entry, unless the items are specifically excluded by the policy or are specifically included under the vehicle policy.
Personal Property Floater or Endorsement
Your homeowner’s insurance policy may provide only limited coverage for single items of high value, such as furs, jewelry, silver, electronics, musical instruments, and other valuables. It may be necessary to insure these valuables with a special addition to your policy, known as a personal property floater or personal property endorsement.
Your homeowner’s policy does not cover your car, your pets or any damage your pets do to your possessions. However, your liability coverage will cover damage or injury that your pet causes to others or to their possessions.
Personal Liability Coverage
Personal Liability Coverage protects you against claims and lawsuits that result from damages or accidents occurring on or off your property. If a family member or pet causes injury or property damage to others, the personal liability coverage pays for the cost of defending you, and for any damages for which you might be liable, up to the limit of liability stated in the policy.
Medical Payments to Others CoverageMedical payments coverage pays only for medical services to someone outside your household if they are injured at your home regardless of fault. In some circumstances, this coverage will also pay if you cause the injury of another person away from your home.
Medical payments coverage limits are generally $1,000 for each person. Higher limits are available for additional cost.
Additional Living Expenses
If a covered loss or peril, such as a fire, forces you to live elsewhere temporarily this coverage may reimburse you for living costs beyond your normal expenses, such as the reasonable cost of a local hotel/motel or apartment complex, or additional food or laundry expenses.
All homeowner’s policies exclude water damage caused by flood or earthquake.
Flooding can include surface water, overflow of a body of water, or spray from any of these, whether driven by wind or not. The National Flood Insurance Program (NFIP) provides flood coverage to residents of designated communities that comply with the federal guidelines for flood prevention.
Most homeowner’s policies also do not provide coverage for:
- Normal wear and tear of personal property.
- Loss of animals, birds or fish.
- Damage to automobiles.
- Water damage due to sewer or drain back-ups. These losses are normally not covered by a homeowner’s or flood insurance policy (see above). This coverage may be available separately as an additional endorsement (an amendment to a policy), but may not be offered when buying homeowner’s insurance unless you ask for it.
- Damages resulting from war, nuclear hazard, neglect, earth movement, or power failure.
- Additional cost of repairs due to changes in building codes or local laws enacted since the home was built. Separate coverage may be available as an added endorsement.
- Watercraft and travel trailers. If you own a boat or RV, you should ask your agent or insurer if it is covered. Some policies will cover small motorboats, sailboats, and travel trailers, but not larger ones.
What is, as well as what is not, covered by your homeowner’s policy will vary from insurer to insurer. Coverage for some specific exclusions may be obtainable from your company. Talk to your agent or insurance company about your concerns and ask what is available.
Every insurance company has underwriting guidelines. Underwriting guidelines are the factors the company uses to determine which risks it will accept and which it will decline or refuse.
Insurance companies have the ability to set their own underwriting guidelines and determine what “risk factors” are important to them. Therefore, owners of properties with older wiring or plumbing, a swimming pool, an underground heating oil storage tank, or a history of claims may need to contact a number of companies to obtain the coverage they want. Insurers may also ask that property owners with these “risk factors” carry a higher deductible before writing a new policy. In addition, applications for property insurance may ask for personal information, such as the type of job you have, where you work, your leisure activities and details of any recent claims you may have had.
Each state regulates the activities of insurance companies within their borders. Most require that company underwriting guidelines not be arbitrary, capricious or unfairly discriminatory and must be applied consistently throughout the state.
Buying the Right Amount of Coverage
Before buying homeowner’s insurance, it is important to consider the amount of coverage you need to have on your house and its contents.
You need to think about:
- The kind of coverage you want and what you are willing to pay.
- The value of your home and its contents.
- Whether you want full coverage or are willing to share the cost of a loss with your insurer.
You will need to choose limits for the coverage you purchase. A limit is the maximum dollar amount the insurer will pay overall or under a particular coverage. In addition, you will also need to choose deductibles. In the event of a covered peril, a deductible is the amount of the loss which you (the insured) are responsible for paying before the insurance company pays. Choosing higher deductibles may decrease your premium.
Actual Cash Value and Replacement Cost
Before buying a policy, it is important to understand the difference between replacement cost and actual cash value. Typically, homeowner policies provide replacement cost coverage on the home and actual cash value on personal property.
Actual cash value is an amount representing the current value of the item, as is. Replacement cost is the amount it would take to repair, replace or rebuild your home with materials of like kind and quality at today’s prices.
To qualify for replacement cost coverage, you generally must insure the dwelling to at least 80 percent of the replacement cost. Under-insuring your property may cause reductions in future loss payments.
Market value is a real estate term that describes the current value of your home if you were to sell it, including the price of the land, at a given point in time. The value of the land your home sits on is not generally considered when determining amounts of insurance.
The mortgage value is the amount of money owed to the mortgage lender.
Mortgage lenders generally require that the home be insured for at least the amount of the outstanding mortgage to protect the lender’s interest. As a result, the market value or mortgage value of your home may vary greatly from the replacement cost. Discuss this matter with your insurance agent or representative. Whether your home is insured for replacement value or actual cash value, it is important to keep track of the home’s value. A room addition, new insulation, and yearly inflation all increase the replacement cost of your home while the actual cash value may decrease over time. Check with your agent or insurance company at least once a year to be sure that your policy continues to provide adequate coverage.
In addition to the standard deductibles in a homeowner’s policy, there are also separate deductibles that you may encounter.
Wind loss deductibles
This is a separate deductible from the standard homeowner’s policy deductible that applies to all other perils.
Some insurers have begun including hurricane deductibles in homeowner’s policies, which are higher than the standard homeowner’s policy deductible. These deductibles apply only to losses from storms designated as hurricanes by the National Weather Service.
Optional coverage that may be available from some companies include
- Credit Card Forgery and Depositors Forgery Coverage Endorsement
- Identity Theft
- Personal Recreational Vehicles
- Secondary Residence Premises Endorsement
Comparison shopping for homeowner’s insurance can be worth the effort. Be a wise consumer and shop around for the product that is best for you. Insurance companies vary greatly in the price of their policies and in the level of service they provide to consumers.
Terminations, Denials and Cancellations
When a policy first takes effect, the insurer has a right to cancel that policy any time within the first 60 days for any reason not otherwise prohibited by law. The cancellation is not effective until at least 10 days after the insurance company mails or delivers to you a written notice of cancellation.
Renewal on Altered Terms
Sometimes an insurer will renew a policy, but will raise the rates or make the terms less favorable. An insurer is not allowed to change the terms of coverage unless it gives written notice of the changes to the insured, along with the renewal offer. To be effective, the notice must be mailed no less than 30 days before the renewal date.
Non-renewal of a policy refers to the termination of a policy at its expiration date. If the insurance company decides that it does not want to renew your policy, it must mail or deliver to you a written notice at least 30 days before the expiration date. The non-renewal or cancellation notice must include the specific reason for the non-renewal or cancellation as well as the facts that make that reason applicable to your policy. Refer to your insurance policy for a list of the reasons your company may non-renew your policy.
Termination for Non-Payment of Premium
Any insurance company will terminate coverage if the premium is not paid on time. There is no grace period for premium payments for homeowner’s insurance. Always pay your premiums promptly.
|Everything You Need to Know About Buying a Home|
|Step 1: Shop for a Mortgage Loan It pays to shop when looking for a loan.|
|Step 2: Find a Home Create a list of must-haves and nice-to haves.|
|Step 3: Make an Offer Get advice before you place an offer.|
|Step 4: Home Inspection, Title Search and More Buy your home with open eyes.|
|Step 5: Insure Your Home: The right insurance protects you from financial ruin.|
|Step 6: Seal the Deal Understanding your Settlement Statement (HUD-1).|