Every year homeowners suffer serious losses from fire, theft and natural calamities with the cost of damages running into billions of dollars. To protect against extensive financial loss, the wise homeowner should have an up-to-date homeowners insurance policy that adequately covers both home and possessions.
A well designed policy can protect a homeowner from losses if the home is burglarized or vandalized, or if there is a fire or natural disaster. Moreover, homeowners insurance protects personal belongings and protects the homeowner against lawsuits if someone is injured while on the owner’s property.
Policy types and packages
Homeowners insurance policies vary widely. To obtain a policy that best serves your needs, you should understand these variations and differences.
Until the 1950’s, homeowners could only buy insurance designed to protect against specific losses, such as one policy to insure against loss from theft, one for fire, another for vandalism. However, by the mid-1950’s, in order to make matters simpler for customers and to provide more comprehensive coverage, most companies began to “package” various forms of homeowners insurance.
There are currently seven standard insurance “packages.” Five of these are designed for homeowners, one is for renters and cooperative owners, and one is for owners of condominiums. As with other types of insurance, consumers may purchase varying degrees of coverage with each of the packages.
As a general rule, the more a policy covers the higher the cost or premium. The higher the deductible- the amount the policyholder must pay before receiving benefits- the lower the cost.
Keep in mind that different companies frequently use different names for each of their packages and that coverage may vary between seemingly similar packages. It is also important to note that homeowners insurance frequently insures considerably more than just a home and its contents. It may, for example, insure you against the loss or theft of your credit cards, provide considerable personal liability insurance for someone injured on your property, and even pay certain medical bills.
The Different Parts of the Policy
Homeowner insurance policies do differ in their actual structure, but usually contain basically the same components. The parts of the policy are referred to in this way:
· The Declarationssection is almost always on the first page. This section contains summary information including the name and address of the insured, the dollar amount of coverage in the policy, a description of the insured property, the cost of the insurance, the name of the insurance company assuming the risk and contact information.
· The Definitionssection is used to explain the meaning of terms used in the policy. These definitions are the key to understanding the extent of coverage your policy provides.
· The Coveragesections explain the extent of the policy’s protection under both property and liability coverages. Property Coverage is for damage to your property (house, other structures, and household contents) while Liability Coverage is for bodily injury or property damage to others actually or alleged to be caused by you.
· The Exclusionssections details what is not covered by your policy, under both property and liability coverage.It is very important for you to be familiar with what your insurance company will not cover. This is an area that is commonly misunderstood.You should consult with your insurance producer or company about the exclusions in your policy.
· The Conditionssection is used to explain the responsibilities of both the insured and insurance company under the policy. For example, this section explains your duties in the event of a loss and also the procedures the company will follow to settle any losses.
· Endorsementsare riders, amendments, or attachments to your policy which add, remove or otherwise change the standard coverage of the policy. Although you may be able to choose from a number of optional coverages or exclusions with your company or producer (agent, broker or agency), you may need to pay higher premium when optional coverages are added. You should also be aware that an insurance company may, as a condition of continuing your coverage, add endorsements that may limit your coverage. If you accept the endorsements and do not cancel the coverage, the exclusion will be attached to the coverage and once attached will take precedence over the original provisions of the policy.
Insurance for Homeowners
- HO-1 The Basic Form- Provides coverage for eleven types of potential losses to both the structure of the house and its contents. Included are damages resulting from fire and lightning, smoke, windstorms and hail, vandalism, theft, explosions, riots and civil commotion, damage by vehicles and aircraft, glass breakage and volcanic eruption.
- HO-2 The Broad Form- Provides similar coverage for all eleven areas covered in HO-1, plus six other areas. The additional coverage includes damage resulting from the weight of snow, ice, sleet, surges or short circuits in electricity (radio and television tubes are usually not covered), or problems stemming from improperly functioning plumbing, heating, and air conditioning systems or domestic appliances.
- HO-3 The Special Form- Provides maximum protection for the structure, above what is covered under HO-1 and HO-2. Coverage for personal belongings is extensive but not as complete as with HO-5, below. Also, while HO-3 policies should be checked for specific exclusions, most HO-3 plans cover everything except damage resulting from floods, earthquakes, war, nuclear accidents and similar catastrophes.
- HO-4 Renters’ Insurance- Provides personal property liability insurance for tenants living in either a house, apartment or cooperative. Most HO-4 policies provide property coverage against the same catastrophes covered for homeowners by HO-2 or HO-3. Insurance for rented structures should be provided by the landlord or building owner.
- HO-5 The Comprehensive Form- Provides the most comprehensive and expensive coverage available to homeowners. HO-5 is not offered by all companies. Except for damage resulting from such occurrences as war, flood and earthquakes, HO-5 covers virtually everything. The companies that do not offer HO-5 frequently offer similar protection by adding supplementary insurance to a HO-3 policy. This method of coverage may be more cost-effective.
- HO-6 Condominium Owner’s Policy- Provides owners with insurance for the interior space that they occupy plus the contents. The condominium association should provide owners with insurance for the commonly owned structures. Coverage under HO-6 is comparable to that provided by HO-2 or HO-3 for the houseowner.
- HO-8 Older Homes Policy- Provides basic coverage similar to that available under HO-1. However, HO-8 differs in that it insures the house for its actual cash (market) value, not for what it would cost to replace. The cost to replace many older homes might be prohibitively expensive. Actual cash or market value is different from replacement value. Market value represents what you could sell your house for at the time of appraisal. Replacement cost is what it would cost to rebuild, not including the value of the land and foundation.
What is covered
What is covered by a policy depends upon which of the seven packages is selected and what inclusions or exemptions are specifically written into the policy. You should read the policy carefully before purchasing the plan. Most homeowner policies cover the following:
· Structure- In most cases, a house is not considered adequately insured unless it is covered for at least 80 percent of the replacement cost. If cost is no object the house structure should be insured for 100% of its replacement cost. Keep in mind, however, that the purchase price of a home includes the cost of land and foundation which are not destroyed in a fire.
Some homeowners only insure their homes for the outstanding balance on their mortgages because that is what is required by the lender. This may be unwise, because as a home increases in value and as the loan amount decreases, the homeowner’s liability for potential loss increases.
While 80 percent of the current replacement cost may provide adequate coverage, a homeowner should consider purchasing a policy that provides for 100 percent coverage, especially if the difference is significant. The policyholder who opts for less than the 80 percent coverage takes a potentially large risk in the event the home is totally destroyed since he is liable for whatever portion of the home’s full replacement cost is uninsured.
Some companies offer a “guaranteed replacement cost coverage” endorsement to homeowners policies. This arrangement provides the homeowner who purchases less than 100 percent coverage, but more than 80 percent coverage, with full replacement protection in the event of a total loss regardless of policy limits.
In many cases, the cost of a 100 percent replacement cost policy can be reduced if the homeowner is willing to assume responsibility for minor losses through a deductible clause. The insurer pays only for that portion of the loss that exceeds the deductible.
· Landscaping- Generally, trees and plants surrounding the house are insured up to five percent of the level of coverage on the structure. Additional insurance is almost always available at an extra cost. However, do not expect insurance to replace a 200 year-old oak tree with a duplicate, since that is impossible.
· Personal Property- Normally, personal property is insured for up to 50 percent of the coverage on the house structure. However, there are actual dollar limits on such items on jewelry, silverware, stamps and coin collections, and furs. In order to adequately insure these items it is usually wise to purchase additional insurance coverage by way of a “floater” or “rider” policy. These policies will independently insure specific items against theft, damage of any other type of loss in the home or away from home. Most expensive items must be professionally appraised before they will be insured under a floater.
· Temporary Home Expenses- If damage to your home requires that you live temporarily elsewhere, some or all of the extra cost may be covered.
· Personal Liability- Personal liability insurance is designed to protect the homeowner against a claim or lawsuit that could devastate the homeowner financially. If, for example, a visitor slips and falls on the front porch, the homeowner could be sued for hundreds of thousands of dollars. The homeowner also could be liable for damages caused by a tree in his yard falling and damaging his neighbor’s house.
In either event, the insurance company will pay the damages assessed against the homeowner up to the limits of the policy. While insurers offer minimum coverage, a homeowner often can obtain considerably higher protection for only a few dollars more per year in premium costs.
When reviewing an insurer’s personal liability coverage, you should check what protection is provided and at what cost. You should also find out if coverage extends to damage to personal property resulting from accidents that occur away from the home, or while you are on vacation.
If a visitor is injured on your property and needs medical attention, a homeowners policy will pay for the visitor’s medical expenses regardless of whether the visitor or the homeowner was at fault. It is standard for insurance policies to provide supplementary coverage that pays for minor damage to another person’s property caused unintentionally by the homeowner or another member of his family. A homeowner should ask if coverage is provided regardless of who is at fault. Most policies that include supplementary coverage provide payments for damage caused intentionally by children under 13 years of age because it is considered to be accidental. It should be noted that most homeowners policies do not pay for damage caused by an owner’s pet.
Under some “standard” policies liability insurance may be inadequate to protect against the full claims of persons injured on your property. “Umbrella” policies are designed to extend your liability coverage.
Flood insurance is never included in a homeowner’s policy. The federal government offers flood insurance for your home that can be obtained through an insurance agent. The Department of Housing and Urban Development’s Federal Insurance Administration administers a program to make flood insurance available in designated flood-prone areas at low costs.
To qualify for flood insurance, the homeowner’s property must be located in a community that has agreed to plan and carry out land-use control measures to reduce future flooding. Your insurance agent can tell you if the insurance is available where you live.
Since the mid 1980’s, the Federal Insurance Administration has permitted private companies to issue flood insurance. Under a “write-your-own” program, private insurers can sell new policies under their own names and settle claims. The U.S. government then repays the insurance companies.
Most homeowners insurance policies exclude damage resulting from earthquakes. Policies covering earthquakes, however, are generally available from insurance companies and recommended in areas where earthquakes occur. These policies, usually, require a deductible of 10 percent of the cost of the damage.
Determining how much insurance to buy
The first step in determining how much insurance protection to buy is to calculate the value of your home and personal property.
Next, find out how much it would cost to replace your house and personal property. Your insurance agent or broker can help you by providing formulas or worksheets. Also, consider hiring a professional appraiser to calculate the replacement cost.
When calculating any replacement cost keep in mind that what you spent to buy something will likely be very different from what it will cost to replace. For example, clothing and shoe costs have escalated dramatically over the years.
It is recommended that you obtain at least three written estimates for comparable policies. A reasonable place to begin is with the insurance company with which you have had good results for your automobile, life or health insurance.
You may also want to ask friends, neighbors, colleagues and relatives for recommendations for a reputable insurance company.
In an effort to buy more cost-effectively, consider buying a long-term policy and avoid monthly or quarterly payments that frequently include finance charges.
Additionally, consider choosing a policy with a high deductible. With these policies you pay for all small damages or claims up to the amount of the deductible, then the insurance company will cover amounts over the deductible.
By waving the insurance company’s responsibility to pay for the smaller claims you receive the benefit of coverage for major or catastrophic emergencies without having to pay the high costs associated with low deductibles. By raising the deductible, for example, you may save up to 50% of the cost of your homeowners insurance.
Making an inventory
Before and after buying homeowners insurance you need to prepare and maintain a list of personal possessions and their estimated value. A thorough and up-to-date inventory list can save a significant amount of money in the event disaster does strike and the homeowner must file a claim. A good inventory record also can be invaluable when you have to negotiate a settlement with the insurance company, which will usually ask for evidence to back up claims.
A basic rule to follow is this: make a record of what you own, when you bought it, and what it cost. This may involve a lot of leg work, but the results can be useful. Generally, household and personal possessions are insured for half the amount of insurance on the structure. This means that if the home is insured for $100,000, the contents are insured up to a maximum of $50,000. However, additional insurance coverage for the contents may be purchased.
There are several ways to make a list of household goods and possessions. You can walk through the house carrying a small tape recorder. As you go through each room, describe all the furniture and valuables. Another method is to take photographs of the goods and possessions and then store the photographs in a safe location away from the house, preferably in a safe deposit box. Photos are good proof of ownership in the event an insurance adjuster questions a claim. Video cameras are also being used with increasing frequency to record the contents both visually and with a verbal description that accompanies the picture.
Another helpful suggestion is to keep sales receipts from purchases of household possessions- everything from clothing to stereos. It also is a good idea to keep cancelled checks and credit card receipts as proof of an item’s cost.
By using a comprehensive inventory of household goods and possessions, you can determine if an insurer’s policies are adequate and whether additional riders are needed to protect valuables. The list is extremely helpful in the event a disaster occurs. Insurance experts note that many people simply cannot remember what they have.
Tips to remember
- Keep in mind that housing market values and construction costs usually increase every year. Therefore, homeowner coverage should be re-evaluated annually.
- When shopping for a policy remember that a home is not considered adequately insured unless coverage is for at least 80 percent of the replacement cost.
- There are limits to homeowners insurance that a policyholder should know. For example, most policies do not cover business property in the event the homeowner conducts a business at home. Only by reading the policy can you be sure how far the coverage extends.
- When comparing home insurance policies, you should look for certain features that can save money. For example, ask if the company offers premium discounts if the homeowner installs security devices such as a burglar alarm system. Other insurers may give discounts if the homeowner uses identification devices to mark television sets, stereos, cameras and typewriters.
- Discounts also may be available for installing smoke detectors. Your home should already have at least one smoke detector, which may lower the premium slightly.
- Some state insurance agencies provide consumer buyer’s guides and complaint ratios for insurance companies that operate within the state.