The basics of home insurance
Many homeowners, especially rookies new to the game, have no idea what their homeowner’s insurance policies cover.
Buyers know they need to have insurance or their lender won’t provide the financing. And they need to know that they have to keep the cover in place, or the lender could call their loans due and payable in full. As an alternative, the lender could set up a policy at a much higher premium, adding the additional cost to the owner’s monthly home payment.
But as to what is covered? Most people don’t even read their policies.
That’s understandable, given that most policies are written in legal gibberish that few of us can understand. But when you don’t know what’s covered and what’s not, you might have a big surprise when it comes time to make a claim.
So here is, with a nod to the Insurance Information Institute and other sources, a basic introduction to insurance coverage.
Four types of cover
A standard home policy has four types of coverage: the structure itself, your personal effects, third party liability, and additional living expenses.
Structural coverage pays for the repair or reconstruction of the home if it is damaged by fire, lightning, wind, hurricane, or any other disaster listed in the policy. The most popular policy, known as HO-3, offers the broadest coverage, protecting against 16 listed risks.
The personal effects section covers your furniture, clothing and other personal effects if they are stolen or if they are destroyed by an insured loss.
Liability insurance protects you against legal action for injury or damage caused to other people by you, your family members or even your pets. He also pays the costs of your defense, as well as any court order, up to the limit of the police. And it doesn’t just cover your home, but you, all over the world.
If your home is uninhabitable due to damage from a listed risk, the insurer will typically pay for your hotel, restaurant meals, and other living expenses while the location is rebuilt. If your house is rented out and your tenants cannot live there during repairs, the policy may even cover “loss of use”, meaning they will pay you rent that you do not have. could collect during the absence of your tenants.
While an HO-3 policy is the most popular, others are available. An HO-1 policy sets minimum coverage, while an HO-2 offers a bit more (but less than an HO-3). An HO-4 policy is for people who rent single-family homes and covers their belongings against all 16 perils. And an HO-6 policy is for condominium owners, covering their property and the parts of the structure they own.
What is covered – and what is not?
What is covered by your policy is as important as what is not. Floods are not, for example, so you will need a separate policy for this. Sometimes flood coverage is necessary to get and maintain financing, but even if it isn’t, it’s a good idea to take a long and serious look at it. Flooding can happen anytime, anywhere – and not just from massive storms.
Other typical exclusions include damage caused by earthquakes, war, pollution, nuclear accidents, intentional damage, normal wear and tear, construction defects, vehicles parked on property, frozen pipes and vandalism.
Once you’ve chosen the specific policy, you need to choose one of three levels of coverage:
Actual cash value: Pay to replace or repair the house and replace your belongings, less capital cost allowance.
Replacement cost: Pay as above but without capital cost allowance. Note: While replacement cost policies cover structure, they do not cover anything above the actual cash value of your property.
Guaranteed or extended replacement cost: As the highest level of protection, guaranteed coverage pays whatever it costs to rebuild the house as it was, even if it exceeds policy limits. An extended policy pays a certain percentage – typically 20-25% – over the limit.
While this protects against sudden increases in construction costs in the event of a shortage of materials after a major and widespread disaster, it will not be cost effective to bring your home up to current building standards. For this, you will need an “ordinance or law rider”, which will help you pay the additional freight.
Obviously, the more coverage you buy, the higher your premium. The amount you pay is also governed by your deductible: the higher the deductible, the lower the rate.
Don’t stop there
But we must not stop there. Beyond flood coverage, you’ll want to add endorsements, aka endorsements, to your coverage to cover any items you may have that are excluded from your standard policy.
The list of excluded items is long: jewelry, work equipment, wine collections, luxury rugs, antiques, furs, silverware, boats and fine art, to name a few.
Once you’ve got the coverage in place, it’s a good idea to take an annual insurance review to make sure your property is still protected at its current value – up or down – as opposed to to what it was worth when you put the font in place. To protect against this, consider an inflation protection rider so that coverage is automatically increased each year.
Your annual exam should also cover your runners. Maybe you don’t own that beautiful mink coat anymore, for example, or maybe you bought a van Gogh to hang on your living room wall.
Lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous housing magazines and to housing and housing finance industry publications. Readers can contact him at [email protected]