Lew Sichelman
Many homeowners, especially rookies who are new to the game, have no clue what their homeowner’s insurance policies cover.
Buyers know they must have insurance, or their lender won’t provide the financing. And they should know they must keep coverage in place, or the lender could call their loans due and payable in full. As an alternative, the lender could put a policy in place at a much higher premium, tacking the extra cost onto the owner’s monthly house payment.
But as for knowing what’s covered? Most people don’t even read their policies.
That’s understandable, considering most policies are written in legal gobbledygook that few of us can understand. But when you don’t know what’s covered and what’s not, you could be in for a big surprise when the time comes to make a claim.
Here, then, with a nod to the Insurance Information Institute and other sources, is a basic primer on insurance coverage.
Four Types of Coverage
A standard homeowner’s policy has four types of coverage: the structure itself, your personal belongings, liability and additional living expenses.
Structural coverage pays for repairing or rebuilding the house if it is damaged by fire, lightning, wind, hurricane or other disaster listed in the policy. The most popular policy, known as HO-3, offers the broadest coverage, protecting against 16 enumerated perils.
The personal belongings section covers your furniture, clothing and other personal items if they are stolen, or if they are destroyed by an insured disaster.
Liability coverage protects you from lawsuits for injury or damage caused to other people by you, your family members or even your pets. It also pays for the cost of defending you, as well as any court awards, up to the policy’s limit. And it covers not just your house, but you – anywhere in the world.
If your house is uninhabitable because of damage from a listed peril, the insurer typically will pay for your hotel, restaurant meals and other living expenses while the place is being rebuilt. If your house is a rental, and your tenants are unable to live there during repairs, the policy may even cover “loss of use” – meaning it will pay you the rent you couldn’t receive during your tenants’ absence.
While an HO-3 policy is the most popular, others are available. An HO-1 policy sets bare-bones coverage, while an HO-2 offers slightly more (but less than an HO-3). An HO-4 policy is for people who rent single-family houses, and covers their personal belongings against all 16 perils. And an HO-6 policy is for those who own condominiums, covering their belongings and the parts of the structure they own.
What’s Covered – and What Isn’t?
As important as what’s covered by your policy is what’s not covered. Floods are not, for example, so you’ll need a separate policy for that. Sometimes, flood coverage is required to obtain and maintain financing, but even if it’s not, it’s a good idea to give it a long, hard look. Floods can occur anytime, anywhere – and not just from gigantic storms.
Other typical exclusions include damage from earthquakes, war, pollution, nuclear accidents, intentional damage, normal wear and tear, construction defects, vehicles parked on the property, frozen pipes and vandalism.
Once you settle on the specific policy, you need to choose one of three levels of coverage:
Actual cash value: Pays to replace or repair the home and replace your possessions, less a deduction for depreciation.
Replacement cost: Pays the same as above but without deducting for depreciation. Note: Whereas replacement-cost policies cover the structure, they do not cover anything above the actual cash value of your possessions.
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 the policy’s limits. An extended policy pays for a certain percentage – usually 20 percent to 25 percent – over the limit.
While this protects against sudden increases in construction costs when there’s a shortage of materials after a major, widespread disaster, it won’t pay to bring your place up to current building codes. For that, you’ll need an “ordinance or law endorsement,” which will help pay the extra freight.
Obviously, the more coverage you purchase, the higher your premium. The amount you pay also is governed by your deductible: The larger the deductible, the lower the rate.
Don’t Stop There
But you shouldn’t stop there. Beyond flood coverage, you’ll want to add riders, 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 a long one: jewelry, business equipment, wine collections, luxury rugs, antiques, furs, silverware, watercrafts and fine art, to name a few.
Once you put coverage in place, it’s a good idea to perform an annual insurance checkup to make sure your property is still protected at its current value – up or down – as opposed to what it was worth when you put the policy in place. To protect against that, consider an inflation guard endorsement so that coverage is automatically increased every year.
Your annual review should also cover your riders. Maybe you no longer own that beautiful mink coat, for example, or perhaps you bought a van Gogh to hang on your living room wall.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
