What if Chicken Little is Right? (The sky is falling)
Are you covered?
What Is Homeowners Insurance?
Homeowners insurance provides financial protection against disasters. A standard policy insures the home itself and the things you keep in it. The insurance is a package policy. This means that it covers damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. This includes damage caused by household pets.
Damage caused by most disasters is covered but there are exceptions. The most significant are damage caused by floods, earthquakes and poor maintenance. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowners’ responsibility.
The home insurance policy is usually a term contract, a contract that is in effect for a fixed period of time. The payment the insured makes to the insurer is called the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station, or if the house is equipped with fire sprinklers and fire alarms. Perpetual insurance, which is a type of home insurance without a fixed term, can also be obtained in certain areas. Most home buyers borrow money in the form of a mortgage, and the mortgage lender always requires that the buyer purchase homeowners insurance as a condition of the loan,
in order to protect the bank if the home were to be destroyed. Anyone with an insurable interest in the property should be listed on the policy.
If you undertake a remodeling project, make sure you adjust your insurance coverage to reflect the increased value of your home.
How Much Insurance Do I Need?
You need enough insurance to cover the following:
The structure of your home.
Your personal possessions.
The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs.
Your liability to others.
You need enough insurance to cover the cost of rebuilding your home at current construction costs. Don’t include the cost of the land. And don’t base your rebuilding costs on the price you paid for your home. The cost of rebuilding could be more or less than the price you paid or could sell it for today.
Some banks require you to buy homeowners insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure it’s enough to cover the cost of rebuilding. (If your mortgage is paid off, don’t cancel your homeowners policy. Homeowners insurance protects your investment in your home.)
For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local building costs per square foot. To find out construction costs in your community, call your local real estate agent, builders association or insurance agent.
Factors that will determine the cost of rebuilding your home:
Local construction costs
The square footage of the structure
The type of exterior wall construction, frame, masonry (brick or stone) or veneer
The style of the house (ranch, colonial)
The number of bathrooms and other rooms
The type of roof and materials used
Other structures on the premises such as garages, sheds
Fireplaces, exterior trim and other special features like arched windows
Whether the house, or parts of it like the kitchen, was custom built
Improvement to your home, adding a second bathroom, enlarging the kitchen or other additions that have added value to your home
Standard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance. These have to be purchased separately if you feel you need them. Often this is related to where in the world you live.
Replacement cost policies
Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation the decrease in value due to age, wear and tear, and other factors.
If you purchase a flood insurance policy, coverage for the structure is available on a replacement cost basis.
Guaranteed or extended replacement cost coverage
After a major hurricane or a tornado, building materials and construction workers are often in great demand. This can push rebuilding costs above homeowners policy limits, leaving you without enough money to cover the bill. To protect against such a situation, you can buy a policy that pays more than the policy limits.
An extended replacement cost policy will pay an extra 20 percent or more above the limits, depending on the insurance company. A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster.
Building codes are updated periodically and may have changed significantly since your home was built. If your home is badly damaged, you may be required to rebuild your home to meet new building codes. Generally, homeowners insurance policies (even a guaranteed replacement cost policy) won’t pay for the extra expense of rebuilding to code. Many insurance companies offer an Ordinance or Law endorsement that pays a specified amount toward these costs. (An endorsement is a form attached to an insurance policy that changes what the policy covers.)
Consider adding an inflation guard clause to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area.
If you own an older home, you may not be able to buy a replacement cost policy. Instead, you may have to buy a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes, like plastering walls and wooden floors, with similar materials, the policy will pay for repairs using the standard building materials and construction techniques in use today.
Insurance companies differ greatly in how they insure older homes. Some won’t insure older homes for the replacement cost because of the expense of re-creating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for the replacement cost as long as the dwelling is in good condition.
If you can’t insure your home for the replacement cost or choose not to do so, in some cases, the cost of replacing a large old home is so high that you might not want to replace it with a house of the same size, make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.
Your personal possessions
Most homeowners insurance policies provide coverage for your personal possessions for approximately 50 percent to 70 percent of the amount of insurance you have on the structure or dwelling of your home.
To determine if this is enough coverage, you need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire. If you think you need more coverage, contact your agent or insurance company representative and ask for higher limits for your personal possessions.
Insuring expensive items with floaters/endorsements
There may be limits on how much coverage you get for expensive items such as jewelry, silverware and furs. Generally, there is a limit on jewelry. You should ask your agent or look it up in your policy. Insurance companies may also place a limit on what they will pay for computers.
If the limits are too low, consider buying a special personal property floater or an endorsement. These allow you to insure these items individually or as a collection. With floaters and endorsements, there is no deductible. You are charged a premium based on what the item (or collection) is, its dollar value and where you live.
You can determine the value by providing your agent with a recent receipt or getting the item or collection appraised.
Additional living expenses after a disaster
This is a very important feature of a standard homeowners insurance policy. This pays the additional costs of temporarily living away from your home if you can’t live in it due to a fire, severe storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt.
Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20% of the insurance on your house. Some companies will even sell you a policy that provides you with an unlimited amount of loss of use coverage, for a limited amount of time.
If you rent out part of your house, this coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.
You should talk to your agent or company to make sure you know exactly how much coverage you have and how long the coverage will be in effect. In most cases, you can increase this coverage for an additional premium.
Liability to others
This part of your policy covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by pets. It pays for both the cost of defending you in court and for any damages a court rules you must pay.
Umbrella or Excess Liability
You should buy enough liability insurance to protect your assets. If you own property and/or have investments and savings that are worth more than the liability limits in your policy, you may consider purchasing an excess liability or umbrella policy.
Types of Homeowners Insurance
A limited policy that offers varying degrees of coverage but only for items specifically outlined in the policy. These might be used to cover a valuable object found in the home, such as a painting.
Similar to the above is a limited policy in that it covers specific portions of a house against damage. The coverage is usually a “named perils” policy, which lists the events that would be covered. As above, these factors must be spelled out in the policy.
The most common policy is written for a homeowner and is designed to cover all aspects of the home, structure and it contents as well as any liability that may arise from daily use as well as any visitors who may encounter accident or injury on the premises. Covered aspects as well as limits of liability must be clearly spelled out in the policy to insure proper coverage. The coverage is usually called “all risk”.
This is commonly referred to as renters insurance. Similar to HO-6, this policy covers those aspects of the apartment and its contents not specifically covered in the blanket policy written for the complex. This policy can also cover liabilities arising from accidents and intentional injuries for guests as well as passers-by.
This policy, similar to regular homeowners insurance, covers a home (not a condo or apartment), the homeowner and its possessions as well as any liability that might arise from visitors or passers-by. This coverage is differentiated in that it covers a wider breadth and depth of incidents and losses.
A form of supplemental homeowner’s insurance, also known as a Condominium Coverage, is designed especially for the owners of condos. It includes coverage for the part of the building owned by the insured and for the property housed therein of the insured. Designed to span the gap between what the homeowner’s association might cover in a blanket policy written for an entire neighborhood and those items of importance to the insured, typically the policy covers liability for residents and guests of the insured in addition to personal property. The liability coverage, depending on the underwriter, premium paid, and other factors of the policy, can cover incidents up to a specific distance from the insured property, and all valuables within the home from theft, fire or water damage or other forms of loss.
How to Choose an Insurance Company
There are many insurance companies, so choosing between them can be a challenge. Here are the main points to keep in mind when selecting an insurance company:
Insurance companies are licensed by provincial or state governments. Not every company is licensed to operate in each province or state. As a general rule, you should buy from a company licensed in your state, because then you can rely on your provincial/state insurance department to help if there is a problem.
Many companies sell insurance policies and prices vary greatly from one to another, so it really pays to shop around. Get at least three price quotes from companies, agents and from the Internet. Your government insurance department or council may have publications to help you on this and other insurance issues.
You buy insurance to protect you financially and provide peace of mind. Select a company that is likely to be financially sound for many years, by using ratings from independent rating agencies.
Your insurance company and its representatives should answer your questions and handle your claims fairly, efficiently and quickly. You can get a feel for whether this is the case by talking to other customers who have used a particular company or agent. You may also want to check a national claims database to see what complaint information it has on a company. Also, your state insurance department will be able to tell you if the insurance company you are considering doing business with had many consumer complaints about its service relative to the number of policies it sold.
You should feel comfortable with your insurance purchase, whether you buy it from a local agent, directly from the company over the phone, or over the Internet. Make sure that the agent or company will be easy to reach if you have a question or need to file a claim.
Where To Buy Your Insurance
You can buy insurance through your local insurance agent and through insurance companies that sell through their own employees, over the phone, by mail and over the Internet. Consult your provincial insurance council or state insurance department, the yellow pages of your phone book, and friends or relatives for the names of insurance companies doing business in your area.
Can I Own a Home Without Purchasing Homeowners Insurance?
Unlike driving a car, you can legally own a home without homeowners insurance. But, if you have bought your home and financed the purchase with a mortgage, your lender will most likely require you to get homeowners insurance coverage. That’s because lenders need to protect their investment in your home in case your house burns down or is badly damaged by a storm, tornado or other disaster.
If you live in an area that is likely to flood, the bank will also require you to purchase flood insurance. Some financial institutions may also require earthquake coverage if you live in a region vulnerable to earthquakes. If you buy a co-op or condominium, your board will probably require you to buy homeowners insurance.
After your mortgage is paid off, no one will force you to buy homeowners insurance. But it is not advisable to cancel your policy and risk losing what you’ve invested in your home.
This paper is intended for informational purposes only. Nothing contained herein constitutes legal, financial or other professional advice. Transmission of these materials is not intended to create, and receipt does not constitute, any relationship of any kind between the provider and the recipient. Some of these points may not apply in your area. Different term and conditions may vary from state to state and province to province. All articles, text and photographic material presented here is for the use and pleasure of the recipient only. Download PDF
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