UNDERSTANDING THE BASICS
Insuring Your Home
What is homeowner’s insurance?
Homeowners insurance is a policy covering your home (the structure) and its contents (personal belongings). It can save you from severe financial loss if your home is damaged or destroyed. It covers your family's possessions and can provide you with compensation for liability claims, medical expenses, and other amounts that result from property damage and personal injury suffered by others. Most lenders require homeowners insurance in order to obtain a mortgage.
For example, a homeowners insurance policy can protect you against the following scenarios:
A tornado or storm shattering your home's windows or scattering your roofing shingles across the neighborhood
A burglar breaking into your home and stealing that figurine you inherited from your grandmother
Your dog biting a neighbor or delivery person
Physical therapy costs for a guest injured by a fall in your home
A successful personal injury lawsuit brought by a neighbor the last time you practiced your chip shot in the backyard
Damage from a vehicle crashing into your house
Homeowners insurance is also a way for condominium and cooperative unit owners, mobile home owners, and renters to protect their possessions from damage or theft, and to obtain liability coverage for property damage and personal injury suffered by others.
Who is covered?
Homeowners insurance protects more than just the owner of the house, condominium, or other property. Depending on your living situation, the following individuals are covered under your homeowners policy:
The insurance policy identifies the "Named Insured" (meaning the individual who is primarily insured under the policy), who is usually the same person named on a deed or lease as the owner or tenant, respectively. You, as the named insured, receive the most extensive coverage under your homeowners policy, for you are covered by property insurance on your dwelling and other structures, in addition to personal property and liability insurance. Named insured condominium owners and renters do not receive such extensive coverage because they do not, on an individual basis, own their dwelling or other structures.
If your spouse resides in your dwelling, then he or she is covered by personal property and liability insurance, even if he/she isn't identified on the Declarations Page as a named insured.
Individuals who reside in your dwelling are covered by personal property and liability insurance if they are your relatives (e.g., your children) or if they are under 21 years of age and in the care of any member of your family.
Housekeepers, au pairs, or gardeners, for example, are covered by personal property insurance.
Guests and other visitors
Your guests and other invited visitors can typically be covered by personal property insurance so long as you contact the insurance company or your agent to request coverage.
What is covered?
The property insurance section of your homeowners policy protects more than just your actual home or dwelling. In most cases, your insurance company will reimburse you for damage or theft affecting:
Your dwelling, any structures attached to the dwelling, and building materials and supplies that are stored near the dwelling and are used to construct, alter, or repair the dwelling or other structures on your property
Structures on your premises that are not attached to the dwelling, such as a tool shed or detached garage
Personal property such as the contents of your house like furniture, clothing, and stereo equipment, as well as outdoor items like sporting equipment and gardening tools
Generally, the coverage limit for other structures and personal property coverage is a set percentage of the dwelling coverage amount. If you wish, you can increase a policy's preset coverage amount by endorsement (see below).
Condominium or cooperative unit coverage
If you own a condominium or cooperative unit, your homeowners insurance does not cover you for your entire dwelling space because you do not individually own the structure you live in. Instead, you are covered for your personal property and any portion of the unit you own under the terms of the condominium or cooperative documents. Renters are covered for personal property only because renters do not own any portion of the property.
Specific coverage In most cases, whether you own or rent a home, the homeowners insurance company will reimburse you for costs, expenses, and other amounts related to:
Loss of use
If your dwelling is not fit to live in because of damage covered by the policy, you should receive reimbursement for your family's or household's living expenses while you wait to permanently relocate or wait for the dwelling to be repaired. A set coverage limit is always applied to a policy's standard loss-of-use coverage, but it can be increased by endorsement.
If you or another insured are found responsible for personal injury or property damage suffered by another person, your insurance company will offer a settlement amount owed to that person. This is only true if carelessness or negligence, rather than intentional misconduct, caused the injury or damage. If an injured or damaged person brings a lawsuit, your insurance company should pay to defend you or any other insured named in the lawsuit. For example, you may be found negligent if a meter reader was injured by falling off your tricky cellar stairs because the railing was broken (and you knew about the situation but failed to repair it). You may be found liable for intentional misconduct if you cut down a tree on your neighbor's property to improve your view.
Medical payments to others
If a nonresident requires medical assistance as a result of an injury suffered on or near your premises, your insurance company should pay his or her medical expenses. Injuries that take place away from your premises are also covered, as long as you, another insured, a household employee, or your pet caused the injury.
Open perils vs named perils
Your policy can also cover either open perils or named perils. A named perils policy specifies which perils are covered as well as which perils are not. Rather than covering a number of listed or named perils, an open perils policy covers you broadly against risk of direct loss to your dwelling and other structures, and also includes an extensive list of perils which are not covered.
What is not covered?
There is a wide variety of damages, conditions, and costs that are not covered by homeowners insurance. Your insurance policy describes a number of situations that are specifically excepted or excluded from coverage (called exclusions). Some policies contain more exclusions than others. Your policy also describes certain conditions you must meet, and duties you must perform, in order for you to be covered. Terms and limitations that were originally included in your policy can be changed by a document called an "endorsement." For these reasons, you should carefully read your homeowners policy to learn the limitations and exclusions that apply to your specific situation. Here are just a few examples of situations when you may not be covered by a standard homeowners insurance policy:
Although the structures and possessions that lie upon a parcel of land are usually covered by a homeowners policy, the land itself is not. This means, for example, you're not covered by your policy if your neighbor's pool overflows and contaminates your untilled garden.
The Declarations Page of your policy recites maximum coverage amounts that limit what the insurance company must pay. Separate limits are set for the dwelling, other structures, personal property, loss of use, personal liability, and medical payments to others. This means that even if you suffer a loss to your personal property in the amount of, let's say, $50,000, the insurance company will pay you no more than the policy's stated limitation recited on the Declarations Page. If this figure within your policy is $100,000 then you're covered for all of it. On the other hand, if it's only $30,000 then you'll have a $20,000 deficit.
Your homeowners policy will not cover you for damage that results from floods, waves, sewer overflows, or water seeping into your basement.
If you're involved in a business activity, your homeowners policy will not cover you for liability or medical payments due other persons, even if the damage or injury occurred in your home. Other structures located on your premises that are used for business purposes are also not covered by the policy. This means your standard homeowners policy will not reimburse you for medical care required by a client who slips and falls in your home office as he's putting his coat on the rack.
Your tenantsYour standard homeowners policy will not cover you for damages or injuries suffered by the tenants who rent any part of your home.
If an injury or damage is covered by other insurance in addition to your homeowners policy, your homeowners insurance company will only pay its proportionate share of the amount due.
Theft by another insured
Your homeowners insurance will not cover you for a loss caused by a theft committed by another insured person under the policy. This means your policy will not cover you if your nephew (who lives with you) steals a valuable baseball card from the family room.
Registered motor vehicles are specifically excluded from personal property coverage. Only vehicles like motorized wheelchairs and lawn mowers, which are not usually registered with the state, are covered by personal property insurance. Your car is also not covered under the "Personal Liability and Medical Payments to Others" sections of your homeowners policy because insurance companies prefer you to insure vehicles with an automobile insurance policy.
How much coverage is needed?
Your home can be insured for either:
Replacement Cost--pays you the cost of replacing damaged property, with no deduction for depreciation, but with a maximum dollar amount
Guaranteed Replacement Cost--pays the full cost of replacing damaged property, with no deduction for depreciation and no dollar limit. This coverage is not available in all states. Some insurance companies may limit coverage to 120 percent of the cost of rebuilding your home.
Actual Cash Value--pays you an amount equal to the replacement value of damaged property minus a depreciation allowance.
Unless a policy specifically states that property is covered for its replacement value, coverage is for actual cash value.
It is important that your policy should cover 100% of the replacement cost of your home. That way, the insurance company will pay you the full replacement cost for any damage up to the coverage limit. If you fear inflation will decrease the value of your policy, an inflation guard endorsement, which is built-in to many homeowners policies these days, ensures that your coverage amount increases a bit every year to keep up with inflation. What this means, for example, is if your house increases in value next year by 5% your policy's replacement limit will also increase, according to some predetermined index of local home values.
Additions to your home
If you add improvements to your home, you should increase your coverage. Don't wait until the addition is completed to increase your coverage, contact your insurance agent or representative shortly before or after construction begins. Otherwise, if the new addition is damaged or destroyed before you have increased your coverage, you may be responsible for the cost of repairing or rebuilding the addition.
Also, make sure that contractors and subcontractors working on your addition have workers compensation by requesting copies of their insurance certificates. If the coverage is insufficient you may need to extend the liability limits portion of your homeowners policy, or simply find a company whose insurance meets your requirements. The reason for this is relatively simple to understand... Workers injured while working on your addition could sue you if the contractor doesn't have the proper insurance coverage.
Why insure your property?
Property insurance covers risk from loss or damage to your personal property. Even the smallest residence can contain property worth thousands of dollars--for instance, an entertainment or sound system, home computer, or jewelry. If a catastrophe struck tomorrow, and you could afford to replace everything you own, then you may not need property insurance. If that isn't the case, then it's likely you need it.
Homeowner policies cover personal property to some extent
In addition to your home, a standard homeowners policy also covers personal property, meaning articles you own other than land and buildings. Your personal property consists of the contents of your house (like furniture, clothing, and stereo equipment, as well as outdoor items like sporting equipment and gardening tools). Generally, the limit for personal property coverage is stated as a percentage of the dwelling coverage amount listed within the policy.
If you own a condominium or cooperative unit, your homeowners insurance provides coverage for your personal property and any portion of the unit you own under the terms of the condominium or cooperative documents. Similar to a homeowner, you must choose a specific amount of coverage for the building. It is crucial to determine how much responsibility you have under the condominium or cooperative documents. In these types of situations one should never guess what these amounts or percentages are. It is advisable to find out for sure and if possible receive this information in writing. Then keep it in a safe place in case you need it in the future.
Homeowners policies have set limits
Homeowners policies set specific dollar limits for particular categories of personal property in a section entitled Special Limits of Liability. Note that for some categories, the policy specifies a limit only for theft, not for damage or destruction. The reason is that items such as jewelry, firearms, and furs are especially susceptible to theft, and insurance companies want to limit their exposure to these fairly common incidents. The damage or destruction of these items is less common, and insurance companies are willing to cover them up to their actual cash value.
Below are some examples of the standard limits for particular categories of personal property:
$200 for money, bank notes, bullion, gold, silver, coins, and metals
$1,000 for securities, accounts, deeds, letters of credit, notes other than bank notes, manuscripts, personal records, passports, tickets, and some other related items
$1,000 for the theft of jewelry, furs, watches, and precious and semi-precious stones
$2,000 for the theft of firearms
$2,500 for the theft of silverware, silver-plated ware, goldware, gold-plated ware, and pewterware
$2,500 for property at the residence used for business purposes
$250 for property used away from the residence for business purposes
*Of course, depending on your policy's type, limits and endorsements these figures may or may not be accurate.
Chances are, the value of many of your personal belongings may exceed the limits in your homeowners policy. Only you know for certain. That's why you have the option of increasing these specific limits by purchasing either a Scheduled Personal Property endorsement or a floater. You may need an increased jewelry limit, for instance, for covering engagement or wedding rings. If you buy a personal property rider, you must be able to verify the cost and condition of the item. Photos or a video can be used to inventory your property. However, you should be sure to keep the inventory away from the premises (i.e., safe deposit box). Professional appraisals are needed for certain items, such as jewelry, antiques, or camera equipment (beyond a basic camera).
Renters need property insurance, too
Many renters are under the mistaken belief that they are covered under their landlord's homeowners insurance policy. This is not true. Your landlord's policy covers the building itself, not the personal belongings of you or other tenants. The fact that you pay rent instead of a mortgage payment doesn't make your personal possessions any less valuable. By taking out a renters insurance policy, you can cover your personal property from loss or damage that results from broken pipes, fire, theft or any other event specified in the policy. In fact, renters may even be more likely to suffer from a loss of personal belongings because they live in close proximity to other individuals and families.
Renters insurance also protects you from liability claims against you if someone suffers an injury or property damage because of something you did or didn't do. For example, if you forget to turn your stove off, and your apartment catches fire and destroys the building, you could be held liable by the landlord. Your renters insurance policy provides a set amount of liability protection.
In addition to protecting you from property loss or damage and liability claims, renters insurance (HO4) is very reasonably priced.
Protect your possessions wherever they are
Property insurance may protect your possessions wherever they are. For example, if you are on vacation and lose a valuable item, as long as the loss is by a covered peril or event, in most cases the location doesn't matter. Your policy will specify covered perils and events.
How much property coverage do you need?
To determine how much property insurance coverage you need, make an inventory of all your home's contents. Don't forget to include furniture, appliances, jewelry, artwork, and the contents of your closets, cabinets and the toy chest. When possible, list the serial number, date and cost of purchase. Include receipts if possible. An easy way to inventory your possessions is to use a video camera or take photos. When using a video camera, you can talk about the specific items, their cost, and when you bought them. Ideally, you would want enough insurance coverage to replace your possessions if they were destroyed.
Keep a copy of your inventory in a location away from your home, like a safety deposit box, or maybe at a close friend or relative's house. This way, if your home is destroyed, your inventory list will be safe at another location. When you make major purchases, remember to add them to your inventory and check with your insurer--you may need to increase your coverage levels.
Two methods to determine value
Insurance companies use one of two methods to determine the value of property:
Replacement cost--pays you the cost of replacing damaged property, with no deduction for depreciation, but with a maximum dollar amount.
Actual Cash Value--pays you an amount equal to the replacement value of damaged property minus a depreciation allowance.
Unless a policy specifically states that property is covered for its replacement value, coverage is for the lower, actual cash value. Check your policy, or ask your insurance agent or representative if you are not sure what level of coverage you have.
Periodically review your existing coverage
Review your existing homeowners or renters policy to make sure you have enough coverage for all valuable possessions. Periodically review your coverage to make sure it is keeping pace with new purchases and/or gifts you have received