How Does Homeowners Insurance Protect Me?
Similar to the many types of auto insurance, homeowners insurance is a bundle of different categories of coverage, each applying in various situations.
Unfortunately you aren’t able to choose what categories you want. Six different components factor in homeowners insurance. Depending on your type of home, and your financial cushion, you can choose a coverage level for each category. This allows you to get the plan that works best for you and keeps your costs down.
How Does Homeowners Insurance Protect You?
Standard policies cover damages to your home, your possessions, and also any liability for accidents that happen on your property. As a homeowner, it’s important to carry insurance. Not only for the damage to the house itself, but to the contents of the house. Homeowners insurance protects you in the event that someone is hurt or their property is damaged involving your property. Without insurance a lawsuit may be filed against you personally. Umbrella liability insurance coverage is always a good added layer of protection.
How Much Insurance Is Needed?
The level of homeowners insurance coverage needed is determined by 3 things:
1. Protection of Assets
Based on the premium level chosen you pay more or less out of pocket if an accident occurs. The larger financial cushion you have, allows you to choose a lower premium. If you have a lot of assets (which could be at stake in a lawsuit), you may choose a higher level of liability insurance to protect your assets.
2. Lender Requirements
If you have a mortgage, your lender may require that you carry homeowners insurance. The minimum coverage is the amount of the mortgage. If there is a catastrophic event such as a home fire (which results in a total loss), the mortgage company will be able to recoup the remainder of your balance. Having more insurance coverage will benefit you as well as your bank.
3. Various Policy Requirements
Insurers may require you to purchase a specific types of coverage. Such as flood insurance if you live in a flood-prone area, in order to carry general homeowners insurance.
Types of Homeowners Insurance Coverage
There are four basic types of coverage for homeowners. The levels of coverage needed determine what your insurance company will base your premium calculations on.
1. Property Damage
This covers damage to your home, from damages from fire, wind, or hail. Repairs costs over the deductible will be covered when the insurance company determines the damage is coverable. Damages from events like a flood or earthquake are not included in this coverage. You will need to buy specific coverage to cover those events and prepare for natural disasters.
Your insurance company will break down your coverage levels for property damage into three separate categories. You will be able to choose the levels of coverage for each category:
Coverage A is usually your highest and most important coverage. It covers anything involving your dwelling or the physical structure of your home. This coverage includes the core structure of the home, flooring, roofing, doors, cabinets, appliances, light fixtures, and more. Imagine your home was suddenly flipped upside down, anything that stayed in place and didn’t move would be considered part of Coverage A. Kitchen appliances and washers/dryers are covered under Coverage A.
It’s important to check if you have a “broad” form of Coverage A or an “all perils” Coverage A policy. Understand, “all perils” does not mean that you are covered for everything. It means that you are covered for everything except items specifically excluded in the policy.
There are numerous exclusions in a homeowners policy that people aren’t aware of. The most common exclusion is wear & tear and deterioration. If the roof leaks due to old age or an old plumbing pipe breaks, the policy will not pay to repair the roof or fix the pipe. But, homeowners insurance typically will pay for the water damage caused in the incident. Keep in mind there may be policies that deny this coverage altogether.
Special considerations: Many homeowners policies do not pay for mold damage. Many policies add a limited amount of coverage back in. Policies allow up to $10,000 for damages solely caused by mold. Don’t let an adjuster tell you it’s not covered or that it has a limit because mold was involved. Damage present from water damage, will be covered under the general Coverage A limit.
Coverage B covers all “other structures” other than your home that are unattached from the home. This includes sheds, fences, a separate garage, a mother-in-law suite that is not attached to the same foundation as the home, and any other structure on your property unattached from the main foundation.
This is deemed by many to be a less important coverage, but still carries a heavy responsibility. Often this area is where most people are underinsured. If you install an expensive new fence or a new garage on your property, make sure you increase your Coverage B on your homeowners insurance. During natural disasters like a hurricanes, many people will find out that their insurance covers their main home adequately but won’t cover the full amount of the damage to the other structures.
Coverage C covers all personal property. Items you would take with you when you move is considered to be personal property. In this area people end up without enough coverage and don’t even realize it. Major events like floods, fires, hurricanes, and other big losses will cover your personal property. But, homeowners polices limit the total dollar value on certain categories of personal property. Many times it limits certain items for the amount that can be covered if there is burglary or theft.
For expensive items like large amounts of jewelry, you must have them appraised separately and have the jewelry coverage added on your policy. Many policies will also limit the amount you can receive if china, guns, or cash were stolen.
Once you add this separate coverages, you will have full coverage up to the appraised amount. This is generally with no deductible, and virtually anything can happen to it and you’ll be reimbursed. Remember to pay a little extra to get a replacement cost property, or the insurance company will only reimburse for current market value.
If you choose not to get the separate coverage, you risk of being subjected to a limit if items are stolen. The basic homeowners policy with no extra endorsements will not extend coverage for losing an expensive piece of personal property. There are many angry customers who find out after losing their wedding ring that their jewelry was not covered. So if you have any expensive jewelry or expensive items, make sure that you get appropriate coverage added to your policy.
2. Additional Living Expenses
Coverage D is your additional living expense coverage. This covers the expenses you may incur if you are not able to live in your home for a period of time due to it being damaged beyond habitability. This coverage also extends to homes damaged and are now under construction, or if you are not permitted to return to the area by government order (for example wildfires in the area).
This coverage applies in situations where an accident or natural disaster has occurred, and not if your home is under non-emergency renovation. Remember, with this coverage the insurance company pays only a “reasonable expense” for temporary housing and additional living expense. Your policy determines how long you can claim this benefit and how much you can receive per day ininsurance company will evaluate how much your home is insured for. Then they will figure out what a comparable rent payment would be for a similar home.
Example, if you have a home insured for $500,000, they will try to put you up in a home of similar size with comparable amenities. The renting range would be $3,500 to $4,500 per month. If your home is only insured for $150,000, they will put you up in a smaller home or townhouse and pay about $1,500 to $2,000 for rent.
Keep in mind, the policy does cover expenses like meals, but will only pay the amount above and beyond your normal expenses. If you normally spend $150 a week for food, but are living in a hotel and spend $300 a week on food, the insurance company will reimburse you $150, not $300.
3. Personal Liability
Coverage E (personal liability, bodily injury, and property damage) covers you and your family members against lawsuits involving injury or property damage. Also it covers you if you cause damage to someone else’s property.
Your insurance company will defend you against lawsuits that fall under the terms of your policy and will pay any judgments up to the amount specified in your policy. For example, your dog bites a visitor who then sues you, or if you accidentally knock over your neighbor’s expensive vase. Coverage E doesn’t apply if the lawsuits are auto accident claims or business-related.
4. Medical Payment Coverage
Coverage F pays the medical expenses of anyone accidentally injured on your property or an area immediately adjoining it. This coverage is used if someone fell on your sidewalk and required medical attention, but did not sue you. Depending on the level of coverage chosen, payments are usually capped at specific amounts.
This coverage doesn’t apply to you or your family or other people who live in the house; it is only for visitors. It also doesn’t cover intentional acts or anything related to your home business.
Replacement Value or Actual Cash Value?
Which value is more important? “Replacement value” and “actual cash value” are two distinct ways insurance companies determine the amount of the payment to the insured:
Replacement value refers to the reimbursement for rebuilding or replacing damaged items or structures similar to their previous construction. For example, if you had a large, expensive bay window that was smashed. Replacement value would mean how much the insurance company would pay to replace it with another large bay window of the same design, similar quality and durability. Or if your couch is destroyed in a house fire, they will pay to buy a new couch that is similar.
Actual cash value, means the insurance company will reimburse you for replacing the couch. They will only pay as much as the couch was worth at the time that it was destroyed. This is referred to as depreciation. Your smashed bay window will be replaced with a lower-quality version, since the window has gone down in value. In some situations, insurance companies pay the actual cash value directly to you. Once you replaced the item and provide a receipt showing the cost , you will be reimbursed the remainder of the cost.
Check your homeowners policies. Make sure your coverage amounts are even with the value of your home and possessions.