Consumer's Independent Guide to
HOMEOWNERS INSURANCE
Whether you are a first-time home buyer, a veteran of many
years of mortgage payments and house upkeep, a condo owner or
an apartment dweller, your household is one of some 90 million
in the United States. Chances are your home is your single most
expensive budget item and - for the home or condo owner - your
most valuable investment. Homeowners insurance* is a "package"
policy that covers both property - structures and personal possessions
- and liability.
Because it is comprehensive, your homeowners insurance policy
may include coverage you are not even aware of. If your luggage
is stolen from a motel room while you are a thousand miles away
from home, for example, you will of course want to notify the
police. You will also want to check with your insurance agent
about coverage for loss under your homeowners policy. And if
your house burns down leaving you without a place to stay, your
policy provides living expenses as well as reimbursement for
damaged property. There is more.
Your insurance agent can explain your policy in detail. To
get you started, this guide from the Independent Insurance Agents
of America outlines the key areas of coverage as well as any
exclusions or limits that might apply. More than any other line
of coverage, homeowners insurance is substantially standardized
throughout the United States. The questions and answers in this
guide are based on the most commonly purchased homeowners insurance
policy (called HO3 in the industry) offering the widest protection.
You may be interested in knowing that claims can consume 80
cents or more of every premium dollar (the exact amount varies
from year to year). The rest of that dollar goes to taxes, marketing
and administrative costs, dividends and profits. It is in your
best interests to be aware now of your protection so that you
may select the insurance that best meets your needs.
* Throughout this guide, the term "homeowners insurance"
is used. However, for renters and condo owners the coverage for
personal property and liability is similar. The main difference,
of course, is that you do not need to insure the building. Therefore,
almost all the information contained in this guide should be
of use to you whether you own or rent, live in an apartment,
a condominium, or a home. Questions on specific concerns about
condominiums and renting an apartment or dwelling are answered
after the general questions.
Index
Do I really need
insurance for my home?
Insurance, any kind, is your protection against the uncertainties
of day-to-day living. For most people, their home is their single
most valuable possession - and their biggest investment. Homeowners
insurance protects your investment as well as you, the members
of your family and your household possessions.
If you were to suddenly lose your home due to fire or a tornado
or have the contents damaged or stolen, like most of us, you
probably could not afford to replace everything all at once.
And if somebody sued you for an injury or damage caused by you
or your property, the cost of defending that suit could run into
thousands of dollars just for legal fees - regardless of the
outcome of the suit.
All of these situations are covered by the homeowners package
policy. And while it may be unpleasant to think about fire, theft,
and other "uncertainties of life," let's face it, they
are there and things happen.
Yet another reason you need to carry homeowners insurance
is that mortgage lenders require it. No mortgage company will
lend the large amounts of money needed to finance homes at today's
prices without requiring an insurance policy to protect that
investment.
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My homeowners insurance is part
of the payment I make each month to the mortgage company. Who
decides what insurance to get?
You do - it is your home and your insurance
policy. As a means of protecting their investment, the mortgage
company collects a set amount from you each month, puts it in
escrow, and then pays your insurance and taxes when they fall
due. However, the policy is still yours and you may select the
insurance you feel offers the best coverage at the best rates.
In fact, if you allow the mortgage company to choose, you
might well end up paying more for your homeowners insurance.
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I know I have that homeowners
policy in a drawer somewhere. What exactly does it cover?
"Exact" coverage is hard to define because there
are different policies and about 900 insurance companies writing
most of the property/casualty business in the United States.
However, 80 percent of homeowners policies are based on a standard
form and that is the one described in this guide. All homeowners
policies cover two important areas: property and liability. Remember
that you have to have protection against the proverbial thief
in the night and the person who slips on your sidewalk
by day.
What this means in insurance terms is that your homeowners
policy has two basic components. It covers your structures and
possessions - property insurance - and it furnishes protection
against personal liability. Personal liability, as its
name implies, means you are legally obligated to pay money to
another person for actions caused by you, your family, or your
property. That liability extends to medical payments to others
for injuries caused by you or your family.
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What kinds of perils am I protected
against?
Remember that policies vary but homeowners insurance usually
covers damage to both structures and personal property caused
by:
- Fire or lightning
- Windstorm or hail
- Explosions
- Riot or civil commotion
- Aircraft
- Vehicles
- Smoke
- Theft or vandalism (sometimes called malicious mischief)
- Falling objects
- Weight of ice, snow or sleet
- Freezing of a plumbing, heating, air conditioning
or other such household system
In fact, your coverage is most likely even more comprehensive
than the above list. Many homeowners policies cover damage by
"just about everything," unless the coverage is specifically
excluded. In these cases, it is even more important to understand
what is not covered.
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What about floods, earthquakes
and other catastrophes?
Most catastrophes are covered; for example, wind damage from
hurricanes and tornadoes come under the windstorm peril listed
in the previous question and so are included. Flood and earthquake
damage, however, are not covered by a standard policy.
Be careful not to be lulled into a false sense of geographic
security. Flood and earthquake activity is more widespread than
many people realize. For example, almost 90 percent of the U.S.
population lives in seismically active areas. Since 1900, earthquakes
have occurred in 39 states and caused damage in all 50. And if
your home is located in a flood-prone area, you are 26 times
more likely to suffer a flood loss than a loss from fire.
You may want to check with your agent about special catastrophic
policies for normally excluded conditions like floods and earthquakes.
Of course, the cost of such extra coverage may reflect the high
risk involved. If you live along a shoreline, for example, expect
to pay a higher premium for flood coverage than someone living
on a mountaintop would pay.
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Are there any other exclusions
I should know about?
There may be other exclusions spelled out in your policy such
as neglect, intentional loss, "earth movement," general
power failure and even damage caused by war. If you neglect to
take care of your property (e.g., a leaky roof), you may not
be covered. Obviously, if you intend to lose an object
or damage your property, there is no coverage.
One other exclusion that can be costly is the Ordinance or
Law exclusion. Building codes established by governmental bodies
that drive up the cost of rebuilding or repairing after a loss
occurs may not be covered by your insurance policy. Thus, if
you discover when replacing damaged property that current law
demands higher grade or more expensive materials than the original
ones being replaced, the new materials may not be covered for
the full price.
For example, if the current building code in your area requires
a higher grade of electrical wiring and after a fire you are
replacing all the wiring in your home, your policy may cover
only the cost of replacing the older wiring. The difference
in cost between the old wiring and the new wiring required by
ordinance or law is your responsibility.
Even if you live in a fairly new home, laws and building codes
are constantly being updated. Coverage to include ordinance or
law requirements can be added to your homeowners policy with
an endorsement - an addition that could save you money in the
long run.
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Are the backyard shed and my
color TV both covered in my homeowners policy?
Yes, they are both your property so they are both covered.
The value of the real property - your home, garage, shed and
other structures - is generally based on the value of the main
structure, the house itself. Thus, if the house were insured
for $75,000, the shed, detached garage and other auxiliary structures
would be covered for 10 percent or $7,500 worth of damages. Additional
property protection features may include living expenses should
your home not be habitable for a period of time.
Your personal property is also covered by a homeowners insurance
policy. Personal property includes the contents of your home
and personal belongings used, owned, worn, or carried by you
or members of your household - basically, everything and the
kitchen sink! This coverage is also based on the house coverage,
and there are limits on the losses that can be claimed. Higher
limits can be purchased for both real and personal property.
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Who decides how much my property
is worth?
State laws may dictate how losses are to be figured, which
means the same insurance company may use one method in one state
and a different method in another. The common methods are:
Actual Cash Value - The replacement cost
of the item minus depreciation. For example, a new television
set may cost $500. If your 7-year-old TV set gets damaged in
a fire, it might have depreciated 50 percent. Therefore, you
would be paid $250 for that set.
Replacement Coverage - The cost of replacing
an item without deducting for depreciation. So today's cost for
a TV set with features similar to the 7-year-old one damaged
by fire would determine the amount of compensation. If it still
costs $500 today, that would be the replacement coverage.
Replacement value should not be confused with market
value. The market value is what your house, for example,
would actually sell for and is generally more than the replacement
cost. This is because replacement value does not include the
land - which almost always does not need to be replaced.
Check your policy. If you prefer replacement coverage and
do not already have it, this coverage can be added to your policy.
Typically, the difference in premiums is 10 to 15 percent to
upgrade from actual cash value coverage to replacement coverage.
However, it is well worth it to protect your investment in your
possessions. Your agent can advise you of the costs involved.
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How much will I be paid for
damage to my personal property?
Remember that homeowners insurance is designed to cover general
personal possessions, not valuable collections like antiques,
jewelry or original art. Insurance companies deliberately limit
their coverage of expensive possessions so that household premiums
are more affordable to everyone. After all, if they had to cover
museum-level art collectors under standard homeowners policies,
we would all end up paying higher premiums to cover those expensive
items.
Your policy lists the specific monetary limits for personal
property under what is called "Special Limits." Those
limits usually are:
- $200 for money, bank notes, gold and silver (other
than goldware and silverware), platinum, coins, and medals.
- $1,000 on securities, accounts, deeds, evidences
of debt, letters of credit, notes (other than bank notes), manuscripts,
passports, tickets, and stamps.
- $1,000 on watercraft, including their trailers, furnishings,
equipment and outboard motors.
- $1,000 on trailers not used for watercraft.
- $1,000 for loss by theft of jewelry, watches, furs,
precious and semiprecious stones.
- $2,000 for loss by theft of firearms.
- $2,500 for loss by theft of silverware, silver-plated
ware, goldware, gold-plated ware and pewterware.
- $2,500 on property on the resident premises, used
for business, and $250 on this property damaged or lost away
from the premises.
If these limits seem low to you (maybe that engagement ring
is worth much more than $2,500), you may wish to talk to your
agent about additional coverage for specific items.
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Does my policy cover my possessions
even when I go on vacation?
Yes, perhaps in this case the term "homeowners"
is misleading because this is a package of insurance coverage
that extends to all your possessions no matter where they are.
If you take a round-the-world vacation and lose a valuable item,
as long as the loss is by a covered event or peril, the location
does not matter.
The liability component also extends well beyond the boundaries
of your home. Should you be found legally at fault for injury
or loss to another individual, whether you unfortunately caused
a tumble down a San Francisco hill or a fall in an Indiana barn,
that is personal liability which again is addressed in your homeowners
policy.
As in the property section of your homeowners policy, there
are limits and exclusions to personal liability. Your business
activities, for example, are not covered under a homeowners policy.
You are also not covered for injuries or damage you purposely
cause. So if a fight with a neighbor turns physical and you end
up bopping him on the nose, your homeowners insurance will not
cover the injury or any resulting suit. Your policy lists specific
exclusions and limits.
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I rent out my basement. Are
my tenants covered by my homeowners policy?
No. Your property and the structure (the basement)
are covered by your policy as is your personal liability. However,
the tenants' possessions and liability are not covered by your
policy. Therefore, they may wish to purchase their own renters
insurance. Whether you are a lessor or a renter, you should check
with your agent to make sure you have the right coverage.
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My mother lives with us in a
separate in-law suite. Are her possessions covered?
As a member of the family, she is probably covered
under your homeowners policy. So too is your child away at college
covered for personal liability or theft or damage to his or her
property even in the dormitory or college apartment. However,
you should check with your agent to be sure of the extent of
coverage.
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What about our vacation home
in the next state?
Insurance companies can operate in more than one state so
the company that carries your primary residence may issue a policy
for your vacation home. Personal liability is covered in the
first homeowners policy so the second policy need cover only
property. This type of policy is called a "dwelling policy."
If you rent out your second home for all or part of the year,
your homeowners policy may need to be endorsed (added to) to
cover the increased liability exposure. The renter's property
is not covered under your dwelling policy. Should damage occur
while someone is renting your property, they will need to check
with their own agent about their coverage.
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I work out of my home. Are my
inventory and business property covered?
Yes, but within certain limits. Both are covered as personal
property used for business purposes. However, like all personal
property, there are monetary limits on reimbursement. Whether
your home business is your primary occupation or a hobby that
nets you a few hundred dollars a year, it is still a business
and you should treat it as such. If you've invested quite a bit
in equipment (woodworking tools, for example) and sell the occasional
decoy, you should consider whether the personal property limits
are sufficient.
Also, keep in mind that the personal liability protection
in your homeowners policy does not extend to business liability.
Check with your agent concerning your business insurance needs.
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Help! I've lost everything!
Where do I start?
It's true - if most of us suddenly found ourselves without
anything due to some calamity, we would be hard pressed to know
all that we had lost. When was the last time, for example, that
you counted the number of shoes you own or CDs, not to even mention
furniture, dishes, drapes, or audio and video equipment? And
the list goes on and on. How much is it all worth and where would
you start if you had to replace it?
Now is the time to make a list of major household items
and possessions. The handy inventory form at the back of this
guide will make your job easier. Just remember that, where possible,
it is wise to list the serial number, date and cost of purchase,
and even include the receipt if you can.
Another easy way to inventory your home is to use a video
camera or take pictures of your home and its contents. As you
take the video, you can also talk about the items and their date
and cost of purchase.
Whichever method you choose, have a copy made and ask a friend
or family member to hold on to it. Or store your copy in a safe
deposit box. You could even check with your agent - he or she
may be able to store a copy for you. That way if the worst happens
and your home is destroyed, the inventory list will be safe at
another location.
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Why does the insurance company
want to know where the nearest fire hydrant to my home is?
The insurance company has to weigh many factors in determining
a premium to charge for your policy. One factor is access to
water (hence the question about the location of the nearest fire
hydrant) as well as the dependability and nearness of your local
fire company and police. Rural homes more than five miles from
a water supply are more at risk for severe damage from fire and
lightning. Therefore, they can be more expensive to insure and
rural homeowners may even have difficulty obtaining insurance.
Other factors are, of course, the age and construction of
your house. Generally, brick and stone homes are cheaper to insure
than ones constructed of wood.
The number and dollar amount of lawsuits in your state can
also influence your premiums. Residents in states that experience
a large number of lawsuits or of verdicts in excess of $1 million
may face higher premiums to cover the cost of those suits.
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Is there anything I can do to
lower my premiums?
Because your premium is based partly on the level of risk
the insurance company must take, there are things you can do
to lower your premium. Installing deadbolt locks (to discourage
theft), fire extinguishers, smoke alarms, and burglar and fire
alarms that alert your local police and fire stations can often
save you up to 15 percent on your premium. Check with your agent
before purchasing any of these items to see if your insurance
carrier has specific requirements to qualify for the discount.
Many insurers also offer discounts if you insure both your
home and automobile with the same company. Another way to save
may be to increase the deductible on your homeowners policy.
If your deductible is $100, it means that you agree to pay this
amount first, and your insurance company will pay for damages
that exceed this deductible. By increasing your deductible from
$100 to $250, or even $500, this decreases the insurance company's
risk, which may mean a savings in your premium.
Also, it pays to shop around for insurance coverage just like
anything else. Of course, you may want to keep in mind that the
extent of coverage also determines the premium cost so the cheapest
policy is not necessarily the best. Your insurance agent can
help you evaluate the different policies and companies to find
the one most suitable for you.
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Who keeps an eye on the insurance
companies?
Insurance is a heavily regulated industry. Every state has
some sort of department, administration or agency that regulates
and monitors every insurer operating within the state's borders.
In addition to approving rates, your state's insurance department
is involved in all insurance matters on behalf of private citizens
and businesses. It also issues operating licenses to insurers
and agents, based on their ability to meet the state's requirements
for conduct and knowledge about insurance issues.
Your insurance company and agent work closely with your insurance
department to make sure you are getting the best and fairest
possible service within the state's guidelines. If you ever have
difficulty settling a claim, work with your agent to resolve
the difficulty. However, you can also contact your state's insurance
department (listed in the next section of this guide) if you
wish to know more about your options and rights as an insurance
consumer.
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What do I do when my property
is damaged or stolen?
Contact your agent as soon as possible. If there is damage
to your home or possessions, make "emergency" repairs
to protect yourself and your property from further damage, then
call your agent. For example, if some of the windows in your
home have been blown out by wind, you may board them up to prevent
additional damage. In fact, your policy covers the cost of these
emergency measures.
However, before setting about to make permanent repairs, call
your agent. The insurance company has the right to inspect the
property in its damaged condition. They may want to send a claims
adjuster or instruct you to get an estimate from an independent
contractor.
If you have property stolen, notify the police immediately
and call your agent.
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What if I am sued or found liable
for injury to another person?
Liability covers bodily injury and property damage to others
due to your negligence. The coverage applies to non-auto accidents
that occur either at your residence or off the premises. Medical
expense payments such as first aid can also be due to the injured
party. Should you be sued or suspect that you may be, contact
your agent immediately.
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I am a renter, not a homeowner.
Do I need insurance?
The same rule of thumb applies to renters as to homeowners.
If catastrophe struck tomorrow, could you afford to replace everything
you own? Or if you were sued, would you have enough money to
pay legal fees and possibly settle the suit? If not, chances
are you would benefit from the protection that renters insurance
brings.
Renters insurance offers the same general personal property
coverage and liability protection as a homeowners policy. Thus,
your camera is insured while you are on vacation, and you are
covered if your grandfather clock crashes into the apartment
lobby's wall and leaves a gaping hole. In fact, most policies
are surprisingly extensive and may include additional living
expenses (also called loss-of-use coverage) if you are forced
by fire or other damage to live elsewhere.
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Isn't my apartment covered under
my landlord's policy?
No, the landlord's insurance covers damage to the building
and the landlord's property - not your personal property
or liability. Plus, you may be liable for damage to the building
if it is your fault. If you go out and leave the stove on and
an ensuing fire causes extensive damage to the entire building,
you may be held liable to the landlord.
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How are prices determined for
renters insurance?
Renters insurance is surprisingly inexpensive. That's because
you are not insuring a building. Like all property/casualty policies,
the value of your property to be insured and other risk factors
are weighed by the insurance company to determine your premium.
Your insurance agent can help you find the best combination of
coverage and cost.
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I live in an apartment with
three roommates. Do we each need a policy?
Check with your agent. Usually, it is best if all roommates
are on the same policy although it is possible for each to purchase
his or her own coverage. If you do need to "go it alone,"
you alone receive the security of renters coverage.
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I own a condo. How is my policy
different?
Condo owners insurance covers the same general areas outlined
throughout this guide for homeowners in the important areas of
personal property and liability. In addition, condo owners insurance
provides coverage for some situations specific to condominium
unit owners.
Usually, the condominium association buys insurance to cover
the property (building and structures) and liability coverage
for the general association. If you own a condominium unit, you
may be responsible for covering from the "walls in"
on your unit, that is, for your personal property and the interior
of your unit (whatever area is excluded from the condo association's
policy) as well as for your personal liability.
Sometimes, condo owners are assessed by their condo association
for losses "outside the walls" that were not completely
covered by the association's policy. For example, if the clubhouse
is destroyed and the condo association did not have it insured,
you could be assessed for a "share" amount needed to
replace it. If you wish, check with your agent about adding such
"loss assessment coverage" to your condo owners policy.
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