Homeowners Insurance -- What Are Your Choices?

Think of the money wrapped up in everything under your roof (not to mention your roof itself!) and you will definitely want to be covered by a good homeowners insurance policy. While most homeowners policies cover similar things, they differ on the amount of coverage. Of course, as with all insurance, the more coverage you need, the more expensive the policy premium.

What’s In and What’s Out

The message for homeowners is: Read your policy details to find out exactly what is, and what is not, covered. In general, policy coverage details include:

• Actual cash value. With an actual cash value replacement policy, insurance covers only the value of the house and contents, minus depreciation.  It might cost much more to actually rebuild the house. Actual cash value is the lowest type of coverage.
• Replacement cost coverage. This covers the actual replacement cost of your home (excluding the land) or the damaged items up to the policy limit, so that if something were to happen, insurance would pick up the cost of replacing everything damaged, comparable to its value when the damage occurred.
• Extended replacement cost. Some policies pay an extended percentage to rebuild a home rather than the entire replacement amount, or cash value. For example, if you took out a policy for $200,000 of coverage, your extended policy might pay 25% more than the limit, or $250,000, to repair damage. This is to protect against sudden increases in construction costs if there is a shortage of building materials after a widespread disaster (hurricane or flood).
• Personal property protection. This covers your personal property, such as furniture, jewelry, computers, artwork, etc. To determine the amount of coverage you need, take an inventory of your property. Otherwise, the insurance company will estimate the cost for you at a percentage of the insurance you have on the house itself. Personal property is generally included in your basic policy, but you might have to ask for an add-on -- a “rider” or “endorsement” -- to cover your most valuable possessions.
• Liability coverage. This covers you from claims brought by third parties for things such as injuries that occur in your house or on your property. This can include medical payments to others, usually with limits. The amount of coverage you need varies by your personal worth; the richer you are, the more you have to lose in the event of a lawsuit. The coverage also includes legal bills; if you are sued for a covered claim, the insurance company’s lawyer will defend you.
• Umbrella policy. If you want more than $1 million in liability coverage, you need an umbrella policy for a higher policy limit. It’s called “umbrella” because it covers you for liability for your home and auto. You only make claims against umbrella coverage when your liability exceeds your base policies.
• Separate disaster coverage. Standard homeowners insurance pays for repairing a home damaged by such things as fire, and replacing items due to theft. However, most standard policies do not insure against “acts of God,” including floods and earthquakes. You can, however, get individual riders added on to your standard policy for some, but not all, of these things. Premiums for such things as earthquake and flood insurance can be high, but your lender might require them if you are in an area where these occur -- or you might want them for peace of mind.
• Exclusions and limitations.  Be sure to read the section of your policy on exclusions and limitations. Such occurrences as tidal waves, sewer damage, landslides, and war are usually excluded.
• Living expenses. If your house is unlivable due to damage, you might need to move to temporary housing. Your policy might include the cost of a hotel, meals, and other living expenses. Also, if you are a landlord, your insurance might cover the cost of moving your renters, as well as rent interruption, during repairs.
• Inflation guard coverage. This covers you against rising building costs caused by inflation. Your policy automatically increases by a percentage set by the insurance company.
• Damage to the property of others. Some policies include a small liability limit for damage caused to another person’s property by someone in your family.
• Supplementary coverage. Policies often cover such things as debris removal, fire department service charges, and credit card theft.

Types of Policies

The Insurance Services Office, or ISO, maintains a standard set of homeowners policies for the industry.  Each policy includes property and liability coverage, but there are different levels of coverage, identified by a number. Of course, there are variations within these, depending on your insurance company and your individual need.
HO-1: Very basic policy with only 10 named disasters covered.
HO-2: Coverage of house and contents for 16 disasters.
HO-3: Covers all disasters except those listed under exclusions.
HO-4: Renters’ coverage that does not include the structure.
HO-6: Co-op and condo coverage.
HO-8: Covers older homes, but not replacement value.

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