What Does Your Home Owner’s Insurance Cover?
In Part 1 of our Four Part Homeowner’s Insurance Series, I offered practical considerations to help you achieve a lower premium for your insurance. Here, we examine the scope and limits of your insurance coverage to help you determine if you have adequate insurance coverage to restore, repair, or replace your property and assets in the event of a disaster.
1. What is Covered By Your Homeowner’s Insurance?
The typical homeowner’s policy is a package that combines more than one type of insurance coverage. There are four basic types of coverage contained in a homeowner’s policy:
Dwelling and Personal Property — for example, if a car plows into your picture window, your homeowner’s policy will likely cover damage to the structure.
Personal Liability — for example, if someone trips on your front steps, your policy may cover the legal fees if they decide to sue.
Medical Payments — for example, if your home has radon, medical treatment for visitors to your home who suffered radon poisoning may be included in your coverage.
Additional Living Expenses — for example, if your home becomes uninhabitable, you may be paid expenses for time spent in a hotel.
Depending on where you live, you should consider whether you need to add coverage to the standard policy to cover things such as Earthquake, Flood, or Windstorm (e.g., Hurricanes). If you operate a home office, also carefully consider whether the policy will cover claims associated with a “business pursuit.”
2. How Much Is the Deductible?
In the event you sustain a loss, your insurance policy may require you to pay a deductible - i.e. a certain amount - before you can recover from your insurance company. Some coverages - such as coverages for Hurricanes, for example, may have very high deductibles. Make sure that you have adequate resources on-hand to pay the deductible in the event of the loss.
3. What are the Policy Limits?
Your insurance policy will have a limit on the amount of coverage that will be paid by your insurance company for a loss. A “per occurrence” limit is the amount the insurance company will pay for a single incident. An “aggregate limit” is the maximum amount the insurance company will pay for the entire policy period. A “sublimit” is any limit of insurance that exists within another limit. For example, items such as fine jewelry or firearms may be subject to a lower limit.
4. What is the Value of Your Real & Personal Property?
To make sure you purchase the adequate amount of coverage, take stock of the value of your “real property” (i.e., the house and structures) and “personal property” (i.e., items such as home furnishings, clothing, jewelry). To assess the value of your “real property,” a local builder or appraiser may be able to provide you with the typical construction costs per square foot in your local area. It may be difficult to do an estimate regarding the value of your personal property, so it will be important to have a good inventory. We will address how to do the “inventory” in Part Three of this series!
5. Does the Policy Provide “Replacement Cost” or “Actual Cash Value”?
A policy that provides coverage for “replacement costs” will pay you the dollar amount needed to replace a damaged or lost item with one of similar kind and quality without deducting for depreciation. A policy that pays “actual cash value” will pay you the amount needed to replace the item minus depreciation (i.e., the decrease in value due to age, obsolescence, wear and tear, and other factors).
While the above considerations will be helpful for you to consider, you also should consult with an experienced insurance agent or broker to help guide you through the process of purchasing the right coverage for you. If you need a referral to a good broker in the DC area, please let me know.