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Homeowners Insurance
INDEX Purchasing Homeowners Insurance
Purchasing Homeowners Insurance Merely having a homeowners/renters insurance policy does NOT mean you are protected. It depends on the policy. Does a given policy cover damage caused by a short circuit inside a wall? A water leak in a concealed area? Cracking in your foundation? Mistakes made by workers you hire? Damage caused by falling trees? Damage from dry rot? No insurance policy covers ALL loss caused by ANY event. Therefore, before you meet with an agent to purchase Homeowners/Renters insurance, you must be prepared. Many people do not do this, but it is very important. You need to assess:
Types of Homeowners Coverage: Dwelling Coverage, Personal Property Coverage and Liability Coverage There are three main categories of Homeowners coverage that you need to analyze:
Your Preparation Before Meeting with an Agent Dwelling Protection Coverage Preparation : Items to cover The first thing you need to do in preparing to intelligently discuss dwelling protection coverage with an insurance company representative is to make a list of the "dwelling" category items you are trying to insure. House? Patio? Garage? Pool? Landscaping? Storage building? Driveway? Retaining wall? Make a written list of these questions and issues.
The second thing to do is to estimate what it would cost to repair or replace these structures TODAY.
To estimate the amount of dwelling protection coverage needed, you should do the following:
Make sure this estimate is for "LIKE KIND AND QUALITY" MATERIALS AND WORK. Older homes often have expensive moldings and woodwork and custom cabinets, doors and light fixtures. Some new homes have marble, granite, limestone or other expensive finishes. You don't want these things replaced with prefabricated materials. Ask yourself what you need to do to assure that the estimates you have prepared are kept current with inflation and with increasing costs for labor and materials. More on this later.
Next, you need to think about the kinds of losses that pose significant concern to you. This assessment will differ from one area or region to another. Firestorms where there is a dry season, mold and mildew in areas where it is wet and humid, hurricanes in Florida, tornadoes in Kansas, hurricanes in coastal areas and floods in low-lying or mountainous areas, and so on. In addition, there are issues that could constitute a potential problem anywhere-depending on the age and condition of your house and other factors. These might include some of the things we talked about earlier. Concerns about electrical short circuits, plumbing failures, dry rot, mold, foundation problems, etc. Make a list of the kinds of issues that may prove a potential problem for you. Store all of these notes in your insurance Notebook. You will use them when you meet with the insurance agent.
Coverage for Natural Disasters: Flood, Hurricane and Earthquake Insurance Do you live in a flood plain or earthquake country? Have you adequately protected yourself from damage caused by violent storms, floods and earthquakes? Storms, tornadoes, earthquakes, floods and other natural disasters can demolish homes and their contents. It is important to evaluate your vulnerability to natural disasters and to make your insurance decisions accordingly.
Flood Insurance Do you live by the ocean? Near a river? Is your home located in a flood plain or near mountains where runoff from winter snowstorms can cause flooding? Is there a levee nearby? Floods are caused by varied and unexpected events, including hurricanes, the overflow of inland or tidal waters, the unusual and rapid accumulation or runoff of surface waters during a heavy rainfall, the collapse of a levee or dam, or a heavy snow runoff. The Federal Emergency Management Agency (FEMA), located at http:\\www.fema.gov, can tell you the level of flood threat in your area. Local government authorities can also advise you as to whether you live in an area where flood is a potential threat. Many people forgo purchasing flood insurance either because they think such damage will be covered by their homeowners policy, because they do not know where to purchase flood insurance, or because they mistakenly believe that floods will not occur in their area. Obviously, it is important to investigate your needs before the flood occurs. Damage caused by floods can be extensive and expensive, and so most homeowner policies exclude coverage for damage caused by these kinds of natural disasters. As a result, the National Flood Insurance Program (NFIP) is responsible for underwriting the vast majority of flood insurance policies in this country. NFIP coverage is only available to homeowners residing in communities where organizations or private insurance companies have agreed to participate in the program. Almost all communities with serious flooding potential have joined. To see if flood insurance is available in your community, contact NFIP at (800) 427-4661 or through its website at http://www.fema.gov/business/nfip. Many companies, possibly including the company that already handles your homeowner's or auto insurance, write and service flood policies for the federal government. The program is largely financed through the premiums charged to consumers. If you determine that you reside in a flood plain or other flood threat, contact your insurance agent or the NFIP to inquire about protection. Personal property and content coverage is separate, and you do not have to be a homeowner to purchase this type of protection. Renters can insure their belongings too. Before a flood occurs, carefully read the claims documentation, negotiation and resolution portions of this section to learn how to handle a claim should one arise.
It is a good idea to have the following items on hand in case of any disaster, including a flood: a first-aid kit, canned food and can opener; several gallons of water, protective clothing, rainwear, sleeping bags, a battery-powered radio and a flashlight. Keep all of this together in water-proof bags. Store copies of important documents, including insurance policies, wills, titles and deeds to property, birth and marriage certificates, credit card and bank account information, and an inventory of household belongings off-site in a place such a safety-deposit box or with a relative. It is a good idea to keep a videotape of the contents of your home off-site as well. Prior to evacuation, you can prepare your home. Moving furniture and other valuables to an upper floor can help protect them from water damage.
Hurricane Coverage Hurricanes may not be covered by flood policies, and they are sometimes excluded by homeowners policies too. After Hurricane Andrew, insurance companies began pulling out the marketplace because of the overwhelming losses suffered after paying claims. As a result, some hurricane-prone communities created government-sponsored insurance programs to protect insurers against catastrophic losses and to encourage insurers to offer hurricane coverage. Check with your local agent if hurricanes occur in your area.
Earthquake Coverage Do you need earthquake coverage? In order to determine whether you need earthquake insurance you should first determine the likelihood of an earthquake striking in your area, and then decide whether earthquake coverage is affordable and worthy of your investment. The problem is that effective earthquake coverage is hard to find, expensive and lacking in benefits in most places where residents most need such coverage. It’s easier to buy hurricane insurance in California and earthquake insurance in Florida than the other way around. Today, two-thirds of the earthquake coverage in effect in California is sold through the California Earthquake Authority (CEA). The CEA is a privately funded, publicly managed consortium of 15 insurance companies that was created after California’s infamous Northridge quake. The CEA's “mini-policy” is generally regarded as the industry's standard earthquake policy. Similar “mini-policies” are sold by many property insurers who do not participate in the CEA. The main problem with the CEA’s “mini-policies” is that it’s name accurately describes what you do and do not get. Numerous, important exclusions are contained in the CEA's basic earthquake policy. Another problem is that these policies generally have a 15% deductible with homeowners dwelling coverage limits, a $5,000 limit for personal property, a $1,500 limit for loss of use, and a $10,000 limit for building-code upgrades. In addition, you must pay many deductibles. When considering an earthquake policy, pay close attention to the combined effect of the exclusions, deductibles and limits under each portion of the coverage. Unfortunately, some people find that the combination of these restrictions leave little left to be paid for.
Fire Coverage Fire damage under a homeowners policy is almost always covered. This is often required by state law or insurance regulations, and is usually so whether a fire was caused by a firestorm, acts of God, someone's negligence or even by wrongdoing. The most conspicuous exceptions are fraud or arson by an insured or acts of war or insurrection. Fire Loss may even be covered if it results from an uncovered cause. For example, a flood may cause short circuits which burn a house down. Even though flood damage is excluded, damage caused by the resulting fire may be covered. Fire losses include both dwelling and apartment structure damage and personal property damage.
Personal Property Coverage Preparation When preparing to meet with an agent to discuss the Personal Property Protection part of your insurance, the steps are similar to those with Dwelling Protection Coverage.
First, make a list of your personal property. This process will surprise you. If you take a notepad and go through your house room by room, you will be shocked at how long your list is. This is time consuming, but do it! You don't have to count every sock and pencil, but go through the house thoroughly, listing televisions, stereos, tools, appliances, suits, coats, dresses, ties, rugs, tables, chairs, dressers, sofas, beds, art, jewelry, sports equipment, etc. Put it all down on your list.
Amount of Personal Property Coverage Next, list what it would cost to REPLACE these things. If you were surprised at what you actually own, you will be totally shocked at what it would cost you to replace it all.
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Get out your calculator and write down in your notes realistic replacement estimates for the things you actually own. Jewelry, Art, Coins, Stamps, Collectibles and other items of value. Highlight any personal property that may be of particular value. Especially jewelry, art, oriental rugs, crystal, silverware, antiques, collections, etc. List the value of these things SEPARATELY. In order for them to be insured, they may have to be appraised (or even photographed).
Perils Once again, list your concerns over how these things could be lost. Theft? Accident? Misplacement (at home or while away)? Fire? Write this list down and put it in your file.
Liability Coverage Protection Preparation Last, think about the issues related to Liability Coverage Preparation.
Amount of coverage What is the total value of all your current assets? Equity on your home or other property? Stocks and bonds? Retirement accounts? Any businesses in which you have a financial interest? The earnings you (and your spouse) receive from work? Autos, boats, collections, art, jewelry, anything substantial? Ask yourself, if some guest tumbles down your stairs and herniates a disc, or a neighbor's child takes a bad fall on your property and badly fractures his leg, or a worker is electrocuted while working on your circuit breaker, or a painter falls from the second story, or if some other horrible thing happens that will cost the victim or victim's family extensive loss, to what extent do you want your family assets to be at risk? Some people feel somewhat cavalier about taking some chances in life. This may be a legitimate approach. But it's pointless to insure substantial assets with an inadequate policy. Think this through carefully so you can make an intelligent judgment call.
Having developed your notes on coverage options, potential risks, and needed limits, you are ready to sit down with an insurance representative to discuss potential policies. You may be able to purchase a policy from an insurance agent, broker or directly through the insurance company. Agents are representatives of the insurance company. Two types of agents are Captive agents and Independent agents. Captive agents work for one insurance company and sell only that insurance company's policies. When you ask key questions, take notes on the answers. Keep in mind that some agents and brokers do not fully understand the specific but important details of the policies they are selling. Therefore, before purchasing homeowners insurance, make sure you are dealing with a qualified, experienced agent or broker. Ask whatever questions are important in order to assess this. Don’t be embarrassed to ask someone how many companies he/she has represented in the past; how many homeowners policies they have sold; whether they have ever been fined or sanction by any insurance regulators or anything similar. No qualified agent will ever take offense at this. Show the agent a copy of the InsuranceConsumers Bill of Rights and ask whether they agree with it.
Dwelling Coverage: Questions For the Agent
Will the proposed policy cover ALL of your real property, including the home, garage, shed, driveway, fence, gate, landscaping or other things you listed? Does the proposed policy exclude any of this from coverage? What causes of damage are included in your preparation notes? Are these causes of loss included in the policy you are considering? What causes of damage are excluded from coverage (flood, earthquake, etc.)? Does the policy provide a FULL dwelling replacement cost guarantee (the company agrees to pay the cost of rebuilding the real property, even if the cost exceeds the policy limits)? TIP: Some replacement "guarantees" are not what they might seem. They merely provide a set percentage increase above the face value of the policy. Be careful. Does the policy provide FULL code upgrade coverage (the increased cost of building a home resulting from changes in building code regulations)? Based on the total value of the real property you want covered, what limits should you purchase and what deductibles do you want? Of course, the lower the limits and the higher the deductibles, the lower the cost of the insurance.
Personal Property Coverage: Questions For the Agent
TIP: Sometimes a policy will pay for the replacement cost, but only after you actually replace the specific item with the same item. If you purchase a different item, you get only the depreciated value of what was destroyed. Be certain you understand your replacement value completely. Based on the total value of the personal property you want covered, what limits should you purchase and what are the corresponding deductibles? How does this work as to specific items?
Liability Coverage: Questions For the Agent
TIP: You want the cost of defense fees to be in addition to any settlement or judgment the company must pay. Otherwise, legal fees could swallow most or all of your limits, leaving you responsible for paying a settlement or judgment out of your pocket. Who chooses your defense attorney(s) and how are they selected?
Additional Living Expenses (ALE) Many people do not know that when their home becomes uninhabitable most insurance policies require the insurer to pay for temporary accommodations of "like kind and quality." Additional Living Expenses (ALE) coverage is critical when you are faced with living in a damaged home. Here are some questions you should ask about the ALE provision in any policy you are considering:
Again, remember to keep notes on everything you are told. Always save these notes in your binder or file.
Alternative Dispute Resolution (ADR) Provisions Contained in Insurance Policies You must scrutinize these provisions very carefully. Two common types of ADR provisions are Appraisal and Arbitration.
Appraisal or Arbitration Appraisal is normally used when a dispute concerns the value of a claim. It is not usually used to determine whether a claim is covered under the policy. Most appraisal clauses call for an independent appraiser, who will assess the damaged property and determine how much it will cost to repair or replace it. Arbitration involves appointing a person to decide the dispute. Both appraisal and arbitration clauses are controversial because, even though the policyholder is rarely informed of the appraisal or arbitration clause in the policy, he or she may be giving up important legal protections merely by buying a particular policy. An appraiser or arbitrator's decision can be final, binding and not subject to appeal - even if they completely ignored the facts, evidence and contractual obligations of the parties. This is important. Always ask questions about the details of an appraisal or arbitration clause:
After you have determined the type of coverage you need, discussed the policy limits and deductibles and asked relevant questions concerning important provisions in the policy, you are ready to fill out the insurance application.
For this reason, you must carefully read all policy application questions and answers very carefully. If you are unsure of the meaning of a question, ask the insurance company or agent and note any significant response on the application form. Do not sign the application until you have completed the application and checked it again for accuracy. After you sign the application (usually under penalty of perjury), photocopy the application and keep the copy in your insurance binder or file. TIP: Some types of insurance contracts contain an Incontestability Clause, which means that the insurance company cannot deny a claim based on a material misrepresentation on the application after the policy has been in effect for a specified number of years (usually two or three). Ask if the policy you are considering has such a clause.
A Homeowners/Renters insurance "policy" typically consists of the application; a declarations page; a definitions section; the insuring agreement; exclusions and limitations sections; policy endorsements; "your duties in the event of loss" section and an arbitration or appraisal section. The first section is usually the dwelling protection portion, followed by personal property. Liability is usually last. As with all types of insurance, you really should insist on seeing a copy of the policy before you pay for it while you are with the company representative.
READ your policy before you buy it. If you find any misstatements or inaccuracies or you see something that you did not expect, call the insurance company or agent RIGHT AWAY and resolve the matter. Take notes on this conversation and save them in your insurance file. Do not wait until you have a claim because by then it may be too late. It is better to resolve the issue NOW than to learn later on that you are not covered.
Some insurance companies use what are called HO Forms to describe parts of the coverage they offer. These forms generally describe Dwelling and Personal Property Coverage, not Liability Coverage. You may be told particular forms cover all situations (with some exclusions), but it is important, and your responsibility, to be ask the questions you prepared even when HO forms are used.
Maintaining Your Homeowners Insurance There is little point in keeping insurance coverage that does not cover your situation anymore. Therefore, keep your insurance policy up-to-date. Have you remodeled your home? Built a new addition or structure on your property? Have you purchased new items or received gifts that should be added to your personal property or other coverage? Has anything changed on your property that poses additional risk to others or to their property? Has your property or other assets increased or decreased in value over time? Has the cost of labor and material increased significantly since you bought your policy? When circumstances change, notify your insurer. Some of your updates may not modify your policy or change your premium at all. They simply put the insurance company on notice, and verifies they are aware and have agreed to cover it. Other updates may require you to modify your old policy, purchase a new one or add an endorsement.
Once you have been issued an insurance policy and paid your first premium, your Homeowners/Renters insurance coverage begins. Your coverage should continue in effect until the anniversary date of your policy or until the policy says it will end. Before the insurance policy expires, the insurance company should send you a notice of renewal. Usually, you can renew your policy by simply continuing to pay the premiums. Be sure to read the notice of renewal in case the insurance company requires you to do something more. Before you decide to renew your policy, re-read it to see if it should be updated. And to see if there have been any changes or reductions in your coverage.
The insurance company may also elect NOT to renew your policy. It can often do this for any reason. However, most states require that the insurance company give you adequate notice (usually 30-60 days) of its decision not to renew. This is intended to provide you with time to purchase replacement insurance elsewhere.
Again, save all copies of prior policies, whether they were with the current company or someone else. Keep these in your binder or file. They can wind up being very important.
Generally, you may cancel your insurance policy at any time and for any reason.
In contrast, in most states the insurance company may only cancel your policy before the anniversary date if:
If the insurance company cancels your policy because of a premium lapse, it may decide to reinstate you if and when you do pay your premium. If it does reinstate you, may still not have been covered during the period of non-payment. This means that the insurance company may refuse to pay a claim that arose during the lapse. |
TIP: Insurance can involve a considerable amount of paper-preparation notes, notes on your meeting with the agent, promotional materials, the policy, past policies, claims, correspondence, telephone notes, claims and documents from experts. 
It's extremely important that you remain organized so that nothing is overlooked. This can make a difference of tens or even hundreds of thousands of dollars to you in the future.
TIP: Be careful! Do not accept some arbitrary number. Make sure that your house and other structures are insured for what it would actually cost to rebuild them. Otherwise, if you suffer a loss, you may find yourself underinsured by tens of thousands of dollars or more. If you want to intentionally underinsure in order to save premium dollars, do it knowingly, recognizing the risk you are choosing to take.