HOMEOWNERS COVERAGE

When you decide to buy homeowners insurance, your agent will typically provide you with four choices of policies. Separate policies are available for condominium owners and renters.

These four policies range in degree of coverage, from basic to highly comprehensive. Yet, even the most comprehensive policy (known as an HO5 Form) has significant limitations. You should be aware of these limitations prior to selecting a policy in order to purchase adequate coverage.

• Perils Covered - Insurance policies are very specific

Most policies cover only those losses that are caused by a particular list of perils. For example, the basic policy (the HO1 Form) does not provide coverage for any loss that results from the freezing of plumbing fixtures.

While the comprehensive policy (HO5) does provide coverage for this peril, it may specifically exclude coverage for another peril. You should ask your insurance agent what perils are excluded from coverage to evaluate which type of policy you need.

• Internal Limitations

Regardless of which type of policy you choose, almost all the policies share identical internal limitations on how much they will reimburse you for certain kinds of property and liability damages.

In general, detached structures such as tool sheds and garages are covered for an additional amount of insurance equal to 10% of the amount of your primary insurance policy. This amount is typically called the dwelling limit. Trees, shrubs, plants and lawns are covered for 5% of the dwelling limit with a $500 maximum limit per item.

Standard homeowner's policies also provide coverage for loss of the use of your home and for temporary housing expenses. Generally, this coverage equals up to 20% of the dwelling limit.

• Other Special Limitations

These may involve coverage for personal property, including the following typical maximum payments:

$ 100 Money, bank notes, gold, silver, coins
$ 500 Securities, deeds, passports, tickets, stamps
$ 500 Watercraft and related equipment
$1,000 Theft of jewelry, furs, semi- or precious gems
$1,000 Theft of silverware, crystal, pewter, etc.
$1,000 Theft of guns

These internal limitations may differ among the various individual policies available and create the need for individuals to purchase additional coverage. This is done with a Scheduled Personal Property Endorsement added to a homeowner's policy with a Personal Articles Floater. These schedules can cover almost any item, including cameras, fine art, golf equipment and china.

• Liability Coverage

This coverage exists to pay the legal expenses and judgments resulting from claims brought against family members or residents of the household, including pets. However, this coverage excludes injuries that are caused by automobile accidents.

• Miscellaneous Exclusions

Other exclusions include: liabilities related to large watercraft or aircraft; any case involving intentional damage; rendering or failing to render professional services; and cases in which the insured is liable to provide worker’s compensation.

LIABILITY LIMITS

Most common liability coverage is $100,000 for personal liability, $500 per person for medical payments, and $250 for damage to another’s property.

However, the magnitude of defense and settlement costs has increased dramatically in recent years. All individuals are vulnerable to much higher claims, even in the millions of dollars. Therefore, additional liability protection is usually recommended. Many insurers recommend no less than $300,000 of liability insurance.

Financial advisors generally recommend that this be coordinated with a general liability umbrella policy with coverage limits of $1 million to $5 million, depending upon the financial status and exposure. This coverage is inexpensive and can protect a lifetime of earnings and savings. However, it must be coordinated with the amount of coverage of the underlying policy. If the homeowners have $500,000 of liability, the umbrella will cost less than if the homeowners have only $300,000. Therefore, your agent should compare the rate structures to determine the most inexpensive combination.

• Inflation

Often, the power of the inflation on the value of your insured property can be a limitation. Over time, the value of your insured property may appreciate as rising prices increase replacement costs.

Inflation Guard Endorsements are available to add to your homeowners policy. These endorsements periodically increase your coverage limits by a fixed percentage (generally 2% yearly) to adjust for inflation.

An alternative to endorsements is a periodic review of your coverage, increasing your policy relative to the changes in the value of your assets. The problem with this approach is that it is too easy to let several years slip by without a review. Automatic clauses in your policy can avoid this risk.

• Limitation of Payments - Co-Insurance

Generally, homes are insured on the basis of replacement cost. This means the cost required to replace an asset at today’s prices—up to the limit of the policy. However, if you want to be insured for replacement cost, you must meet certain eligibility requirements when purchasing your insurance.

To be eligible for a full replacement cost payment, you must keep your home insured for at least 80% of the cost to rebuild it at the time of the loss. If this 80% insurance requirement is not met, you will be subject to severe penalties on the amount of your payment.

In the event of total loss, your insurer will pay only up to the amount for which you are insured. In other words, a home valued at $100,000 and insured for 75% of its value, or $75,000, would only receive $75,000 if it were totally destroyed by fire. However, if the fire caused only $40,000 of damage, since the home was under-insured, the insurance company would pay only 75% of the loss - which amounts to $30,000.

One way to be certain that you would be paid in full is to purchase Guaranteed Replacement Cost coverage. This guarantees full replacement of total loss if you insure for 100% of the value of your home when you purchase your policy and provided that you periodically adjust your coverage for inflation.

• Limitation of Payment - Replacement Value

The contents of your home are generally insured in terms of actual cash value. However, many insurers are beginning to offer Replacement Cost of Contents provisions to allow homeowners to insure their possessions for the full replacement cost.

These policies are particularly attractive to people who are concerned with the loss of clothing, upholstery and other items which depreciate over a relatively short period of time.

SUMMARY COMMENTS

While this is not a comprehensive list of all items excluded from coverage, it points out that you may have many areas to consider before you choose your homeowners policy.

Many people should consider increasing the deductible and applying the savings to improving or increasing the benefits.

The use of additional floater policies (or policy riders) can provide you with the extra coverage that you feel is necessary. However, they also increase your premiums. It is each family’s decision whether the cost of additional insurance is reasonable relative to the added protection.