HOME
INSURANCE BASICS
What is homeowners insurance?
Homeowners insurance provides financial protection
against disasters. A standard policy insures the
home itself and the things you keep in it.
Homeowners insurance is a package policy. This means
that it covers both damage to your property and
your liability or legal responsibility for any injuries
and property damage you or members of your family
cause to other people. This includes damage caused
by household pets.
Damage caused by most disasters is covered but there
are exceptions. The most significant are damage
caused by floods, earthquakes and poor maintenance.
You must buy two separate policies for flood and
earthquake coverage. Maintenance-related problems
are the homeowners' responsibility. |
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What
is in a standard homeowners insurance policy?
A standard homeowners insurance policy includes
four essential types of coverage. They include:
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Coverage for the structure
of your home. |
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Coverage for your personal belongings.insurance. |
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Liability protection. |
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Additional living expenses in the
event you are temporarily unable to live in your
home because of a fire or other insured disaster. |
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The
structure of your house
This part of your policy pays to repair or rebuild
your home if it is damaged or destroyed by fire,
hurricane, hail, lightning or other disaster listed
in your policy. It will not pay for damage caused
by a flood, earthquake or routine wear and tear.
When purchasing coverage for the structure of your
home, it is important to buy enough to rebuild your
home.
Most standard policies also cover structures that
are detached from your home such as a garage, tool
shed or gazebo. Generally, these structures are
covered for about 10% of the amount of insurance
you have on the structure of your home. If you need
more coverage, talk to your insurance agent about
purchasing more insurance.
Your
personal belongings
Your furniture, clothes, sports equipment and other
personal items are covered if they are stolen or
destroyed by fire, hurricane or other insured disaster.
Most companies provide coverage for 50% to 70% of
the amount of insurance you have on the structure
of your home. So if you have $100,000 worth of insurance
on the structure of your home, you would have between
$50,000 to $70,000 worth of coverage for your belongings.
The best way to determine if this is enough coverage
is to conduct a home inventory.
This part of your policy includes off-premises coverage.
This means that your belongings are covered anywhere
in the world, unless you have decided against off-premises
coverage. Some companies limit the amount to 10%
of the amount of insurance you have for your possessions.
You have up to $500 of coverage for unauthorized
use of your credit cards.
Expensive items like jewelry, furs and silverware
are covered, but there are usually dollar limits
if they are stolen. Generally, you are covered for
between $1,000 to $2,000 for all of your jewelry
and furs. To insure these items to their full value,
purchase a special personal property endorsement
or floater and insure the item for it's appraised
value. Coverage includes “accidental disappearance,”
meaning coverage if you simply lose that item. And
there is no deductible.
Trees, plants and shrubs are also covered under
standard homeowners insurance. Generally you are
covered for 5% of the insurance on the house—up
to about $500 per item. Perils covered are theft,
fire, lightning, explosion, vandalism, riot and
even falling aircraft. They are not covered for
damage by wind or disease.
Liability
protection
Liability covers you against lawsuits for bodily
injury or property damage that you or family members
cause to other people. It also pays for damage caused
by your pets. So, if your son, daughter or dog accidentally
ruins your neighbor’s expensive rug, you are
covered. However, if they destroy your rug, you
are not covered.
The liability portion of your policy pays for both
the cost of defending you in court and any court
awards—up to the limit of your policy. You
are also covered not just in your home, but anywhere
in the world.
Liability limits generally start at about $100,000.
However, experts recommend that you purchase at
least $300,000 worth of protection. Some people
feel more comfortable with even more coverage. You
can purchase an umbrella or excess liability policy
which provides broader coverage, including claims
against you for libel and slander, as well as higher
liability limits. Generally, umbrella policies cost
between $200 to $350 for $1 million of additional
liability protection.
Your policy also provides no-fault medical coverage.
In the event a friend or neighbor is injured in
your home, he or she can simply submit medical bills
to your insurance company. This way, expenses are
paid without a liability claim being filed against
you. You can generally get $1,000 to $5,000 worth
of this coverage. It does not, however, pay the
medical bills for your family or your pet.
Additional living expenses
This pays the additional costs of living away from
home if you can't live there due to damage from
a fire, storm or other insured disaster. It covers
hotel bills, restaurant meals and other living expenses
incurred while your home is being rebuilt. Coverage
for additional living expenses differs from company
to company. Many policies provide coverage for about
20% of the insurance on your house. You can increase
this coverage, however, for an additional premium.
Some companies sell a policy that provides an unlimited
amount of loss-of-use coverage, but for a limited
amount of time.
If you rent out part of your house, this coverage
also reimburses you for the rent that you would
have collected from your tenant if your home had
not been destroyed. |
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Are
there different types of policies?
Yes. A person who owns his or her home would have
a different policy from someone who rents. Policies
also differ on the amount of insurance coverage
provided. |
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What
type of insurance do I need for a co-op or condo?
If you have purchased a condo or co-op, the bank
will require insurance to protect its investment
in your home. You may, however, need more insurance
to cover your personal items, liability or fees
that may be charged to you regarding shared areas
of the building like the lobby.
You will need two separate policies to protect your
investment:
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Your own
insurance policy.
This provides coverage for your personal possessions,
structural improvements to your apartment and additional
living expenses if you are the victim of fire, theft
or other disaster listed in your policy. You also
get liability protection. |
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A "master
policy" provided by the condo/co-op board.
This covers the common areas you share with others
in your building like the roof, basement, elevator,
boiler and walkways for both liability and physical
damage.
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To adequately insure
your apartment, it is important to know which structural
parts of your home are covered by the condo/co-op
association and which are not. You can do this by
reading your association’s bylaws and/or proprietary
lease. If you have questions, talk to your condo
association, insurance professional or family attorney.
Sometimes the association is responsible for insuring
the individual condo or co-op units, as they were
originally built, including standard fixtures. The
individual owner, in this case, is only responsible
for alterations to the original structure of the
apartment, like remodeling the kitchen or bathtub.
Sometimes this includes not only improvements you
make, but those made by previous owners.
In other situations, the condo/co-op association
is responsible only for insuring the bare walls,
floor and ceiling. The owner must insure kitchen
cabinets, built-in appliances, plumbing, wiring,
bathroom fixtures etc
Also ask your insurance professional about the following
additional coverages:
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Unit assessment
This reimburses you for your share of an assessment
charged to all unit owners as a result of a covered
loss. For instance, if there is a fire in the lobby,
all the unit owners are charged the cost of repairing
the loss. |
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Water back-up
This insures your property for damage by the back-up
of sewers or drains. Water back-up may not always
be included in a policy. Check to see that it is
included. |
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Umbrella
liability
This is an inexpensive way to get more liability
protection and broader coverage than is included
in a standard condo/co-op policy. |
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Flood or
earthquake
If you live in an area prone to these disasters,
you will need to purchase seperate flood and earthquake
policies. Flood insurance is available through FEMA's
National Flood Insurance Program (http://www.fema.gov/nfip/).
Both flood and earthquake insurance can be purchased
through your insurance agent. |
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Floater or
endorsement
If you own expensive jewelry, furs or collectibles,
you might consider getting additional coverage since
there is generally a $1,000 to $2,000 limit for
theft of jewelry on a standard policy.
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it is important to find an agent or company that
specializes in condominiums or co-ops. Also don’t
forget to ask about all available discounts. You
can reduce your rates by raising your deductibles
and by installing a smoke and fire alarm system
that rings at an outside service. If you insure
your unit with the same company that underwrites
your building’s insurance policy, you might
also get an additional reduction in premiums |
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What
type of disasters are covered?
Most homeowners policies cover all disasters listed
below. Some policies provide coverage only for the
first 10 listed. Check your insurance policies for
the "perils" covered. |
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Dwelling & personal property |
Dwelling |
Personal
property |
Modified
Coverage HO-8 |
| Perils |
Basic HO-1*+ |
Broad
HO-
2* |
Special
HO-
3* |
Special
HO-3 |
Renters
HO-4 |
Condo/
Co-op HO-6 |
Modified
Coverage HO-8 |
| Fire or lightning |
A++ |
Superior |
97 |
6.4 |
6.4 |
6.4 |
6.4 |
| Windstorm or hail |
x |
x |
x |
x |
x |
x |
x |
| Explosion |
x |
x |
x |
v |
x |
x |
v |
| Riot or civil commotion |
x |
x |
x |
x |
x |
x |
x |
| Damage caused by aircraft |
x |
x |
x |
x |
x |
x |
x |
| Damage caused by vehicles |
x |
x |
x |
x |
x |
x |
x |
| Smoke |
x |
x |
x |
x |
x |
x |
x |
| Vandalism or malicious mischief |
x |
x |
x |
x |
x |
x |
x |
| Theft |
x |
v |
x |
x |
x |
x |
x |
| Volcanic eruption |
x |
x |
x |
x |
x |
x |
x |
| Falling object |
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x |
x |
x |
x |
x |
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| Weight of ice, snow or sleet |
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x |
x |
x |
x |
x |
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| Accidental discharge or overflow
of water or steam from within a plumbing,
heating, air conditioning, or automatic fire-protective
sprinkler system, or from a household appliance. |
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x |
x |
x |
x |
x |
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| Sudden and accidental tearing
apart, cracking, burning, or bulging of a
steam or hot water heating system, an air
conditioning or automatic fire-protective
system. |
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x |
x |
x |
x |
x |
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| Freezing of a plumbing, heating,
air conditioning or automatic, fire-protective
sprinkler system, or of a household appliance |
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x |
x |
x |
x |
x |
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| Sudden and accidental damage
from artificially generated electrical current
(does not include loss to a tube, transistor
or similar electronic component) |
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x |
x |
x |
x |
x |
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| All perils except flood, earthquake,
war, nuclear accident, landslide, mudslide,
sinkhole and others specified in your policy.
Check your policy for a complete list of perils
excluded |
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x |
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* HO-1, HO-2 and
HO-3 refer to standard Homeowners Policies.
+HO-1 has been discontinued in most states.
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Disasters
not covered
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Floods
You can purchase flood coverage directly from your
homeowners insurance agent. However, the policy
is provided by the Federal Flood Insurance Program
( 800-427-4661, http://www.fema.gov/nfip
).
You can get replacement cost coverage for the structure
of your home, but only actual cash value coverage
is available for your possessions. There may also
be limits on coverage for furniture and other possessions
stored in your basement.
Flood insurance is available for renters as well
as homeowners. You will need flood insurance if
you live in a designated flood zone. But also consider
buying it if your house could be flooded by melting
snow, an overflowing creek or water running down
a steep hill. Don’t wait until the evening
news announces a flood season warning to buy a policy.
There is a 30-day waiting period before coverage
takes effect.
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Earthquakes
Earthquake coverage can be a separate policy or
an endorsement to your homeowners or renters policy.
It available from most insurance companies. In California,
it is also available from the California Earthquake
Authority (http://www.cea.gov).
In earthquake prone states like California, the
policy comes with a high deductible. |
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Maintenance
damage
It is your responsibility to take reasonable precautions
to protect your home from damage. Your insurance
policy will not cover damage due to lack of maintenance,
mold, termite infestation and infestation from other
pests. |
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Can
I own a home without homeowners insurance?
Unlike driving a car, you can legally own a home
without homeowners insurance. But, if you have bought
your home and financed the purchase with a mortgage,
your lender will most likely require you to get
homeowners insurance coverage. That’s because
lenders need to protect their investment in your
home in case your house burns down or is badly damaged
by a storm, tornado or other disaster.
If you live in an area that is likely to flood,
the bank will also require you to purchase flood
insurance. Some financial institutions may also
require earthquake coverage if you live in a region
vulnerable to earthquakes. If you buy a co-op or
condominium, your board will probably require you
to buy homeowners insurance.
After your mortgage is paid off, no one will force
you to buy homeowners insurance. But it is not advisable
to cancel your policy and risk losing what you’ve
invested in your home. |
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What
is renters insurance?
Renters insurance provides financial protection
against the loss or destruction of your possessions
when you rent a house or apartment. While your landlord
may be sympathetic to a burglary you have experienced
or a fire caused by your iron, destruction or loss
of your possessions is not usually covered by your
landlord’s insurance. Because in most cases,
renters insurance covers only the value of your
belongings, not the physical building, the premium
is relatively inexpensive.
By purchasing renters insurance, your possessions
are covered against losses from fire or smoke, lightning,
vandalism, theft, explosion, windstorm and water
damage (not including floods). Like homeowners insurance,
renters insurance also covers your responsibility
to other people injured at your home or elsewhere
by you, a family member or your pet and pays legal
defense costs if you are taken to court.
Renters insurance covers your additional living
expenses if you are unable to live in your apartment
because of a fire or other covered peril. Most policies
will reimburse you the difference between your additional
living expenses and your normal living expenses
but still may set limits as to the amount they will
pay.
There are two types of renters insurance policies
you may purchase:
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Actual Cash
Value - pays to replace your home or possessions
minus a deduction for depreciation up to the limit
of your policy |
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Replacement
Cost - pays the actual cost of replacing
your home or possessions (no deduction for depreciation)
up to the limit of your policy
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may want to consider purchasing a floater. A standard
renters policy offers only limited coverage for
items such as jewelry, silver, furs, etc. If you
own property that exceeds these limits, it is recommended
that you supplement your policy with a floater.
A floater is a separate policy that provides additional
insurance for your valuables and covers them for
perils not included in your policy such as accidental
loss. |
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How
do I take a home inventory and why?
Would you be able to remember all the possessions
you’ve accumulated over the years if they
were destroyed by a fire? Having an up-to-date home
inventory will help you get your insurance claim
settled faster, verify losses for your income tax
return and help you purchase the correct amount
of insurance.
Start by making a list of your possessions, describing
each item and noting where you bought it and its
make and model. Clip to your list any sales receipts,
purchase contracts, and appraisals you have. For
clothing, count the items you own by category --
pants, coats, shoes, for example –- making
notes about those that are especially valuable.
For major appliance and electronic equipment, record
their serial numbers usually found on the back or
bottom.
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Don't be put
off!
If you are just setting up a household, starting
an inventory list can be relatively simple. If you’ve
been living in the same house for many years, however,
the task of creating a list can be daunting. Still,
it’s better to have an incomplete inventory
than nothing at all. Start with recent purchases
and then try to remember what you can about older
possessions. |
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Big ticket
items
Valuable items like jewelry, art work and collectibles
may have increased in value since you received them.
Check with your agent to make sure that you have
adequate insurance for these items. They may need
to be insured separately. |
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Take a picture
Besides the list, you can take pictures of rooms
and important individual items. On the back of the
photos, note what is shown and where you bought
it or the make. Don't forget things that are in
closets or drawers. |
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Videotape
it
Walk through your house or apartment videotaping
and describing the contents. Or do the same thing
using a tape recorder. |
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Use a personal
computer
Use your PC to make your inventory list. Personal
finance software packages often include a homeowners
room-by-room inventory program. |
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Storing the
list, photos and tapes
Regardless of how you do it (written list, floppy
disk, photos, videotape or audio tape), keep your
inventory along with receipts in your safe deposit
box or at a friend's or relative's home. That way
you’ll be sure to have something to give your
insurance representative if your home is damaged.
When you make a significant purchase, add the information
to your inventory while the details are fresh in
your mind. |
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