is homeowners insurance, and who should buy it?
is one of the most popular forms of personal insurance on the
market. The typical homeowners policy has two main sections:
Section I covers your property, and Section II provides personal
liability coverage (to cover you in case of lawsuits arising
from things that happen on your property). Almost anyone who
owns or leases property should have this type of insurance.
Often, homeowners insurance is required by lenders as a requirement
to obtain a mortgage.
What is the difference between "actual cash value"
and "replacement cost"?
losses under a homeowners policy can be paid on either an actual
cash value basis or on a replacement cost basis. When "actual
cash value" is used, the policyowner is entitled to the
depreciated value of the damaged property so the older
the item is, the less money you may receive for it. Under the
"replacement cost" coverage, the policyowner is reimbursed
the amount it costs to replace the property with something of
a similar type and quality at current prices.
What are the limits in the standard homeowners policy?
this answer is based on the Insurance Services Office's HO-3
policy.] Coverage A and B cover your dwelling and other structures
on the premises on an "all risks" basis up to the
set the limit for Coverage A when you buy the policy. The Coverage
B limit is usually equal to 10% of the policy limit on Coverage
A. Coverage C covers losses to your personal property on a "named
perils" basis, which means youre covered for all
the perils specifically named on your policy. The policy limit
on Coverage C is equal to 50% of the policy limit on Coverage
A. Coverage D covers extra expenses you may incur when the residence
cant be used because of an insured loss. The policy limit
for Coverage D is equal to 20% of the policy limit on Coverage
A. You choose the Coverage E - personal liability - limit when
you buy the policy. The limit on Coverage F - medical payments
to others - is usually set at $1000 per injured person.
Where and when is my personal property covered?
C, the named perils coverage, applies to all your personal property
(except property specifically excluded) anywhere in the world.
For example, suppose that while traveling, you purchased a dresser
and you wanted to ship it home. Your homeowners policy would
provide coverage while the dresser is in transit - even though
the dresser has never been in your home before.
Do I need earthquake coverage? How can I get it?
damages due to earthquakes are not covered under standard homeowners
insurance policies. And unless you live in an area prone to
earthquakes, you probably dont need it. If you do live
in a part of the country with high earthquake activity you may
want to consider adding an earthquake endorsement to your homeowners
insurance policy. This will cover damages due to earthquakes,
landslides, volcanic eruptions and other earth movements.
What should I consider when buying homeowners insurance?
and foremost, buy the amount and type of insurance you need.
Remember: if your policy limit is less than 80% of the replacement
cost of your home, you will face a "coinsurance penalty,"
which means youll have out-of-pocket expenses to cover
costs beyond your policys deductible. For example: Your
home's estimated replacement value (RCV) is $100,000. The co-insurance
clause requires you carry at least $80,000 (80% of your RCV),
so you would be underinsured by half if you bought a $40,000
policy. In such a scenario, the company would pay half of a
loss less the policy deductible - so if you had a $500 deductible
and suffered a $10,000 covered loss, your policy would only
figure out how much personal property insurance and personal
liability coverage you need. Personal property, like a home,
should be insured for its replacement value. Personal liability
is a bit more subjective, but limits should not be less than
those on other liability insurance such as auto. Seek advice
from a financial or legal professional if in doubt. Finally,
think about the extras you could add to your policy. For example,
do you want the personal property replacement cost endorsement
or the earthquake endorsement? Finally, once you have decided
on the coverage you want, you can decide which insurer you would
like to purchase the insurance from. You should also decide
whether you would like an insurance agent to help you make decisions
or you want to buy the product directly from an insurer without
What is the difference between an "all risks" policy
and a "named perils" policy?
named perils policy covers losses that are due to only those
perils listed in the policy. Those typically include fire, windstorm,
hail, and other physical losses. An all risks policy covers
losses that are due to any peril except those specifically excluded
in the policy. An all risks policy provides broader protection
than a named perils policy.
What can I do to lower the cost of my homeowners insurance?
best thing to do is to shop around. You could find quotes on
homeowners insurance that vary by hundreds of dollars for the
same coverage on the same home. When you shop, make sure each
insurer is offering the same coverage. Many insurers use the
ISO policy forms, but this is not always the case. Another way
to cut costs is to look for discounts that apply to you. For
example, many insurers will offer a discount when you buy both
your automobile and homeowners insurance from them. Some insurers
offer discounts if you have deadbolt exterior locks on all your
doors, or if your home has a security system. Ask your agent
or company about discounts. Another easy way to save is to raise
your deductible. Increasing your deductible from $250 to $500
will lower your premium, sometimes by as much as five or ten
percent. However, you should be sure you have enough cash on
hand to cover the larger deductible in case of emergency.
If I have an accident I think is covered under my homeowners
policy, what should I do?
contracts are conditional contracts, which means policyowners
have certain responsibilities to meet if a covered loss occurs.
Not completing these can result in non-payment by the insurance
company for losses that otherwise would have been covered. These
include: (1) notifying the insurance company or the agent that
a loss has occurred -- this should be done as soon as you discover
the loss; (2) protecting the property from further damage and/or
making any repairs necessary to prevent further damage; (3)
preparing a detailed list of the personal items damaged that
contains descriptions, the items actual cash value, or
their replacement cost if you have added the replacement cost
endorsement to your policy; (4) being prepared to show the company
and/or the insurance agent the damaged items; (5) completing
a statement for the insurance company that explains how the
loss occurred -- for example, the time the damage occurred,
the cause, etc.
Who pays for my legal defense costs if I am sued?
the unfortunate event that you are sued, your homeowners policy
will not only cover the cost of your legal defense, but your
insurance company will also provide the legal counsel.