What makes up your homeowners policy and what is required
You aren’t able to pick and choose what categories you want – there are six different components to homeowners insurance, all of which are required, which we’ll discuss below.
However, depending on your possessions, type of home, and your financial cushion, you can choose a coverage level for each category to get a plan that works best for you, while keeping your costs down.
What Does Homeowners Insurance Protect Against?
In most standard policies, you will be covered for damage to your home and its contents as well as liability for accidents that occur on your property. As a homeowner, it’s important to carry insurance not only against damage to the house itself, but also to the contents of the house if something should happen, such as a fire or flood.
You will also generally carry liability insurance to protect you in the event that someone else or their property is hurt or damaged in an accident on your property. Without insurance, you could end up with a lawsuit filed against you personally. Adding umbrella liability insurance coverage might also be a good idea.
How Much Insurance Do You Need?
The level of homeowners insurance coverage that you’ll need from your homeowners insurance is generally determined by 3 things:
- Asset Protection
Depending on the premium level you choose, you’ll have to pay more or less out of your own pocket if an accident occurs. If you have a larger financial cushion, you might be able to choose a lower premium which will provide less financial help or carry a larger deductible. Also, if you have a lot of assets which might be at stake in a lawsuit, you may wish to choose a higher level of liability insurance to protect those assets if you are sued.
- Lender Requirements
If you have a mortgage, your lender may require that you carry homeowners insurance. Generally the minimum coverage is the amount of the mortgage, so that if there is a catastrophic event such as a home fireand the house is a total loss, the mortgage company will be able to recoup the remainder of your balance. Obviously, having more coverage will mean the insurance will be able to benefit you as well as your bank.
- Policy Requirements
Your insurance company may require that you purchase specific types of coverage, such as flood insurance if you live in a flood-prone area, in order to carry general homeowners insurance.
Types of Homeowners Insurance Coverage
There are four basic types of coverage for homeowners, which are further broken down into six separate types of coverage below. The levels of coverage you need for these six different areas are what your insurance company will base your premium calculations on.
- Property Damage
This covers damage to your home, such as from fire, wind, or hail. Generally the cost of repairs over the deductible will be covered once the insurance company has determined that the damage is coverable. In some policies, damage from events such as a flood or earthquake is not included, and you will need to buy specific coverage to cover damage from those events and prepare for natural disasters.
Your insurance company will break down your coverage levels for property damage into three separate categories, and you’ll generally be able to choose levels of coverage for each category:
Coverage A is usually your highest and most important coverage, because it covers anything involving your dwelling or the physical structure of your home. It includes the core structure of the home, flooring, roofing, doors, cabinets, appliances, light fixtures, and much more. If you imagine that your home was suddenly flipped upside down, anything that stayed in place and didn’t move would be considered to be part of your Coverage A. Kitchen appliances and washers/dryers are sometimes covered under Coverage A.
It’s important to check whether you have a “broad” form of Coverage A or an “all perils” Coverage A policy. Remember, “all perils” does not mean that you are covered for everything, just that you are covered for everything except items specifically excluded in the policy.
There are numerous exclusions in a homeowners policy that many people aren’t aware of. The most common exclusion is wear & tear and deterioration. If the roof leaks due to old age or an old plumbing pipe breaks, the policy will not pay to repair the roof or fix the pipe. (A home warranty probably would, but your home insurance doesn’t cover old age.) However, homeowners insurance generally will pay for the resulting water damage due to the incident. Again, there may be some policies that deny this coverage altogether, but many will pay for the resulting water damage from a wear & tear incident.
A few special considerations: Many homeowners policies do not pay for mold damage by default. It is excluded, but many policies will add a limited amount of coverage back in. Many policies allow up to $10,000 for coverage due to any damage that is solely caused by mold. Don’t let an adjuster tell you it’s not covered or that it has a limit because mold was involved. If the damage is already there from water damage, then it will be covered under the general Coverage A limit and not under the mold limit.
Also, remember that frame houses are generally not covered for termite damage.
Coverage B covers all “other structures” other than your home that are unattached from the home. This includes sheds, fences, a separate garage, a mother-in-law suite that is not attached to the same foundation as the home, and any other structure on your property unattached from the main foundation.
This is one of the less important coverages, but still carries a heavy responsibility. It is often the area where most people are underinsured. If you install an expensive new fence or a new work garage on your property, make sure that you increase your Coverage B on your homeowners insurance. This is an area where, in a natural disaster like a hurricane, many people will find out that their insurance covers their main dwelling adequately but won’t cover the full amount of the damage to the outlying structures.
Coverage C covers all of your personal property. Anything that you would take with you when you move is considered to be your personal property in the world of insurance.
Unfortunately, this is often an area where many people end up without enough coverage and don’t even realize it. Large accidents such as water losses, fires, hurricanes, and other big losses will cover your personal property well. However, a homeowners policy often limits the total dollar value on certain categories of personal property, and many times it limits certain items for the amount that can be covered if there is burglary or theft.
For some expensive items, such as a large amount of jewelry, you must have them appraised separately and have the jewelry coverage added on your policy. Many policies will also limit the amount you can receive if china, guns, or cash were stolen, and most limit coverage of stolen watercraft or trailers.
Once you add this separate coverage, you will have full coverage up to the appraised amount, generally with no deductible, and virtually anything can happen to it and you’ll be reimbursed. This is also where you’ll want to pay extra to get a replacement cost property, or the insurance company will only reimburse for current market value. After all, it’s no fun if your five year old computer, now worth about $3, is stolen!
However, without getting this separate coverage, you run the risk of being subject to a limit if it is stolen, often as low as $1,000. The typical homeowners policy with no extra endorsements will also not extend coverage for losing an expensive piece of personal property. So, if you have any expensive jewelry or other expensive items that are easily lost or stolen, make sure that you inform your insurance agent and get appropriate coverage added to your policy.
- Additional Living Expenses
Coverage D is your additional living expense coverage. This covers the expenses you may incur if you are not able to live in your home for a period of time due to it being damaged beyond habitability, if it was damaged and is now under construction, or if you are not permitted to return to the area by government order (such as if there are wildfires in the area).
This is only applicable in situations where an accident or natural disaster has occurred, and not if, for example, your home is under non-emergency renovation. The main thing to remember with this coverage is that the insurance company pays only a “reasonable expense” for temporary housing and additional living expense. Your policy will determine how long you can claim this benefit and how much you can receive per day in reimbursement. Your insurance company will evaluate how much your home is insured for, and then figure out what a comparable rent payment would be for a similar dwelling.
So, if you have a home insured for $500,000, they will try to put you up in a home of similar size with comparable amenities which is renting in the range of $3,500 to $4,500 per month. If your home is only insured for $150,000, they will try to put you up in a smaller home or townhouse and pay about $1,500 to $2,000 for rent.
Also, the policy does cover expenses such as meals, but will only pay the amount above and beyond your normal expenses. So, if you normally spend $150 a week for food, but are living in a hotel and spend $300 a week on food since you do not have a kitchen to cook in, then the insurance company will reimburse you $150, not $300.
- Personal Liability
Coverage E (personal liability, bodily injury, and property damage) covers you and your family members against lawsuits involving injury or property damage. It also covers you if you cause damage to someone else’s property.
Your insurance company will defend you against lawsuits that fall under the terms of your policy and will pay any judgments up to the amount specified in your policy. This would be used if, for example, your dog bites a visitor who then sues you, or if you accidentally knock over your neighbor’s expensive vase; the coverage doesn’t apply if the lawsuits are auto- (e.g. car accident claims) or business-related.
- Medical Payment Coverage
Coverage F pays the medical expenses of anyone accidentally injured on your property or an area immediately adjoining it, such as a sidewalk or alley. This would be used if someone fell on your sidewalk and required medical attention, but did not sue you. Depending on the level of coverage you choose, these payments are usually capped at specific amounts.
This coverage doesn’t apply to you or your family members or other people who live in the house, however; it is only for visitors. It also doesn’t cover intentional acts or anything related to your home business.
Replacement Value vs. Actual Cash Value
“Replacement value” and “actual cash value” are two distinct ways insurance companies will use to determine the amount of the payment to the insured:
Replacement value refers to the reimbursement for rebuilding or replacing damaged items or structures in a manner similar to their previous construction. So if you had a large, expensive bay window that was smashed and you filed homeowners insurance claims, replacement value would mean how much the insurance company would pay to replace it with another large bay window of the same design, or of similar quality and durability. If your couch is destroyed in a house fire, they will pay to buy a new couch that is similar.
Actual cash value, on the other hand, means the insurance company will reimburse you for replacing the couch, but will only pay as much as the couch was worth at the time that it was destroyed. (The difference is referred to as depreciation.) Similarly, your smashed bay window might be replaced with a lower-quality version, since the window would have gone down in value since its installation.
In some situations, the insurance company may pay the actual cash value directly to you, and then once you have replaced the item and can provide a receipt showing the cost of replacement, the insurance company will reimburse you the remainder of the cost.
Have you checked your homeowners policy amounts recently, to make sure your coverage amounts are keeping up with the value of your home and possessions? What special coverage do you carry for jewelry or other property?