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Hidden home insurance loopholes can shock you

Read the Spanish version: Secretos sobre seguros de casa que te impactarán

home insurance loopholesSome aspects of your home insurance policy -- like rates and deductibles -- are relatively easy to find on your policy and understand. But some clauses lay buried within your policy's declarations and exclusions pages. If left unexplored, these stipulations can lead to headaches if you ever have to file a claim.

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Don't wait until disaster strikes to find out what is -- and is not – covered by your policy.

Sneaky home insurance deductibles

If you have to file a claim, watch out for a sneaky loophole that deals with deductibles. Some home insurance companies have different deductibles for certain perils. You are probably aware of how much your deductible costs for regular perils covered in your policy. But homeowner insurance in high-risk hurricane areas (like the Gulf Coast) or tornado zones (like the Midwest) typically have a “special” separate and different deductible if you file a claim for damages caused by hurricanes or tornados.

"These separate deductibles are based on the insured property's value," says Robert Hunter,  insurance director for the Consumer Federation of America and former Texas Insurance Commissioner who is also familiar with setting property insurance rate reductions for Florida. "They're often about 5 percent of the home's value."

For example, if your home is valued at $200,000, your "standard coverage" deductible for "other perils" losses like fire, burglary and such may be between $500 and $1,000. But Hunter says the hurricane and tornado deductible could be $10,000. That’s quite a difference if you’re not prepared to pay it. 

Why two deductibles?

"Separate hurricane deductibles are written into home insurance policies to control an insurer's exposure to catastrophic loss, moderate the price of coverage and improve coverage availability," says Bob Dean, president and CEO of Dean & Draper Insurance Agency LLP in Houston, Texas.

A tale of two insurance perils

According to Hunter, another especially egregious home insurance loophole is the "anti-concurrent causation clause." This one earned a nasty reputation following Hurricane Katrina.

According to this clause, if two events happen at roughly the same time (regardless of their order of occurrence) and one is covered and the other is not, the entire claim will be denied. So if your home is damaged by a windstorm (which is a covered peril in a standard policy) but it’s soon after also damaged by a flood – and you don’t have flood insurance – your insurer won’t cover the wind damage. "Even if the wind is what ripped off your roof to cause the flood," says Hunter.

Hunter says another example is vandalism and flood. "I was consulted on a claim where a vandal broke into a yard with a pool and the vandalism to the pool caused the home to flood. Because the owner didn't have flood insurance, neither the vandalism nor the flood damage was covered," he says.

Dean says the “anti-concurrent causation clause” is found in just about every home insurance policy. "There's the chance that anyone could have two casualties at or around the same time," he adds.

If you’re wondering where in your home insurance policy this clause can be found, Dean suggests checking the exclusions section.

This clause has led a public outrage because thousands of claims have been partially or completely denied. But the seemingly unfair wording is commonly upheld. "Past court rulings have upheld the use of the anti-concurrent causation clause and have not found it to be ambiguous in its wording," Dean says.

Coverage caps

In addition to clauses, Dean says there’s also a coverage cap to watch out for.

"Water damage is typically covered under a homeowner insurance policy but that coverage often comes with a cap or ‘up to the policy’ limits," he says.

A standard home insurance policy also typically has exclusions for water damage from flood, surface water, waves and overflow from a body of water. Some insurers may also have coverage limitations for basements.

Coverage limits are also typical jewelry, coins, firearms and antiques.

Compromised structures

Another common home insurance loophole concerns coverage relating to certain structures of your home or a shed.

Perhaps honeybees buzzed their way through your siding and built a hive that's compromising your home's foundation. Maybe termites have eaten into your home and left you to foot their lunch tab. Dean says some insurance companies may argue that since bees and termites have been around for centuries, they could have been attacking your home prior to the coverage going into effect.

Read your entire policy -- even all the fine print -- before purchasing or renewing your home insurance policy. "And check with your agent about every possible coverage exclusion or limitation to understand how your carrier will respond if you file a claim,” Dean says.

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