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How to read your homeowners insurance policy

Your home is likely your most valuable asset, and a homeowners policy is an important part of protecting your home and your belongings. If you have a mortgage on your home, your lender probably required you to get a homeowners policy. But even without a mortgage, it’s still your best bet to protect your investment.

But do you even know what’s in your policy? Would you know your coverage in the event of an emergency? Many of us haven’t taken the time to properly review this contract, but here’s how you can finally tackle that chore.

Understand the basics of homeowners insurance

Review declaration page

Overview of your property coverage

Understanding your personal liability

Important definitions for homeowners

Advice from insurance experts

Understand the basics of homeowners insurance

The basic job of a homeowners policy is to protect your home and possessions from certain perils, such as wind, hail, fire damage and theft. It also offers liability protection, which protects your assets from liability claims, medical expenses and other damages if people are injured on your property.

Most common types of homeowners policies

The type of home you own will usually dictate the coverage type you have. You can read more about the usual eight types of homeowners policies, but here are the three most common options:

HO-2 A basic named-peril policy, meaning only specific perils are covered. Personal property is covered, but these policies are only recommended for the most basic coverage needs. Some examples of covered basic perils are theft, vandalism, wind, fire and lightning, and weight of ice, snow or sleet.
HO-3 The HO-3 is the most common policy type and offers a wide range of coverage. This is an exclusion policy, which means that all perils are covered except those specifically called out in the policy. Common exclusions are earthquakes, flood, mudslides, nuclear accidents, terrorism/acts of war and sinkholes. Personal property is only protected against the same perils covered by a HO-2 policy.
HO-4 An HO-4 policy is more commonly known as renters insurance. It covers all of your personal property in an apartment or rented house. It also offers liability protection in the event someone is injured in your apartment.

Review the declaration page

While the majority of insurers use fairly standard forms to compile their homeowner policies, there can be differences. “Each policy will spell out certain things that are covered and others that are excluded, but they can vary from company to company,” explains Carole Walker, Executive Director of the Rocky Mountain Insurance Information Association.

The forms can vary, but in most cases, the layout of a policy is fairly consistent.

The declaration page should be reviewed carefully. It summarizes your coverages, as well as your personal and home information.

Information included on the declaration page:

  • Policy number
  • Policy period – the period of time the policy covers
  • Name and address of the policy owner
  • Address of the insured premises
  • Name of mortgagee – usually your mortgage company
  • Coverage types and policy limits that apply to your policy
  • Deductible amount for the policy
  • Home-rating information
  • Discounts received
  • Premium amount

Give the declaration page a thorough reading. Review the personal information for errors, and check that it reflects the proper coverage levels, as well as any additional riders you may have added.

Overview of your property coverage

When it comes to homeowners coverage, you need enough insurance in the event that you need to cover the cost of the following after a disaster:

  • Rebuilding the structure of your home
  • Replacing your personal property
  • Paying for the cost of additional living expenses (if you need to live somewhere else while your home is repaired or rebuilt)
  • Covering the cost of personal liability claims

Section I coverage A – Dwelling

A homeowner policy is broken into two parts; section I details your property coverage, and section II describes the liability coverages offered by your policy.

When it comes to the structure of your home, you should carry enough insurance to cover the cost of rebuilding your home, not the market value of your house.

An insurance agent can help you determine appropriate coverage levels in your area, but here’s a quick calculation:

Total square footage of your home  X  local per foot building costs = Approximate coverage amount

You can get your local costs by contacting a real estate agent or a building association. The cost of the land is not added into your calculations, but you do need to factor in current construction costs.

14 things that need a rider

Also, add in the cost of any upgrades you have made (that would cost more than the average per square- foot costs) or any unique materials you have used and would want to replicate.

Section I coverage B - Personal property

In most cases, personal property coverage is a percentage of your policy limits. The majority of policies cover personal property at 50 to 70 percent of the amount of structure coverage you have.

Do a detailed home-inventory list to determine if this will be enough. High-value property, such as jewelry, art, guns and coin collections, are usually limited to $2,500. If your items exceed this amount, it’s wise to purchase a rider to up the limit on these types of items.

Section I coverage C – Loss of use

This component of a homeowners policy will pay for additional costs that you incur when it is necessary to live away from your home due to damage from a covered peril. The coverage will pay for up to 12 months of the necessary difference in living expenses required to maintain your family’s current standard of living.

For example, if you normally spend $1,000 of groceries and dining each month, but your displacement causes the grocery and dining bills to increase to $1,400, your insurance will pay the additional $400.

This coverage will vary by insurer, but most policies offer 10 percent of your home coverage with additional coverage available for a price.

Loss of use

Additional information in Section I

After reviewing these sections in detail, have a look at the additional information that is included.

  • Additional coverage: This spells out any additional coverages that are included with a policy. Examples of these are temporary repairs, landscaping replacement amounts and even debris removal. Carefully review this section to make sure it includes everything you might need.
  • Losses insured: This section spells out exactly what perils are covered, as well as any other conditions that must apply for a loss to be covered.
  • Losses not insured: Review this section in detail, and ask questions if you don’t understand something. Common exclusions include mold, fungus, flooding, earth movement, acts of war/terrorism and nuclear hazard.

Understand your personal liability coverage

Section II - Liability

The liability portion of a homeowners policy protects you against lawsuits for property damage or bodily injury that you or members of your family cause to other people. Examples of this would be a guest slipping on an icy sidewalk, tripping down your stairs or being bitten by your dog.

The liability portion of your policy covers the following:

  • Injured party’s medical bills
  • Legal fees
  • Any damages awarded to the injured party

Most homeowners policies offer a minimum of $100,000 worth of liability coverage, but this is often not enough to cover all expenses. Industry experts recommend carrying at least $300,000 to $500,000.

If you’re in a position when you think it would be beneficial to have additional personal liability insurance, you can look into an umbrella policy.  Umbrella insurance provides extra liability protection above the limits of your car and home insurance policies. It covers damage claims that you, your dependents or your pets cause to others, and it kicks in once claims exceed your home insurance and auto insurance liability limits.

Important definitions for homeowners

Because insurance policies are written in a legal language, all homeowner policies come with a section dedicated to defining certain words. Here are just a few definitions you should be aware of when reading your policy:

Replacement cost: Not understanding this term can be an expensive oversight. This simply means that your policy pays for the full amount to replace your dwelling or property, up to a maximum dollar limit,” explains Bret Boizelle with Boizelle Insurance Partnership. In other words, it doesn’t matter if your TV is 15 years old, you are getting reimbursed for the cost of a brand new one.

Actual cash value: This is the flipside of replacement cost. “This type of coverage takes depreciation into account when calculating your payout,” says Boizelle. This means you are getting a much smaller check for that 15-year-old TV. Actual cash value does result in lower premiums, but it could end up leaving you with a large gap between the amount of the check you receive and how it costs to refurnish your home.Quote

Deductible: While most of us understand the concept of deductibles, homeowner policies can have specialty deductibles. According to Travis Biggert with Hub International, “Many states have instituted separate deductibles for wind and hail, and many policyholders don’t understand them.”

In some states the wind or hail deductible can be a percentage of your coverage instead of a set amount. As an example, a 10 percent wind deductible on a home insured for $300,000 puts the deductible at $3,000.

Insured: This spells out who is covered by your policy. If you have a pet, verify that the pet falls under this definition. This can be important if Fido bites someone, as the victim could sue. Many insurers exclude certain breeds, so verify your pet is covered.

Advice from insurance experts

Here are a few tips from industry experts to help you navigate the world of homeowners insurance:

Review your quote with an expert. Homeowners insurance can be tricky, so it pays to consult an expert after you narrow down your choices from a batch of quotes. “Never shop on price alone,” advises Kristofer Kirchen, President of Advanced Insurance Managers, “as you usually get what you pay for.”

Coverage levels are key. Understanding your coverage levels is important. “There is nothing worse than receiving a bill for an insurance-related fix and having the insurance company not cover all of it due to a technicality in the policy,” says Sacha Ferrandi, Founder of Source Capital Funding.

Inventory your personal property and review your coverage limits to make sure the limits will easily cover your items replacement costs.

Add-ons can be worth it. There are a number of riders that can be added to a policy, and many of them are well worth the price. “Consider adding sewer and drain backup coverage to your homeowners policy. It is one of the most common homeowners claims, averaging $10,000-$20,000 in expenses, and it is almost always excluded from a basic policy,” warns Boizelle.

The same goes for high-value items. “Valuable jewelry needs to specifically listed and appraised on a policy to make sure items are sufficiently covered. If items are not scheduled, most policies will only pay between $1,000 and $2,500 per item,” says Boizelle.

Any time you make a change or improvement to your home, you should review the dwelling coverage on your policy. If you’ve finished your basement, updated your kitchen or bathroom, it’s time to call your agent.

Be honest with your insurer.  Always be honest with your insurer. Misleading them about the breed of your dog can be an expensive mistake if it turns out to be an excluded breed. “Be truthful regarding all exposures you have,” says Kirchen. “This will ensure your agent has a full picture of what needs to be insured and exposures that need to be avoided. Remember, failure to disclose material facts is grounds for a claim to be denied or the policy cancelled entirely,” continues Kirchen.Quote 2

Shop smart: The cost of homeowners insurance has been on the rise for a number of years, so shopping your coverage regularly has never been more important. “It’s very important to be a smart consumer, and shop your policy on a regular basis,” says Walker.

A few tips from Walker on obtaining the best premium rate possible:

  • Carry at least a $1,000 deductible (as long as you can afford it), which will lower your premium.
  • Don’t file small claims. Save your insurance for big events.
  • Ask about discounts. Fire and hail resistant building materials will result in a discount, as will security systems and monitored smoke detectors.
  • Bundling your coverages, such as auto and home, should result in a significant discount.
  • Maintain your credit score as it has a major impact on your premium (in nearly all states).

Compare the best home insurance companies for the best rates

If your review turned up exclusions you are unhappy with, minimum coverage levels or is simply not offering the protection you need, it’s time to shop around.

Rates can vary dramatically between insurers, so get quotes from a variety of the best home insurance companies, and be sure that you are comparing apples to apples in regards to coverage levels and deductibles.

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