What is Covered Under My Homeowners Insurance and How Much Coverage Do I Need?
When you sit down to review your homeowners insurance coverage every year, wouldn’t it be great to have a better understanding of what all those policy terms and contract clauses mean? That might be asking a lot, but you can never know too much about your insurance coverage! There is nothing worse than having a loss and then discovering that you didn’t understand or weren’t fully informed about the kind of protection and the amount of coverage that you have.
Consider taking some time to familiarize yourself with your homeowners insurance policy. After all, it protects what is probably your greatest asset—your home.
What is Covered Under My Homeowners Insurance Policy?
Most homeowners insurance policies include four areas of coverage:
- Dwelling coverage
- Other structures coverage
- Personal property coverage
- Loss of use coverage
Each of these areas of protection is described below.
Dwelling coverage provides protection for damage to the interior or exterior of your house (the structure) due to fire, hurricanes, lightning, vandalism or other specified “covered perils,” or causes of loss. Dwelling coverage applies to your house and any attached structures, as well as fixtures in the house like built-in appliances, plumbing, heating, electrical wiring and so on. Damage due to floods or earthquakes is not covered by your dwelling coverage; you need to purchase special earthquake coverage if you live in an area that is prone to earthquakes, and flood insurance is available from FEMA’s National Flood Insurance Program (NFIP). Find information about the NFIP at FloodSmart.gov .
Other structures coverage provides protection for damage to detached structures on your property, including garages, storage sheds, fences, driveways, sidewalks, patio and retaining walls.
Personal property coverage covers loss or damage to the contents of your home, including clothes, furniture, appliances and most of your other personal property. Some policies provide “off premises” coverage for personal property that is lost or damaged when it is not on your property, so if you lose an expensive piece of jewelry while you are away from home, you might be covered for the loss. You can add endorsements or riders—scheduled personal property coverage—to your basic policy for specified high-value items like furs, jewelry and artwork to ensure that you are reimbursed for their appraised value in the event of a loss. Otherwise, your policy might only provide coverage for up to a certain pre-set limit for these items.
Keep in mind that your personal property coverage limit will probably be written as a percentage of your dwelling coverage amount. A great way to determine if this amount is appropriate is to prepare a home inventory.
Loss of use coverage provides for your temporary living expenses if you cannot live in your home while repairs are being made, or if you cannot enter your home because of an order from the government (e.g. during a natural disaster). This coverage reimburses you for the costs
of rent, hotel rooms, restaurant meals and other incidental expenses that you incur because you cannot live in your home.
Personal liability coverage is also included in your homeowners insurance policy. This means that if you, a family member or a pet injures someone or damages someone else’s property, your insurance company will pay for the repairs or medical bills.
How Does My Insurance Policy Calculate Reimbursement if I Have a Loss?
Insurance companies use two basic methods to calculate how you will be reimbursed for a loss. The type of coverage you have will have a significant affect on whether or not you can sufficiently make repairs or rebuild after a loss.
Actual cash value policies reimburse claims based on the amount needed to replace or rebuild lost or damaged property, less depreciation. If you have an actual cash value homeowners insurance policy, you will be reimbursed for what your items are worth now, not what it would cost to purchase a comparable item at today’s prices.
Replacement cost policies pay claims based on the amount needed to replace or rebuild your property or repair damages using similar materials to what you had before. If you have replacement cost coverage, you should be able to make repairs or rebuild using the same or similar materials, at today’s prices.
Actual cash value policies are generally less expensive than replacement cost policies. But in this case, cheaper is not necessarily better. If you have a loss, you may not be able to rebuild your home or replace your belongings sufficiently without replacement cost coverage, with far greater financial consequences for you than saving a few dollars on your monthly premium.
In both cases, you will need to satisfy your deductible before your insurance coverage kicks in.
How Do I Know if I Have Enough Coverage?
The best way to determine the value of your possessions—and know if you have enough insurance coverage—is to take a personal property inventory. A home inventory helps you evaluate the value of your possessions, and can help you get a claim settled faster with less red tape.
Go from room to room and record all of your possessions. This may sound like a lot of work, but it is worth it. You can even make a video recording or take pictures of every room. Take note of the price you paid for each item, the approximate date of purchase, and any model numbers or other pertinent information. Don’t forget to include your garage, the attic and even your vehicles.
After you prepare your inventory, secure it in a safe place. Remember to continuously update it as needed, especially if you make any major purchases.
We recommend that you review your homeowners insurance coverage every year. You may have made significant purchases or want to change your deductibles, or changes in building and materials costs may impact the replacement cost of your home. Have you prepared a home inventory yet? We can help you get started.