David G. Pipes, CLU®, RICP® PRO
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
The annual premium for a homeowner’s insurance policy is an individual computation because the policy itself is tailored to the specific requirements of the named insured and the property being covered. Even though premiums and coverages may be similar in a neighborhood with similar homes, there will usually be peculiarities that will make most of them somewhat different.
Every home has a fire rating. That fire rating is based upon proximity to a manned fire station and adequate water. Those ratings are published and used by most insurance companies. The fire rating is often a mystery to homeowners because they rely upon the fire station down the road one mile, however, their home is not in the district covered by that fire station. There are complicated agreements between fire districts that allow them to cross boundaries and assist in fires but each has a primary area of coverage that always receives priority.
Homeowners often rely upon standing bodies of water and consider them adequate for firefighting. Again, that is a matter of evaluation and does enter into the fire rating. However, a swimming pool will not necessarily improve the fire rating of a home.
Insurance companies mine the mountains of information available on losses and can identify the loss differences based upon territories. These territories are usually bounded by zip codes. They become a part of the rating process that determines the premium charged for coverage.
The major determinant in the development of the premium for a homeowner’s policy is the cost of rebuilding the residence. Because a homeowner’s policy is based upon a formula, this amount drives the amount of coverages extended to
personal property and non-attached structures on the property. This figure is determined, generally, by an outside evaluation system. Frequently the cost of rebuilding the residence doesn’t match the price paid for the house or the estimated value of the house. While this is a source of consternation it is the cost of rebuilding the residence that guides the limits of the policy.
There are certain risks that are excluded or limited. Coverage for some of these can be purchased in the homeowner’s policy. There might be a limit on the coverage for guns, jewelry, furs, currency and art. Some of this coverage can be purchased. There are exclusions for flood and earthquake and limited earthquake coverage is usually available for purchase. Flood insurance is almost always a separate policy. An often overlooked coverage is sewer backup. This is excluded in most policies but coverage can be purchased. Another is law and ordinance. The additional cost of repairing a house caused by changes in laws and ordinances is not covered in a normal policy but that coverage can be purchased.
Liability insurance is the second part of a homeowner’s policy and could be the most important. The coverage extends to claims of personal injury and property damage and covers a wide range of scenarios. The homeowner can select the limit of coverage and this affects the premium. This is a place where a homeowner can be “penny-wise and pound foolish.” You cannot have too much liability insurance.
The computation for a homeowner’s premium is complicated. Some of the pricing is your individual choices and preference. Consult with a licensed agent for advice as choosing incorrect limits can lead to extreme displeasure at the time of a claim.
Answered on October 31, 2014