WHAT DOES A STANDARD HOMEOWNERS POLICY COVER?
GENERALLY, A HOMEOWNERS’ POLICY CAN BE DIVIDED INTO FIVE SEPARATE CATEGORIES. THE DEFINITIONS OF THE PROPERTY, AND THE EXTENT OF COVERAGE VARY BY STATE, COMPANY AND PRODUCT.
1.) DWELLING – the structure of the house and all other permanently attached structures.
2.) OTHER STRUCTURES – these are structures that are detached from the house, or connected to the house by a fence, wire or other form, but not otherwise attached to the dwelling, such as a guest house or detached garage.
3.) PERSONAL PROPERTY – The personal contents of your home. This includes furniture, appliances and clothing. Not all personal property is covered. Items more appropriately covered under different forms of insurance may have limited or no coverage for loss. These items include, but are not limited to, money, jewelry and firearms. Typically there are sub-limits for these special items; which will vary by company.
4.) PERSONAL LIABILITY – Personal liability coverage within your homeowners’ policy provides coverage for bodily injury and/or property damage sustained by others for which you or your immediate family members are legally responsible.
5.) LOSS OF USE – When a loss occurs due to a covered peril and the dwelling becomes uninhabitable, the cost of additional living expenses is covered. Reimbursement of additional living expenses covers the cost to the insured for maintaining a normal standard of living.
“OPEN PERILS” AND “NAMED PERILS” COVERAGE
A peril, as referred to in an insurance policy, is a cause of loss, such as fire or theft. Coverage can be provided on an “open perils” basis, or a “named perils” basis. Named Perils policies list exactly what is covered by the policy, while Open Perils (formerly called All Perils) policies will cover all perils other than what is excluded. Named Perils policies are generally more restrictive. A dwelling policy usually provides coverage for both the dwelling and contents on a named perils basis, while a homeowners policy usually provides coverage for the dwelling on an open perils basis, and for the contents on a named perils basis.
DOES MY POLICY COVER THAT?
1. EARTHQUAKES – Most property insurance policies exclude coverage for losses resulting from earthquakes (although they often cover losses related to fires following earthquakes). Specific earthquake policies are typically required to ensure coverage against losses from earthquakes. Some states with risk of loss from earthquakes have government mandated insurance plans that provide earthquake coverage to property owners who are unable to obtain insurance through the open market.
2. FLOOD – Most property insurance policies exclude coverage for losses resulting from flood. Therefore; unless you purchase a specific flood policy, you do not have coverage for flood losses.
3. HAIL – Most property insurance policies provide coverage for losses resulting from hail. Hail is a named peril, meaning for coverage to apply under a “Named Perils” policy, hail must be defined as a covered peril.
4. HURRICANES – Most property insurance policies provide coverage for losses resulting from hurricanes, except for flood loss associated with the hurricane. However, some policies will provide limited coverage for hurricanes, or require a higher deductible be purchased specifically for the hurricane peril. Most states with risk of hurricanes have government mandated insurance plans that provide hurricane coverage to property owners who are unable to obtain insurance through the voluntary market.
5. TORNADOES – Most property insurance policies provide coverage for losses resulting from tornadoes (wind) although they do not cover losses resulting from the peril of flood. While tornadoes may not be specifically mentioned as a covered cause of loss, tornado losses are one event covered under the broader term windstorm. Windstorm includes tornadoes, straight-line winds and hurricanes.
However, there may be instances where coverages and deductibles may apply specifically to hurricane and not to all windstorms.
6. WILDFIRES – All property insurance policies provide coverage for losses resulting from fires. Depending on the level of exposure, you may need to consider a higher deductible to obtain coverage, or keep it affordable. Most states have coverage available via the FAIR plan, or a JUA, if the voluntary market is not willing to provide coverage.
HOW MUCH INSURANCE IS ENOUGH?
Depending on the type of policy and valuation used, the different dwelling/property coverage options could be:
1. REPLACEMENT COST COVERAGE – The cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation. This is generally the best way to insure your property.
2. ACTUAL CASH VALUE – (ACV) can be calculated in one of three ways; (1) The cost to repair or replace the damaged property, minus depreciation; (2) The damaged property’s “fair market value”; or (3) Using the “broad evidence rule,” which calls for considering all relevant evidence of the value of the damaged property.
3. SPECIAL PAYMENT – Loss is paid before dwelling is repaired, rebuilt or replaced; in which Actual Cash Value (above) will typically be paid.
4. FUNCTIONAL REPLACEMENT COST OR MARKET VALUE COVERAGE – Repairs are made using common, modern materials and methods without deduction for depreciation unless repairs are not made, and if a total loss, the payment amount will be the ‘market value’ of the home.
5. STATED VALUE – A selected value is established by the insured, and this value is the limit of liability. Depending on the coverage valuation you select, the settlement at the time of loss can vary drastically. A loss can be settled based on a replacement cost, repair cost, or actual cash value basis. Replacement cost is not the market value of your home, nor is it the tax-assessed value. It is the cost to replace the damaged property, with no reduction for depreciation of the damaged property. Actual cash value is the cost to replace the damaged property reduced by an allowance for depreciation. Functional cost or market value (also known as repair cost) is the cost to repair the damaged property with equivalent construction for similar use. An example of functional replacement would be to replace a plaster wall with drywall. If stated value coverage is selected, the maximum amount paid at the time of loss is the value of the policy, even if the loss amount is larger than the value of the policy.
WHAT DOES INSURANCE-TO-VALUE RATIO MEAN?
This is the relationship of the amount of insurance purchased to the estimated replacement value of the property. It is important to have an accurate assessment of the replacement cost value of your home. If you do not, and then incur a loss, the cost to actually replace your home may be more than your limit of insurance; leaving you with insufficient coverage. That means you would be responsible for covering the difference. Major catastrophes, such as earthquakes, hurricanes, and wildfires can often create a demand surge for materials and labor, resulting in increased costs to replace damaged property. This must be considered when establishing the appropriate replacement cost for your property. Most property policies require that the property be insured to at least 80% of the replacement cost, or loss payments will be reduced by a proportion of the insured value to 80% of replacement value. This is referred to as the coinsurance penalty. It is also important to realize that other limits within your policy are a percentage of the dwelling coverage amount. For example, the limit of coverage for your personal property will usually be at a standard 50% of the dwelling limit. Additional coverage is available via endorsement, and is typically increased if you purchase replacement cost coverage for your contents.
REPLACEMENT COST COVERAGE
In order to qualify for replacement cost coverage, you will likely be required to insure your property to at least 90%+ of the total estimated replacement cost of all covered property. As long as this requirement is met, and if you incur a total loss, your insurance policy will cover the total cost of replacing your home up to the chosen limit. Further, if the property is not insured to at least the coinsurance value (80%-90%), then the payment for partial losses may be reduced by the same percentage with which you were not compliant. Additional Limits in Case of Total Loss
Many insurance companies offer an endorsement that will provide the full coverage to replace the property in the event of a total loss. Usually, the company requires that the property be insured to at least 100% of the replacement cost of the property in order to qualify for this additional coverage. As long as this requirement is met, if you have a total loss and it costs more to replace than your limit (from a mis-estimate or demand surge), your insurance policy will be increased. The amount of the increase depends on the endorsement purchased, and can be anywhere from 25% to 100% of your chosen limit of insurance. This is typically called a “guaranteed replacement cost’ endorsement.
Additional coverages can be substantial and may be included in your policy with low limits, or available for a separate price upon request. Coverages such as:
– Ordinance or Law; which provides coverage for enforcement of ordinances or laws regulating construction and repair of damaged buildings. Typically this includes city building codes which now require additional construction to both the damaged & undamaged portion of a structure. These additional costs are NOT typically covered under the standard dwelling or property policy.
– Water & Sewer Backup; another optional coverage not typically covered under the standard property policy; which pays in the event your sewer backs up through the drain or toilet and the water then overflows into your house/property. This is not considered “water damage” and is only covered by this endorsement. Specific limits will apply. Items such as this may be available separately as endorsements to your policy. This includes earthquake or flood coverage which can often be purchased as an endorsement to a homeowners policy.