Homeowner Insurance Overview

Developed and refined over time, several forms of homeowner insurance now exist to provide coverage based on the type of housing and the risks to be insured. Due to its lower cost and broader protection, these new forms of coverage have generally replaced the basic fire type policies that were once common. There are basically six variations of homeowner policies as follows:

• HO 1 (Basic) - Fire, lightning, extended coverage, vandalism and malicious mischief, theft, glass breakage and comprehensive personal liability.
• HO 2 (Broad Form) - All the above and additional extended coverage, which provides coverage for other specified causes of loss.
• HO 3 - "All Risks" on buildings and broad form on personal property.
• HO 4 - Personal property coverage only; broad form policy, with coverage for tenants - rather than homeowners.
• HO 5 - "All Risks" coverage on buildings as well as on your personal property.
• HO 6 - Personal property and loss of use coverage (Broad Form) for condominium owners.

Homeowner policies contain a set of standard coverage's that may be altered by endorsements that can serve to increase the amount of insurance and/or broaden the coverage. Basic coverage's are grouped under two sections:

1. Dwelling

Appurtenant structures (detached garage, tool shed), Unscheduled personal property (furniture, clothes), Additional living expenses (cost of living away from home until damage is repaired). Coverage not included if residence is rented or provided.

 2. Comprehensive Personal Liability

Medical Payments To Others Policy Exclusions and Limitations - All Homeowner's policies (even the all-risk type) contain two types of exclusions. They exclude certain catastrophic perils such as earthquakes and floods.

They also limit the coverage on items such as jewelry, cameras and furs. All policy forms place a limit on what they will pay on the following losses, for example:

Endorsements to increase the coverage outlined above may be tailored to fit your needs and added to the policy coverage for additional premium. Furthermore, when you cover some items separately (by endorsement or rider) you may receive broader coverage.

Insure the Value Adequately

The insurance on your home is not its market value nor the actual cash value (replacement value less depreciation). Rather, it is the home's replacement cost. Replacement cost is defined as the full cost of repair or replacement without deduction for depreciation.

There is a clause in your policy requiring 80% coverage for the full replacement cost of your home. If you carry less than 80% of the replacement cost, claims will not be paid in full. The amount of the recovery or indemnification is determined by one of the following means:

1. The actual cash value of the destroyed section of the building.
2. The amount of coverage carried divided by 80% of the replacement cost multiplied by the cost to repair or replace the destroyed section of the building.

Let us take a closer look at how the 80% formula operates. Suppose you purchased a home fifteen years ago for $100,000 and insured it for $90,000. Since that time you have increased coverage to $120,000. However, inflation and your improvements to the home have driven the market value to $300,000 with $40,000 allocated for the lot. The formula is calculated as follows:

• 120,000 coverage divided by (80% of 260,000 replacement cost) = 57.69%
• This percentage multiplied by the cost of repair is the total you will be paid for the loss.

Therefore, if a fire destroys your kitchen, dining room, breakfast room and part of the roof, requiring painting of the entire house and dry cleaning all drapes to remove smoke damage, the bills could easily total $100,000.

Your insurance would pay $57,690 (57.69% of 100,000) and you could have to pay $42,310. Every year this happens to thousands of homeowners who have allowed their insurance to become inadequate.

Comprehensive Personal Liability and Medical Payments

Section 2 of your homeowner's policy covers personal liability and medical payments to others. Thus, if you become liable for damages, either bodily injury or property damage, the insurance company will pay these damages up to the policy limits. The coverage includes yourself or those hurt on your premises and covers you when away from home. It also includes sports and pet liability. This section also provides coverage for false arrest or imprisonment, malicious prosecution, humiliation, libel, slander and defamation.

We suggest a minimum of $300,000 of coverage. Typical limits for medical payments are $500 per person. This should be increased to at least $1,000.

Important Considerations

When reviewing your homeowner policy, several items should receive special attention. Remember, the additional premium for proper coverage may be bothersome, but will never be as critical as discovering that you were under insured, or not covered for a loss.

Appraise home to determine total replacement value

Check to see what the cost of building your home would be based on today's construction costs. Many older well-built homes often have a replacement cost much higher than market value.

Carry adequate amounts of insurance on your home

Make certain you carry at least 80% of the value of your home's replacement cost, so that losses will be settled on a full replacement cost basis.

Make an inventory of your household possessions

Include furniture, jewelry, furs, etc. You may wish to have this done by video and there are firms now that provides this service. Otherwise, you might consider taking several photos of each room.

Keep a copy of the household inventory outside the home

A safe deposit box is an ideal place. The last place you want such a record to be kept is in the desk, which burned with the rest of your possessions!

Check that you are carrying enough contents insurance

Over a period of time, we all acquire more appliances, home computers, furnishings and art works. Some of these may appreciate in value.

Obtain special coverage on collections

Many persons have gradually accumulated collectibles, such as china, porcelain, coins, stamps, carvings, baseball cards, etc. Determine the value and make a conscious decision to insure them - or carry this risk personally.

Appraise jewelry, furs and expensive personal items

Insure these items under a "scheduled personal property" endorsement.

Coordinate the liability with your "umbrella" policy

Be certain that the limit of your homeowner liability coverage reaches the minimum requirement of your "umbrella" liability policy, which should provide from $1 to $5 million of coverage. If it exceeds that amount, you may be able to reduce the homeowner limit and save premiums. If it does not reach, you could have a gap in coverage of $250,000 or more.