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 Guard Against the “I Thought I Was Covered” Blues 

What can you do to guard against the “I thought I was covered” blues? Review your homeowners policy annually to ensure your coverage reflects your needs. Unfortunately, many homeowners lack adequate insurance because lenders require homebuyers to carry only enough insurance to cover the lender’s investment—the value of the mortgage. If a loss occurs, the lender’s money is protected, but homeowners lose their personal property along with their equity.

Does your policy adequately protect your home and possessions? Homeowners insurance is designed to cover your financial losses from conditions or calamities that may damage your home or property. Depending on which policy you select, homeowners insurance may protect your house if damaged by fire, lightening, smoke, windstorms and hail, vandalism, theft, explosions, falling objects, aircraft, vehicles, riots and civil disturbances, and volcanic disruptions. Losses resulting from floods, and very often earthquakes, are excluded from standard policies. While policies vary by company and from state to state, a homeowners policy combines mandatory and optional coverages into a single package. Policies can be tailored to a homeowner’s specific needs.

            The basic homeowners policy contains six essential coverages: the Dwelling, Other Structures, Personal Property, Loss of Use, Personal Liability, and Medical Payments to Others.

The Dwelling

Dwelling coverage provides protection to repair or rebuild your house and any attached structures such as a garage.

Homeowners can choose from three types of structural coverage: Replacement cost coverage replaces the damaged property for its full value (without factoring in depreciation) but limits the dollar amount. Guaranteed replacement cost pays the full amount to replace an item (without factoring in depreciation) and there is no set cap on the amount. Actual cash value pays the replacement value minus depreciation. Unless you specify that you want the property insured for its replacement value, policies default to actual cash value. To avoid placing yourself in financial jeopardy, industry experts recommend insuring a house for at least 80 percent of its replacement value.

Other structures

This may be important coverage to some homeowners but won’t apply to others. It protects structures on your property that are not attached to your home such as detached garages, tool sheds, fences and in-ground pools. Typically, the total amount covered equals 10% of the replacement cost of the house. For example, a house covered for $200,000, would entitle you to receive up to $20,000 for damages to your pool and fence sustained in a windstorm.

Personal Property

This coverage provides protection for your personal possessions such as clothing, furniture or children’s toys in the event they are damaged by a covered peril such as fire.

            Most policies contain standard limitations and exclusions, so you need to review all the policy provisions carefully. You may need to arrange for extra coverage if you hope to repair or replace items that may be limited by the policy such as jewelry or collectibles. Items are protected even if they are not in the house when damaged or lost.  In general, the total amount covered equals 50% of the replacement cost of your home.

Loss of Use

Let’s assume that you can’t live in your house for three weeks due to certain damages, which are covered by your policy. Loss of Use protection provides additional living expenses to compensate you for the extra costs associated with being temporarily displaced from your home while it’s being repaired or rebuilt. Covered expenses might be for hotels, restaurants, and dry cleaners. Typically, a homeowner would be protected at up to 20% of the replacement cost of the house.

Personal Liability

Homeowners insurance not only covers the structure of your home but may also provide protection for accidental bodily injury or property damage to others for which you are legally liable. Applicable instances would be if your dog bites someone, your child throws a ball and breaks a neighbor’s window, or a guest falls down your front steps. Should a lawsuit be filed against you, this coverage will also provide for the cost of your legal defense. Unlike the other areas of coverage, personal liability has no set amounts. You determine how much coverage you want. In this litigious age, it would be prudent to opt for the maximum amount you can afford.

Medical Payments for Others

If your son’s playmate falls out of your tree house or a delivery man trips and falls on your uneven sidewalk, you may be liable for their medical bills. Coverage in a normal homeowners insurance policy is generally limited to $1,000 per person, roughly the cost of a CAT scan. It’s wise therefore to consider purchasing additional coverage for medical costs incurred by others injured while on your property or through your personal activities.

Condominium/Co-op Insurance

A pared-down version of a homeowners policy, condo insurance includes many of the same coverages—Personal Property, Loss of Use, Personal Liability and Medical Payments for Others. It also covers any additions, alternations, fixtures and installations within the perimeter walls, floor and ceiling of the unit. This coverage differs from homeowners insurance in that condominium owners usually don’t need insurance on the exterior walls of the building. The condominium association typically provides insurance on the external building and common areas. However, because association by-laws vary, you need to read your association’s by-laws prior to purchasing insurance.

Renters Insurance

A renter’s policy includes many of the same coverages as the homeowner’s policy such as protection for Personal Property, Loss of Use, Personal Liability and Medical Payments for Others. In this instance, however, the landlord usually provides insurance on the building and all common areas.

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