Time to Do Your Homework
If you didn’t do much homework before you bought your homeowners insurance, don’t feel too bad. You’re not the first. Every homebuyer’s closing to-do list has a lot on it, and getting up to speed on the riveting topic of insurance tends to slip down to the bottom. And yet, your home is at stake!
So now that you’ve had some time to settle in, it’s smart to circle back and go deeper. Are you sure you have the right coverage? Will your insurance company come through when you need it? What if your house gets swallowed up by a sinkhole?
Don’t worry. If you have second thoughts about your policy or your insurance company, you can usually amend your policy or switch companies any time. Just be sure to contact your loan servicer first to find out the steps you need to take (which might include paying up front for the first year).
Here’s what we’re going to cover:
- The basic components of your policy
- 9 insurance misconceptions
- How to file a claim
- How claims affect your premium
- Worst case: total loss
- Are you (like most homeowners) underinsured?
- How to protect yourself with a home inventory
- 7 ways to save on your premium
- Other types of home-related insurance
Understanding Your Policy
In one survey of homeowners, 60 percent had no real idea what their policy did and did not cover. If you don’t understand yours — it’s not exactly light reading — don’t hesitate to contact your insurer for a translation. So make a date with your policy and give it a thorough reading with this lesson as your guide. Until you get your real policy in front of you, here’s a sample declarations page. The declarations page is the first page (or two) and outlines your contract with the insurer.
ORIENTATION: THE BASIC COMPONENTS
Here’s how insurance coverage typically breaks down.
Dwelling (often called “coverage A”). Includes an attached garage.
Other structures (B). Anything not attached to your home, such as a garage, shed, or greenhouse.
Personal property (C). Furniture, appliances, clothing, etc. Some policies cover only a percentage of the cost. The standard limit is half the value of the home.
Loss of use (D). This covers the potentially significant cost of living somewhere else, and sometimes maintaining your home (or what’s left of it), while your home is being repaired or rebuilt.
Liability protection. This covers you (up to the policy limit) against lawsuits for injury or property damage resulting from things that happen on your property. Usually, it also covers injuries or damage that you or your family members cause away from home.
Are you paying your premium directly to your insurance company? If not, you’re paying it monthly when you pay your mortgage (it’s broken out in the “current payment due” section). The payment goes into your escrow account, and the servicer pays the actual bill. Many lenders protect their investment in your home by doing it this way: it’s how they ensure that your home is covered at all times.
9 Insurance Misconceptions
Speaking of understanding your policy … Here are some of the most common misunderstandings. Some of them could have big financial consequences, so again, contact your insurance agent if you have any questions at all about your coverage.
1. Injuries you sustain in your home are covered.
REALITY: Liability coverage is for other people injured on your property.
2. Insure for market value.
REALITY: You want replacement value.
3. Your policy covers all your stuff.
REALITY: There are limits on pricey items like jewelry, which require itemized “riders,” aka “endorsements” or “floaters.”
4. Mold damage is covered.
REALITY: That’s not standard unless it results from a sudden event like a burst pipe, as opposed to long-term exposure.
5. Flood damage is covered.
REALITY: That’s a separate policy. Keep in mind that flood risk can change over time, and storm surge can be a danger outside of official flood zones. Learn more at FEMA.
6. Car insurance covers theft of stuff from your car.
REALITY: Your home insurance does.
7. Your home office is covered.
REALITY: Most homeowners insurance doesn’t cover business-related claims of any kind without a rider.
8. It’s smart to inflate any loss you claim.
REALITY: Receipts and estimates that document your loss and the cost of repair are the best way to ensure that you’re treated fairly.
9. Cheaper is better.
REALITY: The goal is to be made whole after a disaster. Is the insurer known for fair and prompt payment of claims? Consumer Reports is one place to find out (a month’s subscription is just $7). You can also try state insurance board websites.
How to File a Claim
Find out what your insurer requires and keep the exact instructions in two safe but handy places (one offsite, in case your home is no longer with us). You’ll want to notify your insurer ASAP, then make a formal filing that proves the dollar loss in a timely manner, typically no more than 30 days. It should be pretty easy to file for a theft right away, but it might take you a while in the wake of major destruction.
Note that the insurance company will make their own appraisal of the damage, but you have the right to get an independent appraisal — which strangely enough often turns out to be much higher. You also have the right to be reimbursed for the expense of that appraisal. Your policy outlines a procedure to be followed in case of a disagreement.
Visit nonprofit United Policyholders, a good resource in general, for important details and tips on settling claims in your favor.
WHAT IF YOUR INSURER WON'T PAY?
Or won’t pay enough? If you think you’re being treated unfairly, you can argue your case with the insurance company’s adjuster, then the agent. Next you can try filing a complaint with your state’s department of insurance. When there’s a lot of money at stake, it might behoove you to hire an attorney or a public adjuster.
How Claims Affect Your Premium
It might seem reasonable to expect to recover any unforeseen loss that’s more than your deductible. But that’s not always how insurance companies see it — something they often don’t explain to their customers.
Any size claim might prompt some insurers to increase your premium for several years. Sometimes, what’s happening is you’re losing a discount you were getting for having a clean record. Other times, the claim is boosting your risk rating. Whatever the case, if the claim was on the small side, you could end up paying out more than you got. And if you claim too frequently, your insurer might drop you. If that happens, it could be hard to find a new one: claims get recorded in industry databases and stay there for years.
WHAT SIZE CLAIM IS WORTH RISKING A PREMIUM INCREASE?
Catastrophic loss is exactly what insurance is meant for, so if your house burns to the ground, it probably won’t be held against you (talk about adding insult to injury). It’s with the smaller stuff that we enter a gray area.
There’s conflicting advice out there, usually doled out with caveats. Some experts say that as a basic rule, you should always make a claim for damage that’s more than your deductible. Others say you should absorb anything under $5,000, even if your deductible is well below that. What to do?
Different insurance companies have different levels of sensitivity, and the regulatory environment varies from state to state as well. If you’re not sure whether to make a claim, your insurer’s underwriting department might be willing to talk with you about the impact on your premium. It’s a good idea to file a report on the damage in the meantime.
What if you don’t have the money on hand to repair small or medium-size damage to your home? In some cases, taking out a short-term loan will ultimately cost less than a premium increase.
One solid piece of advice: always file a claim if someone is injured on your property. Personal injury claims are the most likely to balloon.
AND WHAT'S CONSIDERED “TOO FREQUENT"?
At some companies, it’s the number and frequency of claims more than the size that sets off their alarm bells. For example, it can appear that you’re using your policy as a substitute for good home maintenance. Insurance underwriters say the typical homeowner has one claim every 10 years. Anything more than that can increase your risk rating, and your premium. If you’ve been with your company for long time, they might be more flexible … or not.
Again, if you’re not sure whether to make a claim, try talking with your insurer’s underwriting department.
For more than an overview of this complicated topic, here are three enlightening articles, each with a somewhat different take:
- “Claims that boost your insurance rates,” at Bankrate
- “To claim or not to claim … that is the question,” at United Policyholders
- “Should you file a home insurance claim?” at HouseLogic
Worst Case: Total Loss
It’s hard to think about the total destruction of your home, but you need to. Make sure you understand and are comfortable with how your policy handles a total loss. Policies vary and so do the state laws that regulate them.
Most policies cover replacement cost, so they pay only if you rebuild. If you don’t rebuild, or prefer to build or buy elsewhere, you might get nothing — while still owing your lender the balance on the mortgage. Some policies will pay only the actual cash value in these situations, which is typically far less than the cost of rebuilding.
If you ever have the bad luck to be in this situation and find yourself overwhelmed, you might consider hiring a public insurance adjuster. Public adjusters deal with the major paperwork that complex claims can entail, arrange inspections, haggle with your insurance company if necessary, and more while you try to get on with your life. In a study of 76,000 claims, the State of Florida found that people who used one settled for 19 to 747 (whoa!) percent more on hurricane-related losses than those who didn’t.
Are You Underinsured?
As many as two-thirds of homeowners are underinsured, according to the nonprofit United Policyholders. And too often they only find out when it’s too late. Don’t let that be you!
IT'S ALL ABOUT REPLACEMENT VALUE
The cost of replacing a home can be a lot higher than its market value. Did your insurance company get the price tag right? They make their calculation with standard industry software, such as HMFacts. You can use it yourself for a small fee. With your first-hand knowledge of your home, you might come up with a different number. If you have concerns about your replacement numbers, you’ll get the most accurate figure of all by hiring a local contractor to determine the cost to rebuild.
If your policy doesn’t already have it, consider extended replacement value. It insures your home for a specific value plus another 20 to 30 percent as a cushion. There’s also inflation guard, which automatically increases your coverage to match rising property values and/or building costs.
DON'T FORGET BUILDING CODE UPGRADES
This add-on coverage pays for improvements that might be needed to meet the latest building codes for electrical systems, insulation, and more. Especially smart for older homes.
Most policies give you a minimum of $100,000, but many experts recommend at least $300,000. Of course, the more assets you have, the more protection you need.
DO YOU NEED ANY RIDERS?
Have you left anything important out of your policy? “Riders,” aka “endorsements,” can be attached to it at an additional cost to insure things that often aren’t relevant to the average household, and therefore aren’t covered by the basic premium.
Below are some common riders. You may have considered and even added a couple when you first bought your policy, but it’s worth reviewing your rider needs regularly.
Earthquake and sinkhole. If you’re in an earthquake zone, you probably know and have already dealt with it insurance-wise. But what about sinkholes? They’re most common in Florida, Texas, Alabama, Missouri, Kentucky, Tennessee, and Pennsylvania. Here’s info and a map.
Inflation guard. This automatically increases your coverage every year to keep up with inflation, to help ensure that it never falls behind replacement value.
Sewer backup. Think aging sewer systems, combined storm/sewer drains that get overwhelmed by heavy rains, blockages from roots or grease … It’s estimated that there are more than a half million claims each year in the United States, and average claims are steadily rising.
Scheduled personal property. Valuables such as jewelry, electronics, computers, fine art, antiques …. A standard policy sets a limit for such things that may not be enough. Ask your insurer about anything unusual or high-end. Scheduled items usually aren’t subject to a deductible.
Personal property replacement cost: For full replacement cost, without depreciation.
Home business. Nothing business-related is covered in a basic homeowner’s policy. Not equipment, not legal liability.
Watercraft. If you own a boat, you’ll want protection against damage both on the water and while docked, and for liability and medical costs in case of a boating accident.
Secondary residence. If you ever buy that vacation home at the beach or in the mountains, keep in mind that a rider might be cheaper than a separate policy.
Personal injury. This adds liability protection not for physical harms, but things like false arrest, slander, or defamation that can also take a big toll.
ONCE A YEAR, REVISIT YOUR POLICY
Has your home or your life changed? Contact your insurer if you might need more coverage.
- Have you made any home improvements that merit more coverage?
- How’s the construction market? Is the cost to repair or rebuild going up?
- Are property values in your area rising fast?
- Is your inventory of your stuff up-to-date? (More on that below)
- Have you started doing business of any kind at home?
- Have your assets grown?
- Any new animals? Many insurers balk at certain dog breeds.
Inventory Your Stuff
When you file a claim, insurers expect you to substantiate your loss in as much detail as possible. That’s your end of the deal. Make a list, take photos, gather or scan receipts, and put dollar amounts to everything. Err on the compulsive side. If you had to start from scratch after a fire, the little stuff would add up fast. Keep documenting as you acquire new belongings.
One simple, free inventory tool we like is Allstate’s Digital Locker (you don’t have to be a customer). It’s intuitive, works on your phone, iPad, or computer, stores everything in the cloud, and keeps a running total dollar value as you add items. You can export the whole thing if you ever need to make a claim. Some of the other large insurance companies offer similar apps. Buying software is also an option.
7 Ways to Save on Your Premium
In addition to understanding just where you're protected, you may be able to make some simple changes that can save you money. Homeowners insurance is no place to skimp, but we've found seven smart ways for you to save.
1. Increase your deductible. Just be sure to confirm with your servicer that a higher deductible is acceptable.
2. Avoid small or frequent claims. One more reason to go with a higher deductible.
3. Bundle. Most companies offer a multi-policy discount. Home and car, for example.
4. Reduce risk factors. Things like home alarm systems and updated heating equipment can earn you a discount. Not to mention prevent theft or damage.
5. Ask about discounts. Insurers don’t always mention them.
6. Keep your credit score healthy. Most insurers factor it into your premium.
7. Shop around some more. Check your state insurance department for rate comparisons or consult an independent agent who sells policies under multiple carriers.
Know Your Insurance Types
Homeowners insurance is just one type of insurance that’s associated with homeownership, and it’s understandable if you get them mixed up. Here are the four main ones. Read more about them on our blog.
Homeowners insurance: Protects you from damage to or loss of your home and personal property, and from lawsuits related to things that happen on your property.
Private mortgage insurance (PMI): If you have less than 20 percent equity in your home, lenders usually protect themselves in case of default by requiring PMI.
Mortgage life insurance: This type of insurance pays off the mortgage if a homeowner dies. Traditional life insurance is typically a better option, though.
Title insurance: You should have gotten this when you bought your home, for a one-time payment. It protects you from challenges to your ownership of the property.