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Frequently Asked Questions
Homeowners Insurance
What is homeowners insurance and
who should buy this type of coverage?
Homeowners insurance is one of the most
popular forms of personal lines insurance on the market today. The
typical homeowners policy has two main sections: Section I covers
the property of the insured and Section II provides personal liability
coverage to the insured. Almost anyone who owns or leases property
has a need for this type of insurance. And many times, homeowners
insurance is required by the lender as part of the requirements
in obtaining a mortgage.
Why is homeowners insurance sometimes
referred to as a "packaged policy?" What are the major
parts of the package?
Before the 1950's, if a person wanted
to purchase all the coverage that the modern day homeowners policy
provides, he or she would have had to purchase at least three separate
policies: one policy to cover personal property and the dwelling,
a separate policy to cover losses due to theft, and a third policy
to cover losses due to personal negligence. Changes in the laws
which regulate the sale of insurance now allow the insurance industry
to sell policies which combine the separate coverages into one all
encompassing policy. The main advantages of combining the various
coverages are lower expenses, and therefore lower cost to consumers,
and the convenience of being able to purchase the property, personal
liability and other coverages in a single policy.
The standard homeowners policy can
have up to six different coverages. Coverage A covers the main dwelling
being insured. Coverage B covers any other structures that are on
the premises but are not attached to the main dwelling. For example,
losses to a detached garaged would be covered under Coverage B.
Coverage C covers the personal property of the insured. Coverage
D covers the additional cost incurred by the policyowner when the
premises cannot be used because of an insured loss. For example,
if a tree falls through the roof of the main house and the policyowner
has to live in a motel for two weeks, the cost of the motel room
would be covered under Coverage D. The last two coverages provide
personal liability coverage to the policyowner. Coverage E protects
the insured from losses due to his or her negligence and provides
this protection anywhere in the world. Coverage F provides medical
payments to other persons who are injured either on the policyowner's
premises or by the actions of the policyowner.
Do all insurance companies offer
the exact same coverage in their homeowners insurance contracts?
Or does the coverage differ among insurers?
Many insurance companies use standardized
policy forms in lieu of developing their own company-specific contracts.
One of the most popular homeowners policy forms used in the United
States was developed by the Insurance Services Office (ISO), an
industry consulting and statistical agency. Comparing premium quotes
from different insurers is relatively easy when the quotes are based
on the same policy form. Because some insurers use their own company-specific
contracts, customers should examine whether the policy forms are
the same when comparing premium quotes from different companies.
What are the key differences between
the various homeowners policy forms?
The major policy forms offered by the
ISO include:
- HO-2 is a named perils policy
- HO-3 is an all risks policy
- HO-4 is designed for tenants and
therefore omits Coverages A and B.
- HO-6 is a named perils policy
designed for the owners of condominiums.
- HO-8 is a named perils policy designed
for owners of older homes where the cost of reconstructing the
home in the event of a catastrophic loss exceeds the market value
of the home.
What is the difference between an
"all risks" policy and a "named perils" policy?
A named perils policy covers
losses that are due to only those perils listed in the policy. The
perils typically covered include fire, windstorm, hail, and other
direct physical losses. An all risks policy covers losses
that are due to any peril except those specifically excluded in
the policy. It is important to note that all risks policy
provides broader protection than do named perils policies.
What are the policy limits (i.e.,
coverage limits) in the standard homeowners policy? How are they
determined?
[Note: this answer is based on the Insurance
Services Office's HO-3 policy.]
Coverages A and B provide protection
to the dwelling and other structures on the premises on an all
risks basis up to the policy limits. The policy limit for Coverage
A is set by the policyowner at the time the insurance is purchased.
The policy limit for Coverage B is usually equal to 10% of the policy
limit on Coverage A. Coverage C covers losses to the insured's personal
property on a named perils basis. The policy limit on Coverage
C is equal to 50% of the policy limit on Coverage A. Coverage D
covers the additional expenses that the policyowner may incur when
the residence cannot be used because of an insured loss. The policy
limit for Coverage D is equal to 20% of the policy limit on Coverage
A. The coverage limit on Coverage E - Personal Liability - is determined
by the policyowner at the time the policy is issued. The coverage
limit on Coverage F - Medical Payments to Others - is usually set
at $1000 per injured person.
What is the difference between actual
cash value and replacement cost?
Covered losses under a homeowners policy
can be paid on either an actual cash value basis or on a
replacement cost basis. When "actual cash value"
is used the policyowner is entitled to the depreciated value of
the damaged property. Under the "replacement cost" coverage,
the policyowner is reimbursed an amount necessary to replace the
article with one of similar type and quality at current prices.
What does it mean to schedule personal
property? What types of property would I most likely want to schedule?
Certain types of personal property are
subject to maximum dollar limits that the insurance company will
pay in the event of a loss. Two classes of personal property are
usually subject to these limits. The first is property that is particularly
valuable that not everyone would own. For example, a collection
of antique china dolls would be subject to a separate, smaller limit
under the standard homeowners policy. The second class of personal
property for which coverage is limited under a standard HO policy
consists of is personal articles that should be covered under other
types of insurance contracts. For example, a computer in the home
that is used for business purposes should be covered under a commercial
property policy, not a personal homeowners policy and is therefore
subject to a limit of liability.
You can purchase additional coverage
for these articles by adding a scheduled personal property endorsement
to your policy. This endorsement will accomplish two things. First,
any article listed in the endorsement will be covered on an all
risks basis instead of the usual named perils coverage
provided in Coverage C. Second, when you schedule personal property
the insurance company will ask you for the verify the replacement
cost of the article. This is usually accomplished by having an appraisal
of the article completed and then forwarding a copy of the appraiser's
report to your insurance company. The replacement cost reported
in the appraisal will then become the coverage limit which applies
to that article, regardless of the limit listed in Coverage C. Examples
of property you should schedule include expensive jewelry and a
silverware, fine art, coin collections and the like.
How does the coinsurance clause
work in the typical HO policy?
The coinsurance clause in the standard
homeowners policy only affects claim payments resulting from losses
covered under either Coverage A - dwelling, or Coverage B - other
insured structures. Losses are paid on a replacement cost basis
as long as your policy limit is equal to at least 80% of the replacement
cost of the dwelling. For example, assume you own a home with a
replacement cost is $150,000 and the home suffers $20,000 in covered
damages. As long as your Coverage A limit is $120,000 (i.e., 80%
of $150,000) or more, the full $20,000 loss will be covered. When
the limit on your homeowners policy is less than 80% of the replacement
cost of the dwelling, a coinsurance clause then applies. In this
case, the typical homeowners policy will pay the greater of either
(1) the actual cash value of the damage, or (2) a percentage of
the replacement cost of the damaged property where this percentage
is equal to the amount of the policy limit divided by 80% of the
replacement cost of the dwelling.
It is recommended that you carry a
policy limit equal to at least 80% of the replacement cost of your
home. This will ensure that you will always receive the full value
of any partial loss. You may, however, want to carry an insurance
amount equal to 100% of the replacement cost of your home. In this
way, if you suffer a complete and total loss, the insurance company
will pay the full replacement costs of your home. Otherwise, the
insurer will only reimburse you up to the policy limit.
What is the inflation-guard endorsement?
Most policyowners purchase enough insurance
to cover at least 80% of the replacement cost of their home. By
purchasing this much insurance, the policyowner can avoid any coinsurance
penalties that otherwise might apply under Coverages A and B. However,
many policyowners forget to increase their policy limits as the
value of the home appreciates. An inflation-guard endorsement
can be added to your homeowners policy which will instruct the insurance
company to automatically raise your policy limit at each policy
renewal according to some predetermined index of local home values.
Policyowners should be careful, however, to make sure that the index
used by your insurer matches the rate at which home values are rising
in your neighborhood.
If I have an accident which I think
is covered under my HO policy, what should I do?
Insurance contracts are conditional
contracts, which means that policyowners have certain duties
that they must perform if a covered loss occurs. Failure to complete
these actions can, and sometimes does, result in non-payment by
the insurance company for losses that otherwise would have been
covered. Required duties include: (1) notifying the insurance company
or the agent that a loss has occurred -- this should be done as
soon as you discover the loss; (2) protecting the property from
further damage and/or to making any repairs necessary to prevent
further damage; (3) preparing a detailed list of the personal items
damaged which contains a description of the items, their actual
cash value, or their replacement cost if you have added the replacement
cost endorsement to your policy; (4) being prepared to show the
company and/or the insurance agent the damaged items; (5) completing
a statement for the insurance company that details the events that
led to loss -- for example, the time the damage occurred, the cause
of the losses, etc.
Do I need earthquake coverage? How
can I get it?
Direct damages due to earthquakes are
not covered under the standard homeowners insurance policy. However,
unless you live in an area that is prone to earthquakes, you probably
do not need this coverage. If you do live in a part of the country
with high earthquake activity you may want to consider adding an
earthquake endorsement to your homeowners insurance policy.
This endorsement will cover damages due to earthquakes, landslides,
volcanic eruptions and other earth movements.
Where and when is my personal property
covered?
Coverage C, which provides named
perils coverage, applies to all your personal property (except
property that is specifically excluded) anywhere in the world. For
example, suppose that while traveling, you purchased a dresser and
you want to ship it home. Your homeowners policy would provide coverage
for the named perils while the dresser is in transit - even though
the dresser has never been in your home before.
Do I really need liability coverage?
How much should I have?
It should come as no surprise to most
people that both the frequency and severity of civil lawsuits have
been on the rise in this country for a long time. Accordingly, everyone
should have liability insurance coverage to protect their personal
assets. The standard homeowners policy offers at least $100,000
of liability coverage and this amount can often be increased to
$300,000 or more at very little additional cost. How much liability
insurance coverage you require depends primarily upon the value
of your personal assets. People with more personal assets to lose
in a lawsuit will typically carry higher liability policy limits.
Individuals who require more liability coverage than their homeowners
policy can provides can purchase a personal umbrella policy
where liability coverage limits of $5-$10 million are possible.
Who pays for my legal defense costs
if I am sued?
In the unfortunate event that you are
sued, your homeowners policy will not only cover the cost of your
legal defense, but your insurance company will also provide the
legal counsel.
What does it means to have a per
occurrence policy limit?
The policy limits in Coverage E -personal
liability- are per occurrence policy limits. Per occurrence
limits apply to either one specific accident or to a series of continuous
and related incidents which lead to a specific bodily injury or
property damage loss. For example, suppose your policy limit in
Coverage E is $100,000. If you were found to be negligent in two
unrelated incidents and the court awarded damages of $50,000 and
$60,000, respectively, your insurance company would cover both losses
fully even though the total damages incurred in the lawsuits exceeded
than $100,000.
What factors should I consider when
purchasing HO insurance?
There are a number of factors you should
consider when purchasing any product or service, and insurance is
no different. Here is a checklist of things you should consider
when you purchase homeowners insurance. First and foremost, purchase
the amount and type of insurance that you need. Remember that if
your policy limit is less than 80% of the replacement cost of your
home, any loss payment from your insurance company will be subject
to a coinsurance penalty. Also, determine the amount of personal
property insurance and personal liability coverage that you need.
Second, determine which, if any, additional endorsements you want
to add to your policy. For example, do you want the personal
property replacement cost endorsement or the earthquake endorsement?
Finally, once you have decided on the coverage you want in your
homeowners insurance policy, you can now decide which insurer you
would like to purchase the insurance from. Some people like the
idea of purchasing insurance from a mutual company rather than a
stock company. You should also decide whether you would like
an insurance agent to assist you in your purchasing decision or
if you would like to buy the product directly from an insurer without
the assistance of an agent.
What factors can affect the cost
of HO insurance?
There are many factors which can affect
the cost of your homeowners insurance. Some factors, such as location,
type of construction, and age of the home are beyond your control.
However, there are other factors which you can control. The type
of policy that you purchase will affect the cost of your insurance.
For example, adding a personal property replacement cost endorsement
to your homeowners policy will increase the cost. The amount of
deductible you choose will also affect your cost. Selecting a larger
deductible will lower your cost of insurance. Finally, the financial
strength of the insurance company offering the product can affect
the cost. Financially healthy companies can usually command a slightly
higher premium because the guarantee made to the policyowner is
a stronger one.
What can I do to lower the cost
of my HO insurance?
There are a number of things you can
do to lower the cost of your homeowners insurance. The best thing
to do is to shop around. It is not surprising to find quotes on
homeowners insurance that vary by hundreds of dollars for the same
coverage on the same home. When you shop, be careful to make sure
each insurer is offering the same coverage. Many insurers use the
ISO policy forms, but this is not always the case. Another
way to lower the cost of your homeowners insurance is to look for
any discounts that you may qualify for. For example, many insurers
will offer a discount when you place both your automobile and homeowners
insurance with the them. Other times, insurers offer discounts if
there are deadbolt exterior locks on all your doors, or if your
home has a security system. Be sure to ask your agent or company
about discounts any that you may qualify for. Another easy way to
lower the cost of your homeowners insurance is to raise your deductible.
Increasing your deductible from $250 to $500 will lower your premium,
sometimes by as much as five or ten percent. However, be careful
to make sure that you have the financial resources necessary to
handle the larger deductible.
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