Homeowner’s Insurance

By: Everett Short

Now that you are planning to buy a house, you’ll also need homeowner’s insurance. Your lender will require proof at or before closing that you’ve provided insurance protection for the structures on the property, and you will want to protect your personal belongings as well. Homeowner’s insurance, however, is not a one-dimensional product, so here’s a primer on the subject.

There is no benefit to gain from over-insuring your home. For example if you pay $150,000 for a new home, the actual amount of homeowner’s insurance is quite a bit less. That’s because even if a disaster destroys your house, the land value does not change. So, you just need enough coverage to replace the structure(s) on your land. The insurance agent will estimate the construction value of your dwelling based on a formula that considers its age, type, location, and size. This amount is the maximum reimbursement you could receive for the replacement of your house, regardless of how much insurance you buy.

There is, however, an inexpensive protection against under-insuring your home – as low as $4 a year in some areas. Ask your agent to provide you with their guarantee replacement cost coverage on the structure. If the insurance agent’s estimate of the cost to replace your home turns out low, the insurance company makes up the difference. This extra protection should add an extra level of comfort for both you and the lender.

This basic structure–replacement coverage will satisfy most lenders, but you also have a good deal of personal property as well. The insurance agent will help you estimate the value of your possessions (the contents) in order to establish a premium. You can buy actual cash value coverage for your clothing, electronic gear, furniture, and everything else you own–this would then pay the depreciated value of your goods. Or, for a higher premium, you can buy replacement cost for these things. Chances are you would want to buy new clothes, not used, if your wardrobe got destroyed in a fire. Ditto with electronics gear and many other objects in your home. When you’re packing up in readiness for the move, it’s a great time to take an inventory of everything you own. Make a list (and take photos, too) by manufacture, date of purchase, and price of appliances, furniture and major objects. Remember to list things you may not think of in terms of value: clothing, books, pots and pans, trinkets, knickknacks, and so forth. Get current appraisals of antiques, art, and other items of value. The inventory and pictures will help your insurance agent update your contents coverage and support your claim if you suffer a loss. Keep a copy of the inventory in a safe place and update it annually or whenever you make a significant purchase.

Type of coverage:

A very basic fire and extended policy coverage provides payment for losses caused only by the specific 17 items or so listed on the policy. If it’s not on the list, it’s not covered. Broad form coverage works the same, except it has more items on the list.

Longtime New Jersey-based insurance agent John Faziola says neither of these is a policy most insurance agents will recommend. “A small money difference,” he advises, “you can get an all-risk homeowner’s policy, which does pretty much what its name implies.” It will cover losses caused by fire and smoke, hail and wind, explosions, riots, theft and vandalism, even damage caused if an automobile or aircraft crashes into your house. It covers some of your property that isn’t in the house, too, like grave markers.

All-risk also includes liability insurance, important because it’s one of the biggest areas of claims against homeowners. If someone is hurt on your property, he or she may sue you for big damages. Many people don’t realize, however, that homeowner’s liability is at work when you accidentally cause injury away from home, too – as long as you are engaged in personal activities on your own time, and the accident does not involve your automobile.

Condos and Co-ops:

Condominium and co-op buyers need to get a different type of insurance than the policy for a regular house – one that includes coverage for contents, for additions and alterations, and for loss assessment. A master policy held by the association protects the building, but only the stripped-down structure. It does not cover your personal belongings, or things like your fixtures or kitchen cabinets, or any improvements you may have made. Also, the unit holder will be assessed the difference between insurance reimbursement and replacement costs if the master policy is inadequate after a loss.

What Isn’t Covered:

Even an “all-risk” policy has certain limitations, and if you’re not sure what they are when you read your policy, then get your insurance agent to make them very clear to you. Common exclusions are damages caused by floods, termites, war, neglect, earthquakes, or intentional loss. There may be others on your policy. Your insurance agent, real estate agent, lender, and the local building inspector will be able to help you decide whether you need a flood, earthquake, or other special policy.

The premium for a homeowner’s insurance policy that is properly tailored to your property, possessions, location, and financial picture is money well spent…an extra security blanket for your home.

If you have questions about homeowner’s insurance, especially when you are moving to a new location where you may not know an insurance agent, you should call the toll-free National Consumer Insurance Helpline, 1-800-942-4242. They offer a number of helpful free brochures. Your real estate agent can make referrals too.