Boring Insurance Stuff You Need to Know: Part 1

Boring Insurance Stuff You Need to Know: Part 1

June 28, 2024

homeowners insurance coverage part 1

Boring Insurance Stuff You Need to Know: Part 1

June 28, 2024

Homeowners Insurance

With apologies to the capable and diligent insurance brokers we work with … insurance can be boring.

 

Insurance companies understand this. To sell their policies, they avoid the fine print. They even avoid the large print. Instead, they use the GEICO Gecko, Flo from Progressive, the Liberty Mutual agent (Doug) and his emu (named LiMu, obviously), the ever-present Jake from State Farm, and other quirky characters. The insurance companies know you don’t want to think about your policy. You just want to buy something that doesn’t cost too much and check it off your to-do list.

 

You don’t need to be an expert in insurance, but you need to understand what your current policy covers and what it does not cover. With that knowledge, you can add valuable protection that is missing or eliminate protection you don’t really need.

 

Below is what you need to know.

 

Market value vs. replacement cost, extended replacement cost, or guaranteed replacement cost:

For dwelling coverage (that is, the physical house), you should have replacement cost as a minimum level of coverage. Homeowners often mistakenly insure their homes for market value, which can be significantly lower than replacement costs. This is especially true in today’s market, as construction costs soar. The best policies have extended replacement cost (for example, 125% of replacement cost) or guaranteed replacement cost (that is, no limit).

 

Personal liability coverage:

For high-net-worth homeowners, liability coverage is the second most important item on the policy, after dwelling coverage. It protects you from a lawsuit if someone is injured on your property. There is usually a limit of $250,000 - $500,000. You can supplement it with an umbrella policy. We’ll write about umbrella policies in another blog.

 

Coverage of personal property:

There’s a coverage limit on personal property (the stuff in your house), just like on your home. It’s often 50-70% of the dwelling limit. Make sure that the limit will cover replacing everything. Usually, it will be sufficient, assuming you don’t have many high-value items like jewelry, art, etc. (see below). Keep a list of what you own – at least the important items. Get replacement cost coverage, not actual cash value. Actual cash value, which reflects wear-and-tear, is what you could sell it for.

 

Coverage for high-value items:

Standard policies often limit coverage for high-value items like jewelry, art, and collectibles. If you have a lot of valuables, you should buy a separate policy. Make a list and keep the list somewhere safe. Get appraisals, keep the appraisals safe, and update them periodically.

 

Many homeowners select a low deductible when they could lower their premium meaningfully with a higher deductible:

With a higher deductible, you may avoid the hassle of a small(ish) claim and the annoyance of seeing your premium rise after a claim. Determine what you can afford to lose and set your deductible to that amount.

 

Perils covered and not covered:

Make sure you know what is and isn’t covered. Usually, perils like fire, smoke, lightning, windstorms/hail, theft, and damage from frozen pipes are covered. Throughout this blog, we highlight perils usually not covered but for which you can protect against for an extra fee.

 

Inflation protection:

Many policies include an inflation guard endorsement, automatically adjusting your coverage limits to account for inflation and ensuring adequate coverage as rebuilding costs increase over time. I had always assumed carriers would boost the covered amount aggressively since that pushes up the premium. Oddly, they sometimes fail to do so.

 

Flood coverage:

Most policies do not offer protection from flooding due to storms, etc. You need to buy a separate policy. Basic flood policies ($250,000 limit on a residence + $100,000 limit on contents) are offered by a government-sponsored program (the National Flood Insurance Program). You buy an excess flood policy to get more coverage – which people in hurricane-threatened areas should have if the $250,000 limit won’t suffice. These are expensive and getting more expensive.

 

Impact of filing a claim on your future premiums:

Per the above, filing multiple claims can lead to increased premiums or even non-renewal of your policy. It’s often better to pay out-of-pocket for modest losses to avoid this.

 

Landslides and mudslides:

Usually, coverage for these natural disasters requires a separate endorsement.

 

Damage from earthquakes is usually not covered:

A separate policy is needed.

 

Home business coverage:

A standard policy typically does not cover business-related losses – for example, loss of equipment, destruction of documents, or liability. You may need a separate business insurance policy or an endorsement if you operate a business from home.

 

Identity theft protection:

Some policies offer optional coverage for expenses related to identity theft, such as legal fees and lost wages. This risk is increasing.

 

Landscaping, swimming pools, and decks:

These structures may have limited coverage.

 

Damage from mold, termites, and pests:

Typically, standard policies exclude this type of damage.

 

Water or sewer backup:

Most policies exclude coverage for water or sewage backup. This exclusion means that the basic policy would not cover any damage caused by water backing up through sewers or drains or from a sump pump overflow. You can pay more for an endorsement to cover this risk, usually with a limit.

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This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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