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Homeowner’s Insurance, Law and Lessons, Part One

  |   By   |   Paul SamakowOpen link in another window

Life is full of fun and bumps along the way.  When a bump happens in your castle, do you know the answer to “what is covered, and am I protected?”  How about:

  • Flooded basement
  • Tree fall on your house
  • Guest trips and breaks a leg in your living room?

Let us begin by a basic “homeowners insurance 101” lesson.  Here is the basic structure of this important and necessary insurance coverage.  Homeowners insurance policies have the following protections for you.

Coverage A is dwelling coverage.  It is not the land your home sits on. It is the brick and mortar of your home, and the things that are permanently attached to your home.  Any damage to the interior or exterior structure of your home is likely covered under this section.

Lesson:  You are likely paying way too much for this coverage, probably because your mortgage company wanted you to have coverage in at least the same amount of your home loan.  Suppose your home cost $400,000 and your mortgage was $350,000.  Twelve years later a fire burns your house to the ground.  It costs $175,000 to rebuild your house, yet, you were paying premiums on $350,000 of coverage for those twelve years.  That could be thousands of dollars. Even worse, you may have been paying for an “inflation rider” all of that time, making your coverage amount more each year, and adding to the premium you were paying. Your insurance company is going to pay $175,000, the replacement value.  They are not going to pay off your mortgage.

Action step:  Call your homeowner insurance agent and reduce the coverage to the “replacement cost new” of your home, plus maybe a little more to be safe.  How do you find out the replacement cost?  Your annual home real estate tax bill from your city or county will tell you the value of your land and the value of your structure.  Your insurance company can run an estimate as well if you ask to reevaluate the replacement cost of your home.

Coverage B is other structures coverage. This is coverage for a shed, a detached garage, a pool house.  The swimming pool itself, that is sometimes debatable.  Again, damage to or destruction of these other structures is protected, up to the actual replacement cost and limits of your policy.  This is typically 10% – 20% of your dwelling coverage amount.

Coverage C is the personal property coverage. This coverage protects against theft and damage to things in your home, such as electronics, furniture, clothing and appliances.  This coverage typically includes limited protection for art, jewelry, cash, firearms, precious stones and other named items.  It also covers things inside chests and dressers, and many people overlook these items if and when it is time to make a claim.

Action step:  Schedule your important things, meaning, literally, make a list of all of your art, all of your jewelry, and all of your clothing that was expensive.  Even better than a list, with prices you paid for these things, is to also take photos or videos of these items.  Getting these things included, or scheduled, will extend the coverage amount of each item as well as what perils that will be covered.  This means, literally, if you lose your expensive watch it will be covered.  Ask your agent how to cover all of your important things that are not normally covered with the standard policy language.  Yes, it will cost a bit more, but it is really pennies and absolutely worth getting better coverage.

Coverage D is loss of use coverage.  Remember the example about your house burning down?  You get benefits from Coverage D in the event your home is destroyed or severely damaged.  You get to be reimbursed for the cost of a hotel, or another home rental, until your house is rebuilt or repaired.  You also get some amount for meals, because it is understood that now that you do not have your kitchen where you save money making most meals, eating out costs more.  You get some compensation for additional costs of commuting if your drive to and from work is more than when you lived in your now destroyed home.

Finally, you get a “we are sorry this happened to you” letter from your insurer – no, not really… just seeing if you were paying attention.  Actually, though, some insurers do send this type of letter.

Action step:  Do the research on your prior costs, for meals and for commuting.  Record the new expenses for these items.

Coverage E is personal liability coverage.  It protects you if a guest in your home is injured.

Lesson:   You should get high limits on Coverage E. It is typically very cheap compared to your other coverages.  In most cases, an extra $500,000 of coverage may only cost an additional one to two dollars per month.  In situations where the injured person is really injured badly (we all know how expensive medical bills can be), your medical payments coverage is not going to mean much, but your personal liability coverage could be very important to protect you.

Action step: Increase or maximize this limit!  You can get hundreds of thousands of dollars in liability for pennies on the dollar.  Usually, one million dollars is the maximum limit.

Coverage F is medical expenses to others.  It provides a minimum amount for medical bills for someone, not for you or your family members, who are injured in your home.  This compensation to them might be anywhere from one to five thousand dollars. It is available regardless of whether you or your family were somehow at fault, or if your guest was just clumsy and you had nothing to do with his or her injury.

Action step:  Minimize your Coverage F on your homeowner’s policy and use the savings to increase your personal liability coverage.  What did he say?  Think about it.  If someone is injured in your home through no fault of yours, you really “owe” them nothing.  By inviting them into your home, you are not a guarantor of their safety no matter what.  This is true particularly if your guest caused his or her own injury.  Regardless, if it’s your fault and there is not enough of coverage F to pay their bills, your personal liability (coverage E) will pay the rest.

Example for adjusting Coverage E and Coverage F:

Joe has $300,000 of personal liability and $5,000 of medical payments on his homeowner’s insurance policy.  If Joe reduced his medical payments coverage to $1,000 and increased his liability coverage to $500,000, he would increase his total coverage by almost $200,000 and in most cases it would cost less than one dollar more per month.

Thanks are provided to Tony Iannarelli, a very honest and dedicated-to-his-clients insurance agent in Fairfax, Virginia, who educated me and proof-read this article.

Stay tuned for Part II, where questions about perils such as lightning, hail, floods, storms, vermin and other pests, and things such as water damage are discussed.  Also, what are the insurance concerns about renters in your home?

Do not pass GO, do not (yet) collect $200, but definitely save your Monopoly game.