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Chances are your home is your single most
valuable investment. Homeowners insurance* is a "package"
policy that covers both property—structures and personal
possessions—and liability.
Because it is comprehensive, your homeowners insurance policy
may include coverage you are not even aware of. If your luggage is
stolen from a motel room while you are a thousand miles away from
home, for example, you will of course want to notify the police. You
will also want to check with your insurance agent about coverage for
loss under your homeowners policy. And if your house burns down
leaving you without a place to stay, your policy provides living
expenses as well as reimbursement for damaged property.
Your insurance agent can explain your policy in detail. To get you
started, this guide outlines the key areas of coverage as well as
any exclusions or limits that might apply. More than any other line
of coverage, homeowners insurance is substantially standardized
throughout the
U.S.
The questions and answers in this guide are based on the most
commonly purchased homeowners insurance policy (called HO3 in the
industry) offering the widest protection.
You may be interested in knowing that claims can consume 80 cents or
more of every premium dollar (the exact amount varies from year to
year). The rest of that dollar goes to taxes, marketing and
administrative costs, dividends and profits. It is in your best
interests to be aware now of your protection so that you may select
the insurance that best meets your needs.
*Throughout this guide, the term "homeowners insurance" is
used. However, for renters and condo owners the coverage for
personal property and liability is similar. The main difference, of
course, is that you do not need to insure the building. Therefore,
almost all the information contained in this guide should be of use
to you whether you own or rent, live in an apartment, a condominium,
or a home. Questions on specific concerns about condominiums and
renting an apartment or dwelling are answered after the general
questions.
Do I really need insurance for my home?
For most people, their home is their single most valuable
possession and largest investment. Homeowners insurance protects
your investment as well as you, your family and your household
possessions.
If you were to suddenly lose your home due to
fire or a tornado, or have the contents damaged or stolen, you
probably could not afford to replace everything all at once. If
somebody sued you for an injury or damage caused by you or your
property, the cost of defending against that lawsuit could be very
expensive regardless of the outcome.
All of these situations are covered by the
homeowners package policy. And while it may be unpleasant to think
about fire, theft, and other uncertainties of life, let's face it,
that’s reality.
Yet another reason you need to carry homeowners
insurance is that mortgage lenders require it. No mortgage company
will lend the large amounts of money needed to finance homes at
today's prices without requiring an insurance policy to protect that
investment.
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My homeowners insurance is part of the payment I make each month
to the mortgage company. Who decides what insurance to get?
You do. It’s your home and your insurance policy. As
a means of protecting its investment, the mortgage company collects
a set amount from you each month, puts it in escrow, and then pays
your insurance and taxes when they fall due. However, the policy is
still yours and you may select the insurance you feel offers the
best coverage at the best rates. In fact, if you allow the mortgage
company to choose, you might well end up paying more for your
homeowners insurance.
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I know I have that homeowners policy in a drawer somewhere. What
exactly does it cover?
"Exact" coverage is hard to define because there are
different policies. However, about 80 percent of homeowners policies
are based on a standard form, which we described in this guide. All
homeowners policies cover two important areas: property and
liability. Remember that you have to have protection against the
proverbial thief in the night and the person who slips on your
sidewalk by day.
What this means in insurance terms is that your
homeowners policy has two basic components. It covers your
structures and possessions—property insurance—and it furnishes
protection against personal liability. Personal liability, as its
name implies, means you are legally obligated to pay money to
another person for actions caused by you, your family, or your
property. That liability extends to medical payments to others for
injuries caused by you or your family.
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What kinds of perils am I protected against?
Remember that policies vary but homeowners insurance usually
covers damage to both structures and personal property caused by:
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Fire or lightning
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Windstorm or hail
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Explosions
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Riot or civil commotion
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Aircraft
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Vehicles
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Smoke
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Theft or vandalism (sometimes called
malicious mischief)
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Falling objects
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Weight of ice, snow or sleet
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Freezing of a plumbing, heating, air
conditioning or other such household system
In fact, your coverage is most likely even more
comprehensive than the above list. Many homeowners policies cover
damage by "just about everything," unless the coverage is
specifically excluded. In these cases, it is even more important to
understand what is not covered.
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What about floods, earthquakes and other catastrophes?
Most catastrophes are covered; for example, wind damage from
hurricanes and tornadoes come under the windstorm peril listed in
the previous question and so are included. Flood and earthquake
damage, however, are not covered by a standard policy.
Be careful not to be lulled into a false sense of
geographic security. Flood and earthquake activity is more
widespread than many people realize. For example, almost 90 percent
of the
U.S.
population lives in seismically active areas. Since 1900,
earthquakes have caused damage in all 50 states. And if your home is
located in a flood-prone area, you are 26 times more likely to
suffer a flood loss than a loss from fire.
You may want to check with your agent about
special catastrophic policies for normally excluded conditions like
floods and earthquakes. Of course, the cost of such extra coverage
may reflect the high risk involved. If you live along a shoreline,
for example, expect to pay a higher premium for flood coverage than
someone living on a mountaintop would pay.
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Are there any other exclusions I should know about?
There may be other exclusions spelled out in your policy such as
neglect, intentional loss, “earth movement,” general power
failure and even damage caused by war. If you neglect to take care
of your property (e.g., a leaky roof), you may not be covered.
Obviously, if you intend to lose an object or damage your property,
there is no coverage.
One other exclusion that can be costly is the
Ordinance or Law exclusion. Building codes established by
governmental bodies that drive up the cost of rebuilding or
repairing after a loss occurs may not be covered by your insurance
policy. Thus, if you discover when replacing damaged property that
current law demands higher grade or more expensive materials than
the original ones being replaced, the new materials may not be
covered for the full price.
For example, if the current building code in your
area requires a higher grade of electrical wiring and after a fire
you are replacing all the wiring in your home, your policy may cover
only the cost of replacing the older wiring. The difference in cost
between the old wiring and the new wiring required by ordinance or
law is your responsibility.
Even if you live in a fairly new home, laws and
building codes are constantly being updated. Coverage to include
ordinance or law requirements can be added to your homeowners policy
with an endorsement—an addition that could save you money in the
long run.
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Are the backyard shed and my color TV both covered in my
homeowners policy?
Yes, they are both your property so they are both covered. The
value of the real property—your home, garage, shed and other
structures—is generally based on the value of the main structure,
the house itself. Thus, if the house were insured for $75,000, the
shed, detached garage and other auxiliary structures would be
covered for 10 percent or $7,500 worth of damages. Additional
property protection features may include living expenses should your
home not be habitable for a period of time.
Your personal property is also covered by a
homeowners insurance policy. Personal property includes the contents
of your home and personal belongings used, owned, worn, or carried
by you or members of your household—basically, everything and the
kitchen sink! This coverage is also based on the house coverage, and
there are limits on the losses that can be claimed. Higher limits
can be purchased for both real and personal property.
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Who decides how much my property is worth?
State laws may dictate how losses are to be figured, which means
the same insurance company may use one method in one state and a
different method in another. The common methods are:
Actual Cash Value—The replacement cost of the
item minus depreciation. For example, a new television set may cost
$500. If your 7-year-old TV set gets damaged in a fire, it might
have depreciated 50 percent. Therefore, you would be paid $250 for
that set.
Replacement Coverage—The cost of replacing an
item without deducting for depreciation. So today's cost for a TV
set with features similar to the 7-year-old one damaged by fire
would determine the amount of compensation. If it still costs $500
today, that would be the replacement coverage.
Replacement value should not be confused with
market value. The market value is what your house, for example,
would actually sell for and is generally more than the replacement
cost. This is because replacement value does not include the land,
which almost always does not need to be replaced.
Check your policy. If you prefer replacement
coverage and do not already have it, this coverage can be added to
your policy. Typically, the difference in premiums is 10 to 15
percent to upgrade from actual cash value coverage to replacement
coverage. However, it is well worth it to protect your investment in
your possessions. Your agent can advise you of the costs involved.
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How much will I be paid for damage to my personal property?
Remember that homeowners insurance is designed to cover general
personal possessions, not valuable collections like antiques,
jewelry or original art. Insurance companies deliberately limit
their coverage of expensive possessions so that household premiums
are more affordable to everyone. After all, if they had to cover
museum-level art collectors under standard homeowners policies, we
would all end up paying higher premiums to cover those expensive
items.
Your policy lists the specific monetary limits
for personal property under what is called "Special
Limits." Those limits usually are:
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$200 for money, bank notes, gold and silver
(other than goldware and silverware), platinum, coins, and
medals.
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$1,000 on securities, accounts, deeds,
evidences of debt, letters of credit, notes (other than bank
notes), manuscripts, passports, tickets, and stamps.
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$1,000 on watercraft, including their
trailers, furnishings, equipment and outboard motors.
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$1,000 on trailers not used for watercraft.
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$1,000 for loss by theft of jewelry, watches,
furs, precious and semiprecious stones.
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$2,000 for loss by theft of firearms.
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$2,500 for loss by theft of silverware,
silver-plated ware, goldware, gold-plated ware and pewterware.
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$2,500 on property on the resident premises,
used for business, and $250 on this property damaged or lost
away from the premises.
If these limits seem low to you (maybe that
engagement ring is worth much more than $2,500), you may wish to
talk to your agent about additional coverage for specific items.
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Does my policy cover my possessions even when I go on vacation?
Yes, perhaps in this case the term "homeowners" is
misleading because this is a package of insurance coverage that
extends to all your possessions no matter where they are. If you
take a round-the-world vacation and lose a valuable item, as long as
the loss is by a covered event or peril, the location does not
matter.
The liability component also extends well beyond
the boundaries of your home. Should you be found legally at fault
for injury or loss to another individual, whether you unfortunately
caused a tumble down a
San Francisco
hill or a fall in an
Indiana
barn, that is personal liability which again is addressed in your
homeowners policy.
As in the property section of your homeowners
policy, there are limits and exclusions to personal liability. Your
business activities, for example, are not covered under a homeowners
policy. You are also not covered for injuries or damage you
purposely cause. So if a fight with a neighbor turns physical and
you end up bopping him on the nose, your homeowners insurance will
not cover the injury or any resulting suit. Your policy lists
specific exclusions and limits
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I rent out my basement. Are my tenants covered by my homeowners
policy?
No. Your property and the structure (the basement) are covered
by your policy as is your personal liability. However, the tenants'
possessions and liability are not covered by your policy. Therefore,
they may wish to purchase their own renters insurance. Whether you
are a lessor or a renter, you should check with your agent to make
sure you have the right coverage.
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My mother lives with us in a separate in-law suite. Are her
possessions covered?
As a member of the family, she is probably covered under your
homeowners policy. So too is your child away at college covered for
personal liability or theft or damage to his or her property even in
the dormitory or college apartment. However, you should check with
your agent to be sure of the extent of coverage.
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What about our vacation home in the next state?
Insurance companies can operate in more than one state so the
company that carries your primary residence may issue a policy for
your vacation home. Personal liability is covered in the first
homeowners policy so the second policy need cover only property.
This type of policy is called a "dwelling policy."
If you rent out your second home for all or part
of the year, your homeowners policy may need to be endorsed (added
to) to cover the increased liability exposure. The renter's property
is not covered under your dwelling policy. Should damage occur while
someone is renting your property, they will need to check with their
own agent about their coverage.
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I work out of my home. Are my inventory and business property
covered?
Yes, but within certain limits. Both are covered as personal
property used for business purposes. However, like all personal
property, there are monetary limits on reimbursement. Whether your
home business is your primary occupation or a hobby that nets you a
few hundred dollars a year, it is still a business and you should
treat it as such. If you've invested quite a bit in equipment
(woodworking tools, for example) and sell the occasional decoy, you
should consider whether the personal property limits are sufficient.
Also, keep in mind that the personal liability
protection in your homeowners policy does not extend to business
liability. Check with your agent concerning your business insurance
needs.
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Help! I've lost everything! Where do I start?
If most of us suddenly found ourselves without anything due to
some calamity, we would be hard pressed to know all that we had
lost. When was the last time you counted the number of shoes you own
or CDs, not to mention furniture, dishes, drapes, or audio and video
equipment? The list goes on and on. How much is it all worth and
where would you start if you had to replace it?
Now is the time to make a list of major household
items and possessions. Just remember that, where possible, it is
wise to list the serial number, date and cost of purchase, and even
include the receipt if you can.
Another easy way to inventory your home is to use
a video camera or take pictures of your home and its contents. As
you take the video, you can also talk about the items and their date
and cost of purchase.
Whichever method you choose, have a copy made and
ask a friend or family member to hold on to it. Or store your copy
in a safe deposit box. That way if the worst happens and your home
is destroyed, the inventory list will be safe at another location.
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Why does the insurance company want to know where the nearest
fire hydrant to my home is?
The insurance company has to weigh many factors in determining a
premium to charge for your policy. One factor is access to water
(hence the question about the location of the nearest fire hydrant)
as well as the dependability and nearness of your local fire company
and police. Rural homes more than five miles from a water supply are
more at risk for severe damage from fire and lightning. Therefore,
they can be more expensive to insure and rural homeowners may even
have difficulty obtaining insurance.
Other factors are, of course, the age and
construction of your house. Generally, brick and stone homes are
cheaper to insure than ones constructed of wood.
The number and dollar amount of lawsuits in your
state can also influence your premiums. Residents in states that
experience a large number of lawsuits or of verdicts in excess of $1
million may face higher premiums to cover the cost of those suits.
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Is there anything I can do to lower my premiums?
Because your premium is based partly on the level of risk the
insurance company must take, there are things you can do to lower
your premium. Installing deadbolt locks (to discourage theft), fire
extinguishers, smoke alarms, and burglar and fire alarms that alert
your local police and fire stations can often save you up to 15
percent on your premium. Check with your agent before purchasing any
of these items to see if your insurance carrier has specific
requirements to qualify for the discount.
Many insurers also offer discounts if you insure
both your home and automobile with the same company. Another way to
save may be to increase the deductible on your homeowners policy. If
your deductible is $100, it means that you agree to pay this amount
first, and your insurance company will pay for damages that exceed
this deductible. By increasing your deductible from $100 to $250, or
even $500, this decreases the insurance company's risk, which may
mean a savings in your premium.
Also, it pays to shop around for insurance
coverage just like anything else. Of course, you may want to keep in
mind that the extent of coverage also determines the premium cost so
the cheapest policy is not necessarily the best. Your agent can help
you evaluate the different policies and companies to find the one
most suitable for you.
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Who keeps an eye on the insurance companies?
Insurance is a heavily regulated industry. Every state has a
government department that regulates and monitors every insurer
operating within the state's borders. In addition to approving
rates, your state's insurance department is involved in all
insurance matters on behalf of private citizens and businesses. It
also issues operating licenses to insurers and agents, based on
their ability to meet the state's requirements for conduct and
knowledge about insurance issues.
Your insurance company and agent work closely
with your insurance department to make sure you are getting the best
and fairest possible service within the state's guidelines. If you
ever have difficulty settling a claim, work with your agent to
resolve the difficulty. However, you can also contact your state's
insurance department if you wish to know more about your options and
rights as an insurance consumer.
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What do I do when my property is damaged or stolen?
Contact your agent as soon as possible. If there is damage to
your home or possessions, make "emergency" repairs to
protect yourself and your property from further damage, then call
your agent. For example, if some of the windows in your home have
been blown out by wind, you may board them up to prevent additional
damage. In fact, your policy covers the cost of these emergency
measures.
However, before setting about to make permanent
repairs, call your agent. The insurance company has the right to
inspect the property in its damaged condition. They may want to send
a claims adjuster or instruct you to get an estimate from an
independent contractor.
If you have property stolen, notify the police
immediately and call your agent.
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What if I am sued or found liable for injury to another person?
Liability covers bodily injury and property damage to others due
to your negligence. The coverage applies to non-auto accidents that
occur either at your residence or off the premises. Medical expense
payments such as first aid can also be due to the injured party.
Should you be sued or suspect that you may be, contact your agent
immediately.
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I am a renter, not a homeowner. Do I need insurance?
The same rule of thumb applies to renters as to homeowners. If
catastrophe struck tomorrow, could you afford to replace everything
you own? Or if you were sued, would you have enough money to pay
legal fees and possibly settle the suit? If not, chances are you
would benefit from the protection that renters insurance brings.
Renters insurance offers the same general
personal property coverage and liability protection as a homeowners
policy. Thus, your camera is insured while you are on vacation, and
you are covered if your grandfather clock crashes into the apartment
lobby's wall and leaves a gaping hole. In fact, most policies are
surprisingly extensive and may include additional living expenses
(also called loss-of-use coverage) if you are forced by fire or
other damage to live elsewhere.
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Isn't my apartment covered under my landlord's policy?
No, the landlord's insurance covers damage to the building and
the landlord's property, not your personal property or liability.
Plus, you may be liable for damage to the building if it is your
fault. If you go out and leave the stove on and an ensuing fire
causes extensive damage to the entire building, you may be held
liable to the landlord.
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How are prices determined for renters insurance?
Renters insurance is surprisingly inexpensive. That's because
you are not insuring a building. Like all property/casualty
policies, the value of your property to be insured and other risk
factors are weighed by the insurance company to determine your
premium. Your agent can help you find the best combination of
coverage and cost.
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I live in an apartment with three roommates. Do we each need a
policy?
Check with your agent. Usually, it is best if all roommates are
on the same policy although it is possible for each to purchase his
or her own coverage. If you do need to "go it alone," you
alone receive the security of renters coverage.
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I own a condo. How is my policy different?
Condo owners insurance covers the same general areas outlined
throughout this guide for homeowners in the important areas of
personal property and liability. In addition, condo owners insurance
provides coverage for some situations specific to condominium unit
owners.
Usually, the condominium association buys
insurance to cover the property (building and structures) and
liability coverage for the general association. If you own a
condominium unit, you may be responsible for covering from the
"walls in" on your unit, that is, for your personal
property and the interior of your unit (whatever area is excluded
from the condo association's policy) as well as for your personal
liability.
Sometimes, condo owners are assessed by their
condo association for losses "outside the walls" that were
not completely covered by the association's policy. For example, if
the clubhouse is destroyed and the condo association did not have it
insured, you could be assessed for a "share" amount needed
to replace it. If you wish, check with your agent about adding such
"loss assessment coverage" to your condo owners policy.
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