Do You Understand Your Home Insurance Policy?

One of the often overlooked aspects of a home purchase is a home insurance policy. If you are placing a mortgage on a property, the lender will require evidence of home insurance coverage before they will advance funds.

Many homeowners innocently assume that all possible “risks” are covered by a home insurance policy. Unfortunately, the realization that this is not the case, typically occurs after a claim is denied.

Home insurance policies come in three types of packages. The most basic form of home insurance covers or protects the owner only against risks named in the policy. There is potential for significant risk for losses not listed in the policy. This is the cheapest form of coverage (as long as no claims are made).

A mid-range policy is defined as broad range coverage. It allows for basic coverage of the content of the house plus all risks on the building. It should be noted that all risks does not imply every possible cause of damage. It includes all risks except those specifically excluded from the policy. It is imperative to read the policy carefully to understand the coverage.
The third and most comprehensive insurance policy covers both buildings and contents for all risks that are not specifically excluded.

Typically, most policies will have limits on the claim amounts for computers, laptops, furs, jewelry, coins, stamps, and cash. If you have valuables that fall in these categories it may be prudent to obtain individual coverage.

Most standard home insurance policies do not cover floods, earthquakes, sewer backup and other natural disasters. You can purchase special riders to obtain coverage for the above risks.
It is important to also analyze the payment of claims options. The less expensive cash value coverage will pay out the depreciation value. For example, if a homeowner was making a claim for a 20 year old roof, they may receive only 10%-20% of the cost of a new one. If you purchase replacement coverage, the insured will receive the actual replacement cost of the item (with no deduction for depreciation) up to a maximum dollar limit. If you want to purchase coverage beyond the face value of the policy (the maximum dollar limit), you can purchase what is referred to as the guaranteed (or extended) replacement coverage which will cover the total cost of replacement even if it exceeds the policy limit.

An insurer should also consider obtaining supplementary coverage for additional living expenses and rental loss of supplementary income (such as basement rent).

If you are conducting business from your own residence, it is important to make mention of this in your home insurance policy to ensure there will be coverage for items such as equipment, contracts and banking records.

If you own a condominium, the condominium insurance policy will not cover individuals for liability inside their unit, losses to their belongings or required improvements. Consult with your insurance agent to ensure you have an adequate condominium insurance policy.
The last component of insurance that requires careful evaluation is the liability component. Most policies today for both homeowners and condo owners carry a standard one million dollar coverage (or $500,000 in less expensive policies)

Today, it has become more commonplace for the courts to award a seriously injured party millions for damages. Based on this information, it has been recommended to get an umbrella policy covering all policies (such as car, home, rental property, snowmobile, etc.) for an additional million dollars coverage. The cost is nominal and it may keep the under-insured away from the bankruptcy courts in the event of a successful claim.

Some final points of consideration:
It is imperative not to lie on an application form. State the intended purpose of the premises. If you aren’t honest, you may obtain a cheaper premium, but you will never collect on a claim.
Property that is illegally acquired, stored or moved is not covered.

If the property is going to be vacant, please notify your insurance agent to obtain special coverage. Failing to do so may result in a claim being denied. If a home is vacant for more than 30 consecutive days, all insurance coverage stops. For this reason, if a homeowner knows his dwelling will be vacant for an extended period (beyond 30 days), he should request a vacancy permit which will provide most of the coverage he had. The insurance company is not obligated to grant you a vacancy permit. Normally, a vacancy permit is limited to three months and a premium is charged.

Under most insurance policies, if your home is unoccupied for more than 4 consecutive days during the winter, insurance companies will not cover water damage caused by freezing due to troubles with any part of the plumbing, heating or central air conditioning systems (and in some instances appliances). A claim will be denied for the above reasons unless it can be demonstrated a competent person made daily house visits to ensure the heat was being maintained.

The message is that it is critical to not take home insurance for granted. It is imperative you purchase the right policy that protects all your needs.