What Do You Mean That's Not Covered? FAQs About Homeowners Insurance

by Dianne Molvig

Do you get the feeling after reading your homeowners insurance policy that you understood all the words and sentences, but you still have no idea what you've just read? You're not alone.

"Policies are written in relatively plain English," points out J. Robert Hunter, director of insurance for the Consumer Federation of America, Washington, D.C., and a former Texas insurance commissioner and federal insurance administrator. "But they're complicated. They have exclusions and citations back and forth between provisions. They're hard to figure out for a layperson."

What's more, these policies deal with something none of us wants to think about in the first place--damage to or destruction of our homes. No wonder, as Hunter observes, "people have a strange combination of fear and boredom" regarding their insurance policies.

But that can set you up for nasty surprises and huge financial losses if you should ever need to file a claim. You may go for years believing you have coverage on your home that in fact your policy doesn't include. Special deductibles might be buried somewhere on page 12 that you didn't know you'd have to pay. Or you may be spending money on coverage you no longer need.

Spare yourself the sorrow, frustration, and a financial hit by knowing exactly what's in your policy. Here we'll discuss a few areas that consumers often overlook or misunderstand.

Are you underinsured or overinsured?

Your policy states a replacement value--that is, what it would cost to rebuild your house if it were completely destroyed. But perhaps you've recently added a room or remodeled your kitchen. Whenever you complete such major projects, boost the replacement value specified in your policy.

Even if you've made no improvements, be sure the replacement value is adequate. A quick way to check is to find out the going rate in your area for per-square-foot construction costs. Ask your insurance agent, a contractor, or a real estate agent. Then multiply that figure by your home's total square footage.

Also, make sure the replacement value keeps pace with rising building costs by adding an inflation-guard endorsement to your policy, which automatically adjusts replacement value at the time of renewal each year. If you have an older home, consider an "ordinance or law" endorsement, which will pay the added costs of rebuilding your home to meet newer, more stringent building codes. An endorsement--also called a floater or rider--provides extra insurance not included in a standard policy, and you pay an extra premium for it.

On the other hand, it's also wise to avoid being overinsured and paying excessive premiums. Insure your house for its replacement value, not what you'd get if you were to sell it. The latter includes the value of the land your home sits on, which, of course, needs no replacement.

What's the cap on replacement costs?

Many consumers assume that if their home is completely destroyed, their insurer will pay whatever it takes to rebuild it. Most insurers, however, set a limit on replacement costs. Typically, this cap equals the replacement value stated in your policy plus 25%. Thus, if your policy pegs the replacement value at $200,000, the insurer will pay no more than $250,000 to rebuild your home.

But say a major storm blows through your area, destroying numerous homes. Construction costs could climb as materials become scarce and contractors are in high demand. That $250,000 may be insufficient to cover rebuilding a house like the one you had, and you'd be stuck paying the extra costs.

So check the replacement cap in your policy. If you want a policy with no limit--guaranteeing to pay whatever it costs to rebuild--you'll have to purchase a special policy available through a few insurers. An independent insurance agent can help you find a company.

Are there special deductibles?

If you live in hurricane country, perhaps you've learned the hard way that your policy carries a separate deductible for hurricane damage. This is a percentage deductible, usually equal to 2% to 5% of the home's insured value. Thus, a $200,000 home would carry a deductible of $4,000 to $10,000. You'd have to pay that much in repairs before your insurer would kick in to help.

Hurricane, tornado, and hail damage all can trigger these sorts of deductibles. If you live in an earthquake zone and have an earthquake policy (neither earthquakes nor floods are covered in standard homeowners policies), it may carry a deductible as high as 10% to 15%, according to Hunter.

Insurers often "slip in these percentage deductibles," he notes, "buried in fine print in a renewal notice ... Nobody reads all that stuff. So when the hurricanes come, people are surprised." And they're out thousands of dollars they didn't suspect they'd have to pay. (You can prepare for this expense by setting up a savings fund at your credit union. Use direct deposit and payroll deduction to build your "deductible" fund, and it will be available for all your unexpected expenses.)

Do you have enough liability coverage?

This covers you if you're sued by someone who's injured on your property. It also pays for injury or damage you, your family members, or your pets cause to other people and their property. Experts recommend that homeowners buy at least $300,000 worth of liability protection. Would that be enough if you were sued for everything you own plus future earnings?

Hunter recommends buying an additional policy, called an umbrella liability policy, to get a lot more protection for little added cost. An umbrella policy kicks in when you've reached your liability coverage limits on your homeowners and auto insurance policies. According to the Insurance Information Institute, New York, you can buy a $1 million umbrella policy for $150 to $300, plus about $75 for the next million and $50 for each million after that.

"To pay for that," Hunter recommends, "I'd take a $1,000 deductible on both my homeowners and auto policies instead of a $500 deductible," and then apply the resulting premium savings to the umbrella policy premium.

What about personal belongings?

Most policies cover personal belongings for 50% to 70% of the insured value of your house. Is that enough? Only a home inventory of everything you own can answer that question.

Certain items, however, may be insured up to only a limited amount. For instance, your policy may place a $1,000 limit on all jewelry. If you have expensive items you want to cover for their full appraised value, you'll need to purchase a personal property endorsement for each item. Remember, though, to remove any of these items from your policy if you sell them or they depreciate significantly in value. Save yourself that extra premium.

Questions?

No one can blame you for dreading the idea of spending the better part of a Saturday afternoon poring over your policy to find answers to the sorts of questions listed above. You may do so and still not feel sure you have clear answers.

If you have any doubts about what's in your policy, "The best advice," Hunter says, "would be to write a letter to your agent or insurance company ... And get them to put their answers in writing."

December 20, 2004