Homeowners Insurance Guide

Transcription

1 Homeowners Insurance Guide How to Protect Your Home and Valuable Property 101 (03/13)

2 Protecting Your Home 4 How Can Homeowners Insurance Protect You? Do Home Renters Need Insurance? Property Protection 4 What Is Protected? What Is Not Protected? Is There Limited Coverage For Valuable Items? How Much Protection Can You Get? How Are Mobile Homes Protected? Should Vacation Homes Be Protected? When Your Property Won t Be Protected How Can I Increase Coverage? Special Features Liability Protection 9 Situations Where Liability Can Arise Special Features When You Wouldn t Be Protected Medical Payment Protection 11 What Is Covered? Special Features When You Wouldn t Be Protected How Much Can You Recover? 12 Property Loss Recovery Special Features Liability Recovery Medical Payments Recovery Purchasing A Homeowners Policy 14 Know What Everything Is Worth Total How Much Protection You Need Talk To Several Agents What About Mail Order? Know What A Policy Offers Credit Scoring Hints On Reducing Costs Changing Insurance Companies Maintaining Your Homeowners Policy 18 Increase Your Coverage Update Your Inventory Of Personal Property 2

3 If You Have A Loss 19 Notify The Proper Authorities Notify Your Insurance Company Protect Your Property From Future Harm Work With The Claims Adjuster If You Have Problems Collecting Conclusion 21 Key Insurance Terms 22 3

4 Protecting Your Home Your home is worth protecting. Fire, storm damage, robbery, vandalism, and natural disasters are all common threats to the largest single investment you ll ever make. And while the contents of your home may not compare to the cost of the home itself, their combined monetary value can be surprisingly high. What s more, because of inflation, your home is probably becoming more valuable each year and its contents more costly to replace. When you protect your home you protect yourself and your financial stability, and the most costefficient way to protect your home is through homeowners insurance. In this guide we will advise you on what to look for when you buy a policy, how to pick the correct amount of coverage, how to choose the right agent, and what to do if you have a loss. Even if you already have homeowners insurance, you can use this guide to help you evaluate your present coverage. How Can Homeowners Insurance Protect You? The idea behind any type of insurance is risk sharing. Here s how it works: a large number of people (insureds) periodically make small payments, called premiums, to insurance companies, and these premium payments go into a large pool of money. The insurance company holds this money and uses it to pay for any losses that a comparatively small number of them might suffer. The idea is that making small, regular payments toward financially protecting yourself is much more digestible than paying a massive bill all on your own should disaster strike. Granted, disaster may never strike, but that is not a risk that most people are comfortable taking. Historically, homeowners have had to purchase a number of separate policies in order to obtain adequate protection. They had to purchase a fire insurance policy, a theft policy, and a liability policy to pay for injuries you may cause another person or damage you may cause to another person s property. As you can imagine, it was difficult to keep track of those different policies. So, in the 1950s, the insurance industry began to market what is known as a homeowners package policy. Today, this type of policy has virtually replaced separate policies. A homeowners package policy provides all the protection of separate policies and more, and is also more economical to maintain. Because different homeowners have different needs, insurance companies offer a variety of homeowners policies. The policies differ primarily in the amount of protection they offer. (These differences are discussed under How Much Protection Can You Get? on page 6.) Do Home Renters Need Insurance? Anyone who wants to protect his or her belongings should invest in homeowners insurance. Even if you don t own a home and you rent a house or apartment, you still have the valuable contents inside your home to protect. Homeowners insurance, with some variations, is available to you. Policies offered to renters, condominium owners, and those living in cooperatives are aimed primarily at protecting the contents of an insured s home and his or her liability. Little, if any, building protection is provided. Property Protection The basic intent of a homeowners policy is to protect you financially against loss or damage to your home. This includes the building structure and what lies within and around it. In this guide we will advise you on what to look for when you buy a policy, how to pick the correct amount of coverage, how to choose the right agent, and what to do if you have a loss. Even if you already have homeowners insurance, you can use this guide to help you evaluate your present coverage. What is Protected? Here is a summary of what can be protected under the property coverage of the typical homeowners insurance policy: 4

5 1. Your single-family house can be protected against damage or destruction. So can a multi-family house (unless it is designed for more than four families, then you will probably need special insurance), townhouse, row house, or mobile home. Most policies refer to the place where you live as the insured premises, regardless of which type of house you have. However, we will use the more descriptive term house in this guide. 2. Your outbuildings, such as garages, tool sheds, etc., can be protected against damage or destruction, provided they are on the insured property. Coverage of outbuildings (often called unattached structures or related private structures on premises in policies) can also protect fences, driveways, sidewalks, and other permanently installed fixtures. Structures that are attached to the main dwelling (such as garages with breezeways) are not considered outbuildings. If an outbuilding is used for business, it isn t protected under a homeowners policy. But, be sure to check how a policy defines business. Some policies specifically state that the occasional rental of an outbuilding is not considered a business purpose. Basically a common sense rule applies. For example, if you are renting your garage to a neighbor so he can store an extra car, the garage may be covered under your policy. On the other hand, if you set up a consulting service office in your garage, it s unlikely it would be covered. 3. Trees and shrubs can be protected, and you can even recover for damage to your lawn if the damage or destruction resulted from one or more of a limited number of causes. These causes are usually limited to fire, lightning, riot, explosion, vandalism, theft, or malicious mischief. What s more, there is an overall limit of recovery, no matter how much loss or damage results to your trees and shrubs. There is also a dollar limit on what you can receive for any one tree or shrub. Coverage is often limited to plantings located within a certain distance of your house. 4. Personal property that you own or have in your care can be protected against damage or loss while located on your property. If you have any doubt that it s vital to protect your personal property, just take a look around your home and add up the value of your furniture, books, clothes, electronics, and jewelry you ll quickly see what you stand to lose. In most policies, personal property is referred to as contents or unscheduled personal property. Each policy will detail the personal property that is covered, and some surprising things may be included. For example, building materials and supplies stored on your property to be used for construction there may be protected. Personal property can be covered when you are away from your home, as well, anywhere in the world. Whether you have to choose this coverage and pay an extra premium or whether it is included at no extra cost depends on the particular policy. In any event, there is a maximum on the amount you can recover in any single instance, no matter how much property is damaged or lost. One important point to note is that property coverage does not apply to all personal property, and the coverage you can purchase on certain categories of items is limited. What is Not Protected? Typically, automobiles and RVs are not covered. Business property while you have it away from your home is not covered either, although this may differ from policy to policy. Personal property of relatives, roomers, guests, or domestic employees is normally not covered, but some policies may give you the option of covering the personal property of guests and domestic employees while their property is in your home. Is There Limited Coverage for Valuable Items? Certain categories of valuable property are covered only to the limits described in the policy. These categories 5

6 usually include money, securities, jewelry, furs, and gold and silver other than jewelry. These limits may also apply to guns, boats and motors, tractors or other motorized vehicles used to service your home, business property, or trailer bodies. Remember a special limit applies to each category, and that s all you can recover, even if you lose all of the items in that category in one occurrence. For example, if the special limit on jewelry in your policy is $750, and a fire destroys 10 pieces of jewelry worth $500 each (a total loss of $5,000), the most you can recover for all 10 items is $750. Special limits, as well as items to which they apply, vary from policy to policy, so be sure to check before you purchase one. However, even if your homeowners policy provides limited coverage on an item of personal property, that item and others in its category can often be fully protected if insured under an amendment to the policy. This amendment is usually called an endorsement, rider, or floater. Talk to your agent about this type of coverage if you have any high-value items around your house. He or she will also tell you about other options you may have available to you. How Much Protection Can You Get? You may be wondering about the extent of the protection you can get for your property. There is, of course, an almost endless list of causes (often called perils ), which can damage or destroy your property. Some homeowners policies will protect you against more causes of loss than others. While there are policies to cover virtually every situation, the primary ones are: 1. HO-3, also known as Special: This type of policy protects a house from all risks, except a few specified ones, such as earthquakes and floods. Be careful, however, to check what is excluded before you sign up. Many policies of this type bill themselves as all-risk, when they technically are not because they do exclude certain perils. These policies also protect personal property from loss or destruction due to a wide range of causes. 2. HO-4 or Contents Broad Form: For people who rent their homes, most insurance companies offer a tenants package. This provides most of the protection available in a regular homeowners policy except that it does not protect the structure where the tenant lives that is the landlord s responsibility. 3. HO-6, or Unit-Owners: For people who own a condominium or live in a cooperative, an expanded version of a tenants policy is offered. It includes the same protection for loss of personal property and legal liability that the tenants package does, plus coverage for real property: alterations, appliances, and fixtures and improvements that are part of the residence premises. Other homeowner policies, such as HO-1 (Basic), HO-2 (Broad), HO-5 (Comprehensive), and HO-8 (Modified Coverage) may also be available, but their use has been reduced to a varying degree. Your insurance agent will be able to help you determine which policy best meets your needs. How Are Mobile Homes Protected? If you own a mobile home, you can protect yourself the same way you would if you owned a single-family home with one important exception. If you have a single-family home that is totally destroyed, insurance can pay for the cost of totally rebuilding your home. This is known as replacement cost coverage. On the other hand, if your mobile home is totally destroyed, coverage will probably be limited to its present actual cash value, not its replacement cost. This means you will recover what your mobile home is worth on the market that day and not what it would cost you to get a new one. Thus, if you bought your mobile home five years ago for $35,000, it may only be worth $29,000 today because of depreciation. As a result, if your mobile home were 6

7 totally destroyed, you d get only $29,000. According to the U.S. Census Bureau, the average price for a new single section manufactured home in 2012 was $41,100. (Double-section homes are larger at around 1,900 square feet of living space with an average selling price of $75,500.) Again, aside from the aforementioned exception, you get much the same protection for your mobile home as you do for a single-family home. In addition, you may also be covered up to $100 for moving your mobile home when it s in danger. For example, if you needed to evacuate from a coastal area when there s a hurricane warning, $100 may be recovered for the costs of moving. In the final analysis, the extent of protection you need will be based on the value of your home and possessions and even on your lifestyle. Your insurance agent will be glad to help determine which package best fits your needs. Should Vacation Homes Be Protected? Vacation homes are equally as vulnerable to damage and theft as primary residences are sometimes more vulnerable if it is at the beach and it s hurricane season. Frequently, your vacation home can be insured by adding coverage to your homeowners policy. If not, you ll need a separate policy. Make sure you are covered for loss and damage caused by fire, smoke, natural disturbances like windstorms, theft, vandalism, and accidents. One of the factors that can affect the coverage you can get on your vacation home is the amount of use it gets. Think about it. You probably do not live in your vacation home a great part of the year. This means there is a greater chance of something going wrong. No one is around to prevent or report events like lightning striking the roof or someone breaking into the house. Since most homeowners policies require occupancy as a condition of insurance, the fact that you visit infrequently may preclude you from obtaining full homeowners coverage. You will be able to get a basic fire insurance policy though. Ask your agent to explain this to you. To reduce the risk of a loss, many people employ house watchers or caretakers to look after their vacation homes. Many insurance companies will give more comprehensive insurance coverage to vacation homeowners for doing this. Often, people don t have enough insurance for the personal possessions they keep in vacation homes. Be sure you have a good estimate of the value of your personal property within your vacation home and enough insurance to cover the cost of replacing these items if needed. Sometimes people, especially apartment dwellers, need more liability insurance for their vacation homes than they need for their permanent residences. For example, even if guests rarely stay with you at your apartment, and you entertain friends at your vacation house all season long, you will want to have more liability insurance for your beach house than for your permanent address. A good insurance agent will help you evaluate the kind of coverage that s best for your particular situation. When Your Property Won t Be Protected Despite the wide property protection available under homeowners policies, every policy contains a provision stating that the insurance company won t have to pay if the loss or damage to your property results directly or indirectly from one or more particular causes. These causes range from the simple such as wear and tear, to the frightening such as war, nuclear disaster, earthquake or flood. (Be sure to check your policy, however, because there may be coverage available for damage resulting from a fire that s caused by nuclear disaster, earthquake or flood.) 7

8 In between are the causes you are more likely to encounter. These include: Law or Ordinances. If you lose money or incur added costs because of the effect some law or ordinance has on the use, construction, repair or demolition of your property, you cannot recover that amount. For example your house has been damaged by fire and the insurance company is willing to pay you the $1,000 it would cost to restore it as it was before the fire. But, some local ordinance requires you to use special materials that would raise the price to $1,200. You would still get $1,000 from the insurance company, not $1,200. Acts of Civil Authorities. You wouldn t be covered if your losses are caused because your property is taken by any civil authority; e.g., eminent domain. Water Damage. We already indicated that coverage isn t available for losses caused by floods. In addition, coverage usually isn t available for damage from water backing up through drains or sewers or from ground water that seeps into any structures on your property. However, check with your agent if your home is in a flood area because you may be eligible for federal flood insurance. Intentional Damage. It only stands to reason that you wouldn t be able to recover for losses intentionally caused by you. Remember: Even if your property would be covered ordinarily, it won t be if damage results from any of the causes listed above. How Can I Increase Coverage? As the previous pages have mentioned, certain limits or exclusions of coverage are found within the homeowners policy. However, a wide variety of endorsements can be purchased to secure the right protection you need (earthquake coverage, sewer backup, law or ordinance, etc.). Talk to your agent about any special endorsements you may need. Special Features In addition to protecting your house, outbuildings, and personal property, a homeowners policy can also cover you in a number of difficult situations. Among the most common of these situations are: Living Expenses. If you are forced out of your home because it is damaged, homeowners insurance can cover any increase in the cost of maintaining your family in the style in which it is accustomed. Thus, if it normally costs you $300 a week to stay at home (utilities, mortgage, food, etc.) and that doubles because you have to move to a hotel and eat out, you ll receive the difference. This protection normally lasts until your home is repaired or you are permanently relocated. Property Removal. If something happens to your house, such as a fire or flood, that requires you to take your personal property out in order to save it, the property may be protected against being damaged or destroyed during the removal process. Debris Removal. Disasters, even small ones, produce debris. Most homeowners policies will pay for removal of debris. So, if your stove explodes and half your kitchen is destroyed, your homeowners policy will pay to have the debris carted away so you can start to repair the damage. Rent Losses. If you rent a part of your home to others and, because of damage, the tenant has to move out, you will likely be able to recover the rent you lost during that period of time until the unit can be lived in again. 8

9 Fire Department Charges. Charges made by fire departments for their services may be covered if the department acts to protect your property. Moving Damages. While moving to a new home, your personal property would be protected whether it is at your old or new home. Some policies also protect your personal property while it is being moved. Here, though, a lower special limit of coverage may apply. Renters or Condominium Owners Improvements. If you rent your home or own a condominium unit, you might get limited coverage for loss or damage to permanent improvements that you put in, such as paneling on a wall. Credit Card Losses. Many policies will reimburse you for a limited amount if you become legally responsible for making payments on a card that was lost or stolen. Even though you are normally responsible for only $50 on each card, the total can be significant if you have a number of cards. Forgery or Counterfeit Money. Some homeowners policies will reimburse you for losses you suffer as a result of accepting forged checks or counterfeit money. A word of caution: It isn t normally spelled out in a policy when payments of the types mentioned above would be made. This means that initially you may have to pay for such things as extra living costs or debris removal by yourself and wait until you are reimbursed. Ask your agent if a particular insurance company has any provisions for advances when you need money the most after a disaster. Liability Protection Physical destruction isn t the only way you could lose your home. You could also lose it if you become legally responsible (liable) for a negligent or careless act that causes death or injury to someone else or damage to someone else s property. The amount you have to pay in damages could be so high that you would have to sell your home to make the payment. (If you doubt this is possible, just look at some of the huge awards reported in the newspapers.) When you have the liability protection of a homeowners policy, you reduce the chance of having to sell your home as the result of liability incurred by you, or any member of your household. Situations Where Liability Can Arise The number of situations that could give rise to personal liability is virtually endless. Here are a few fairly typical situations: A visitor or delivery person trips on a rake you left on your sidewalk. Someone slips on ice that you neglected to clear from your steps. You are playing baseball in the park and a foul ball hits a passerby. Your son is riding his bike and hits a pedestrian. A tree that you are cutting down accidentally falls the wrong way and damages your neighbor s roof. While playing with matches, one of your children sets a brush fire that destroys the garage of the house next door. 9

10 The examples above are diverse and represent only a fraction of possible situations that could make you liable. However, these particular examples were chosen because they illustrate the three major categories of liability against which a homeowners policy will protect you. These categories are: 1. Injury or death to others on your property 2. Injury or death to others off your property 3. Damage to the property of others It s important to note that you and members of your household are normally protected both on and off your property. Special Features The liability section of most homeowners policies will provide a number of special features. Usually, a policy will: 1. Pay for liability incurred while you are operating a small boat. 2. Pay for liability you incur as the result of a contract, provided the contract was made before the loss, is in writing, and isn t part of your business. For example: you want to go horseback riding and the stable makes you sign an agreement that you will be responsible for any damage done by the horse while you are riding it. 3. Pay for liability resulting from injuries to temporary household help, such as cleaning people, babysitters, gardeners, etc. (However, if any of these are permanent employees, you will have to get an employer s liability policy.) 4. Pay for legal, investigation, and court expenses incurred in connection with defending any liability claim against you. 5. Reimburse you for earnings actually lost if you must spend time away from work to assist the insurance company in defending a claim against you. Usually there is a limit of $50 to $75 per day and a requirement that you be away from work at the specific request of the insurance company. 6. Pay limited first-aid expenses you incur in helping someone who sustains an injury covered by your policy. This payment will usually be made regardless of whether you are liable for the injury or not. 7. Pay for liability you incur while operating a motorized vehicle that doesn t have to be registered (a typical example is a small riding mower/tractor for use around your property). 8. Pay for fire or smoke damage or damage caused by an explosion to any property and its contents that you rent from someone else. (This would cover the beach or mountain cottage you may rent during your vacation.) When You Wouldn t Be Protected Liability protection is not all-inclusive. If an accident that injures another person or damages that person s property occurs under certain conditions or is caused by certain activities, you will not be able to collect from your insurance company. These conditions or activities are usually referred to as exclusions. Most of the liability exclusions are really based on common sense. Thus, the typical policy won t provide coverage if your liability arises from: 10

11 intentional acts on your part; use of an aircraft; use or ownership of an automobile; racing, stunt driving, or similar activity in a motorized vehicle; giving, or refusing to give, professional services; war; your business; injury to someone for whom you should have provided worker s compensation insurance; or an injury on property you own other than the property insured under your homeowners insurance policy. Note: Most of these exclusions also apply to the part of the policy that provides for medical payments to those individuals whose injuries you are liable for. In addition to these general common sense exclusions, most homeowners policies will not provide liability protection for: damage to property that you own or that is owned by anyone else covered by your policy; (For example, if you run your power mower over your son s bicycle, you can t recover under liability coverage.) illness or death of a household employee more than a stated number of months after the policy period in which the injury took place ends; or slow and gradual discharge of pollutants into the air, land, or water. Medical Payment Protection No one needs to tell you how incredibly expensive medical care has become. Fortunately most individuals are covered by some sort of medical plan, which means they don t have to bear the cost of medical care alone. Suppose though that someone is injured by an accident on your property or that you accidentally injure another person. Who pays? Unfortunately, you probably do and without any help from your medical plan. You won t have to face this unpleasant prospect if you have a homeowners insurance policy. The medical payments coverage of your policy (actually a subpart of the liability coverage) will usually make payments for you up to the policy limit. What Is Covered? Most homeowners policies bind the insurance company to pay for necessary medical expenses that arise within a stated time (3 years is typical) from the date of an accident that causes bodily injury to someone other than you, or some other person insured under the policy. Payments will be made for: 11

12 injuries to individuals who are hurt while on your property with your permission. injuries to individuals that happen off your property if they are caused by any of your activities, actions of your domestic employees, or any animal or pet you keep. In addition, coverage usually applies if the injury is caused by some condition on your property or if the injured party is a domestic employee hurt on the job. Special Features Because medical payment coverage is so closely related to liability coverage, a lot of the same special features also apply to medical payment coverage. (Naturally those that relate strictly to property damage won t apply.) A feature found in some policies is first-aid expense. This permits you to make voluntary medical payments for persons injured on your premises or as a result of your activities. When You Wouldn t Be Protected Basically, the same general exclusions that apply to medical payment coverage apply to liability coverage as well. In addition, you can t recover medical payments under most policies if the injury is: to you or a member of your family who is considered living in your home. to any person who is on your property because your business is conducted there. to anyone who is covered under some other policy or under worker s compensation, disability, or similar insurance. How Much Can You Recover? If you suffer a loss that is covered by your homeowners policy, how much can you recover? The answer depends on, among other things: what is damaged or destroyed, who is injured, what caused the loss, the extent of the damage or injury, the 80% or other co-insurance clause, and what special limits apply. Naturally, recovery also depends on how much insurance you carry. If there is one hard and fast rule in the complicated area of insurance recovery, it is that you can t recover more than you are insured for. Let s start to examine the vital area of recovery by going through the three major areas of protection available under a homeowners policy. 12

13 Property Loss Recovery Here is how limits of recovery will be established on: 1. Your House. You determine how much insurance protection you want for your house, and your premiums are based on that figure. Also, the limit may be determined by mortgage requirements or local regulations. This figure, called your policy limit, represents the most you will recover in the event of total destruction. No insurance company will permit you to set your limit for more than it would cost to replace your home. They will, however, let you purchase insurance for less than that amount but, because of the 80% or co-insurance rule, doing so could prove to be a false economy on your part. Because the cost of homeowners insurance is relatively low, it is recommended that you insure your home to its full replacement value. The 80% rule provides that if you want to collect the full cost of replacing or repairing your house (or outbuilding), the amount of insurance you carry at the time of the loss must be at least 80% of the full replacement cost of the structure. Full replacement cost means what it would cost you today to rebuild in the event of total destruction. This figure might even exceed the market value of your house if, for example, you have an ornate old Victorian with a lot of detail work that is virtually impossible to duplicate at today s costs. If you do meet the 80% test and your house is destroyed, you can recover the full replacement cost up to your policy limit. If you do not meet the test, your recovery will be less. To illustrate the 80% rule let s say your house costs $200,000 to rebuild, which means you are required to have it insured for at least $160,000 if you want the insurance company to cover major damages in full. Suppose though that you decide to save money on the premium and buy only $120,000 worth of insurance. That means that the insurance company will pay only part of your major loss. The part will be determined by setting up a ratio between what coverage you do have ($120,000) and what the insurance policy says you should have ($160,000). This ratio of $120,000 to $160,000 is 75%, meaning that you can recover only 75% of any major loss. This is why we said it could be very false economy to try to save on coverage. Another word of caution: even if you do meet the 80% test, you ll only recover up to your policy limit in the event of total loss. So it s best to try to achieve 100% coverage of the replacement cost. In most policies, the 80% test does not apply to losses smaller than $1,000 or 5% of the amount of the insurance you carry. The Actual Cash Value method of computing payments will be used if your house is only damaged. Actual cash value is, as the name implies, what the destroyed part of your house was worth at the time of the loss minus depreciation. Thus, if a part of your house that had a 10-year-old roof was destroyed, the insurance company (figuring the average roof life as 20 years) would give you only half of what the roof cost you to put in not what it would cost you today. 2. Your Outbuildings. Normally, outbuildings are insured for 10% of the value of the insurance carried on your house. So, on a $200,000 house insured for that amount, your unattached garage would be insured for 10% or $20,000. Be aware though that the 80% test also applies to outbuildings. 3. Trees and Shrubs. There is a dollar limit both overall (5% to 10% of your house insurance) and per plant ($250 to $500) on what you can recover. 4. Personal Property. Personal property in your home and on your property is usually insured for 50% of the 13

14 value of the insurance you carry on your house (e.g., $100,000 on $200,000 house insurance). In addition, most policies today will also cover losses to personal property that occur away from home. Some, however, may or may not have lower limits. Check your policy. However, don t think that this is an overly generous amount of protection on or off your property. Remember that companies base payments for lost personal property on its actual cash value. This, as we mentioned before, takes into account depreciation and wear and tear, etc. So, even if your bedroom set cost $2,000 five years ago and would cost $3,000 to replace today, you might get only $1,000 if it is destroyed tomorrow. If this approach to evaluation bothers you, and it should, talk to your agent to see if your insurance company can provide you with replacement cost coverage. If it can, you ll naturally have to pay a higher premium. The amount you can recover on certain valuable items of personal property, such as money, securities, jewelry, furs, art objects, etc., will be limited to a relatively low amount. Check your policy and ask your agent about special policies if you have any of these items and their value exceeds the policy limits. These special policies are called floaters and are normally written on an all-risk basis with no deductible. Bear in mind though that allrisk does not cover all risks. Thus, a typical floater will not cover for losses due to wear and tear, intrinsic defects, insects, war, etc. They will, though, usually cover for mysterious disappearance. The amount you can recover for a loss under floaters is based on actual cash value of the lost or damaged items. As with all insurance, a floater should be reviewed (appraised) to see if its coverage on valuable items, such as jewelry, diamonds, etc., has kept pace with inflation. Special Features The limits for special features of a homeowners insurance policy property coverage such as living costs, debris removal, fire department charges, etc., are all spelled out in each policy. Liability Recovery The basic type of homeowners policy will usually cover for $100,000 of liability. You can increase this up to $300,000 for a surprisingly small premium increase. The limits of liability in your policy are the most that will be paid for any one occurrence (incident), regardless of how many persons are injured, how much property is damaged, or how many claims are filed. So, if five people are at your house for dinner and your negligence causes a stove to explode, injuring everyone there, the most your policy would pay if it provides for $100,000 liability coverage is $100,000, even if a court awarded that much in damages to each of the five injured people (a total of $500,000). However, if you are having another dinner party several months later and your stove explodes again, your policy would cover the loss again. Medical Payments Recovery The limit of medical payments coverage, like liability coverage, normally sets a per occurrence limit. In addition, there may be a per-person limit per occurrence. Purchasing a Homeowners Policy If you ve closely read the first half of this guide, by now you understand how important it is to invest in homeowners insurance. But what s the best way to go about selecting a homeowners policy? Know What Everything Is Worth Before you go shopping for insurance, it s good to have a firm estimate of how much the things you want to insure are worth. 1. Your House. Perhaps the best way to value your house is to have a qualified independent appraiser go over it for you. If you can t find one or don t want to spend the money, figure out how many square feet 14

15 there are in your house and find out roughly how much local contractors would charge to build a house of similar size with similar features (e.g. stone or brick construction, fireplaces, etc.). A number of insurance companies publish pamphlets designed to help you value your home by this method. Don t forget to update your valuation from time to time. 2. Personal Property. Valuing your personal property must be done very thoroughly or you could miss a lot. Being thorough will also enable you to come up with a total inventory of your property this could be very important if your house should ever be damaged or destroyed. Most insurance companies have pamphlets or worksheets available to help you value your personal property. A good way to prepare an inventory is to go from room to room listing items in each room with their current value. You may find it convenient to use the following categories: Furnishings and appliances chairs, tables, sofas, television sets, stereo equipment, dishware, beds, dressers, washers, dryers, and similar equipment. Clothing and food it s obvious that your clothing is worth something, but don t overlook the fact that you might typically keep hundreds of dollars worth of food in the house. However, because individual items of clothing and food may have relatively small value, your inventory can include such groupings as shirts, canned goods, etc. Sports and hobby equipment cameras, darkroom equipment, boats and motors, woodworking and other hobby equipment. Valuables jewelry, furs, silver, precious stones, works of art, antiques, stamps or coin collections. If any of these are very valuable, consider protecting them under a separate endorsement. It s a good idea to have valuable items appraised and to take pictures of them. It is also a good idea to take pictures (or if you have the means, video record) all of your personal property. The appraisals and photographs should then be kept in a safe place away from your house (like a safe deposit box). This could make a settlement easier if there is a loss. Total How Much Protection You Need After you have finished valuing your buildings and inventorying your personal property, you ll have a pretty good idea of how much homeowners insurance you ll really need. When you are working on the figures for your house and any outbuildings, remember to consider possible effects of the 80% rule. Talk To Several Agents After you have a figure for your insurance needs, it s time to find out how much you ll have to pay for what you want. The way to do this is to talk to an agent, or better still, several agents. An agent is a person who represents an insurance company, or a number of insurance companies, in selling policies. The agent is, in effect, a retailer, but instead of a markup he gets a percentage of your premiums for making a sale and providing future service. While an agent represents an insurance company, a good agent also provides service for you. This includes clearly explaining policy content and trying to match your needs with the best (not necessarily the most expensive) policy, and, most important, assisting you if you have a claim. In addition, a good agent will help you make periodic reviews of your policy to see that you are adequately covered as the value of your house and personal property increase. 15

16 How can you tell which agent is the one for you? Some hints: 1. Talk to others who have used the agent. 2. Talk face to face with the agent. Are you comfortable talking with each other? Question the agent about his or her experience. 3. Is the agent employed by only one insurance company or are they independent (serving more than one company)? This could be important because the commission that insurance companies pay independent agents may be higher than the commissions that companies pay agents who work directly for them (called captive agents), and the higher cost could result in a higher premium for you. 4. Find out if the agent is a specialist in the type of insurance you want i.e., is the agent a CPCU (Certified Property and Casualty Underwriter)? If so, that means he or she has taken a series of special courses and passed an extensive test. 5. If the agent represents an association-sponsored plan, find out if the policy provides for a grievance appeal system. What About Mail Order? Some companies make insurance available on a mail order basis. You may save money on your premiums, but you will not get the personal service you would if you bought through an agent. Weigh the value of this trade-off carefully before deciding on a mail order policy. Know What A Policy Offers Before you decide to purchase a particular policy, you should know exactly what protection it will give you. The only sure way to find out what a policy will do for you is to read it. Don t rely totally on what the agent says is covered. An insurance policy is a contract. If a protection is not listed in the policy, you don t have it. Unfortunately, however, unless you are an attorney or are exceptionally well versed in insurance, reading a policy isn t very easy because most of them are written in a style that is very difficult to understand. For example, try to figure out what this means: 1. The fair rental value of any portion of the described dwelling or appurtenant structures covered under this policy, as furnished or equipped by the Named Insured, which is rented or held for rental by the Named Insured. The fair rental value shall not include charges and expenses that do not continue during the period of untenantability. Coverage shall be limited to the period of time required to restore, as soon as possible, the rented portion to the same tenantable condition; Difficult to make sense of? Yes. But fortunately, the problem of understanding policies is lessening. Some progressive insurance companies have begun to issue plain English policies. Here is an example of a plain English version of a policy provision corresponding to the one just quoted: Loss of Rent. If you normally rent part of your home or another building on your property, and either of these is damaged so that you can no longer rent it, we will cover the fair rent you have lost. We will pay only for the shortest time needed to repair or replace the damaged rental property. We will not pay any expenses, such as utilities, that you no longer have while repairs are being made. Naturally, we will not pay for loss of rent if there is no damage and a tenant simply has canceled a lease or other rental agreement. While this information is much more reader friendly, it s still important to begin by reading the exclusions. The 16

17 basic approach of most homeowners policies is to state that everything is covered but and then to include a long list of exclusions. Above all, ask questions. One of the keys to finding a good agent is finding one who can answer questions. Credit Scoring Most home insurers operating in the United States use credit information, filtered through a formula, to create an insurance risk score. The score is used to statistically determine how likely one is to file a claim on an insurance policy. Many insurers use the score first to determine whether to offer coverage; more than half use that same information to determine how much to charge in premiums. Your credit report contains information about where you work and live and how you pay your bills. It may also show whether you ve been sued or have filed for bankruptcy. Companies called Consumer Reporting Agencies (CRAs), or credit bureaus, compile and sell your credit report to businesses. Businesses use this information to evaluate your applications for credit, insurance, employment, and other purposes allowed by the Fair Credit Reporting Act. Insurance Risk Scores Some people assume that an insurance risk score is the same thing as a credit score used by lenders to determine whether to approve a loan or line of credit. Both insurance risk scores and credit risk scores are determined from your credit information, but they are not the same. While both scores result from the same five characteristics of a person s credit report, the data are weighted differently. The biggest difference is that insurance risk scores look for stability while credit risk scores look for a reliable pattern. Insurance scores are also more focused on how regularly you pay than on how much you owe. Insurers use the insurance risk score to identify consumers who are consistent and reliable, as well as those who show a pattern of demonstrating common sense with money. Home insurance companies utilize insurance scores more in the underwriting of a risk (accepting new business or continuing to offer coverage). An analysis by Allstate Insurance Company showed that people who have better credit at least as reflected in their insurance scores tend to file fewer claims, thus costing the insurer less money. Insurers indicate that using credit information allows them to more fairly price insurance. Also, a higher insurance score has allowed some people to obtain coverage for which they would not have originally qualified. Rescoring It s important that the information in your report be complete and accurate. If a policyholder believes that personal actions have had a positive effect on their credit report, they should request that their homeowners insurance file be rescored so it will reflect a higher insurance score. However, the same holds true if factors have had a negative effect on your credit. Only a few states require insurance companies to rescore their policyholders on a regular basis (every 2 or 3 years). Tips On Reducing Costs While cost shouldn t be your primary concern when choosing a policy, it s important to know some ways that you can safely reduce premiums. These include: 1. Increasing Deductibles. Every policy has a deductible an agreed upon and set amount that you will pay toward a loss before receiving money from the insurance company. For example, if you have a $250 deductible and suffer a $400 loss, you will pay the first $250, and the insurance company will pay the remaining $150. Statistically, most losses are relatively small, so you can cut your premium costs by increasing your deductible to $500 or $1,

18 2. Installing a Smoke Detector or Fire/Security Alarms. A number of insurance companies will reduce your premium by anywhere between 2-10% if you equip your home with these devices. 3. Asking Questions. Ask whether a particular company will offer premium reductions if your house is relatively new, if you have burglar alarms, or if no one in your house is a smoker. 4. Shopping Around. It s a good idea to talk to several agents because you ll quite often hear different prices quoted for the same coverage. If you are sure that the coverage is the same, there is no reason not to take the lowest price if you have confidence in the company, its claims services, and its agent. 5. Extending Your Liability Coverage. Extend the coverage on your main home to cover your vacation home as well, because it s cheaper to increase the liability coverage on an existing policy rather than to purchase a second liability policy. You should also be aware that you can extend your liability coverage even if you have a separate property protection policy on your vacation home. Changing Insurance Companies Generally, people have a right to change their minds, and this is certainly true of homeowners insurance policy holders. However, switching insurance companies is not as simple as switching to a different brand of gas for your car. If you want to switch: be sure the new policy offers you at least as many features as your present one. try to time the effective date of the new policy as closely as possible with the termination of your present one. That way, you won t pay double premiums. and you are paying a mortgage, get in touch with your bank to see if you have an automatic insurance premium payment feature in your escrow account. If you do, you ll have to arrange to have premiums paid to your new insurer. Maintaining Your Homeowners Policy A homeowners policy should not be regarded as a document that doesn t change. As your circumstances change, your coverage should also. As time passes, it is likely you will acquire more and better quality personal property and, usually, your home itself will increase in value both because of inflation and through additions and improvements. Increase Your Coverage As what you own increases in value, the amount of protection you have should naturally increase. Letting the value of your home run away from your coverage could prove disastrous remember the 80% rule. How can you upgrade your coverage? There are two methods: 1. Specifically request that your coverage be increased. You may get an annual reminder from insurance companies asking if you would like to increase coverage. You can do this at any time during the policy period. 2. Your policy may provide that coverage will automatically increase by a certain amount each year. But be careful; the rate of increase set in a policy may well be lower than inflation. In addition, it may not reflect additions or improvements you made on your home. Even with an automatic increase, there still may be times when you have to specifically request additional coverage. 18

19 Update Your Inventory of Personal Property Make it a point to periodically update your inventory of personal property. To do this effectively, you should go through the whole procedure again, revaluing items and categories of items, adding new ones, and removing ones you no longer own. An updated inventory will enable you to have the listing you ll need in case of a loss. It will also remind you of any valuable items you may have acquired which may require adding an endorsement to your policy. If You Have a Loss If you suffer a loss that you believe should be covered under your homeowners policy, you will have to follow certain procedures if you want to collect. Notify The Proper Authorities The first thing to do is notify the proper authorities. Who falls within this category will depend on the type of incident you have to report police in the event of a theft; firemen in the event of fire; your doctor and police in the event of personal injury, etc. Not only is notification of authorities a logical step, it can be a key to recovery. For example, if you don t notify the police about a theft, you can seriously harm your chances of recovery. Notify Your Insurance Company Call the claims office of your insurance company to initiate a loss report. In many cases, the claims representative will record your information. Note that this person is not the agent or representative who sold you the policy; insurance companies have a separate group that processes claims. Most insurance companies have the ability to take a major loss report 24 hours a day, 7 days a week. Call up your agent and state what happened. In addition, most policies require you to give immediate written notice to the insurance company of any loss. Immediate need not be taken literally, but you should take it to mean as soon as possible after the loss. If you let an unreasonable period of time pass between loss and your written notice, your claim can be seriously jeopardized. If you suffer a property loss, you must also provide the company with written notice. This should contain a complete inventory of destroyed and damaged property, including quantity, cost, date of purchase, actual cash value, and amount of loss claimed. If a theft was involved, tell the company the time and place of the incident and when you called the police. If you have had an accident and expect to rely on your liability coverage, your written notice must include all possible particulars about the incident. Protect Your Property From Future Harm When property damage is involved, you are required to protect the property from future damage forthwith ( forthwith really means reasonable). If you don t, the insurance company will not be liable for any additional damage caused by your failure. For example, if a fire does $2,000 worth of damage to your roof but you neglect to cover the holes chopped by the firemen and rain damages $1,000 worth of furniture in the room below, you will not be able to recover for the furniture. The concept of protecting property from additional damage may seem simple enough, but don t be fooled. There are tremendous hidden pitfalls in this area. A typical example: During a fire, the fire department cuts off your electricity as a safety precaution. It s winter and your pipes freeze and burst without heat from your electric heating system. You will be responsible for getting the pipes drained or arranging some sort of 19

20 emergency heating. If you fail to do either of these and your pipes do break, you can t recover. Obviously in the face of a fire, it isn t always easy to think of everything. A good agent will help you in times of crises like this. Work With The Claims Adjuster After a loss, the most basic step is to determine the extent of the loss. To help in this vital computation, the insurance company may enlist a claims adjuster. A claims adjuster aids the insurance company by looking after the details of a claim. The adjuster investigates the circumstances of a loss, discusses it with you, and then gives the insurance company an assessment of the amount of damage. The company uses this assessment to determine the amount of your recovery. The adjuster might also help you in arranging repairs for your damaged property, and if there s a liability claim, try to find out who s responsible. The services of a claims adjuster come with your insurance policy, and there will be no charge to you. If you don t want to deal with the insurance company and the adjuster, or you feel you need an independent opinion, you can hire an independent adjuster. For a fee (usually 5% to 15% of the amount you recover), the independent adjuster will deal with the company s adjuster, handle your inventory, and obtain estimates for repair on your property. But be careful! An independent adjuster may not be worth the price. Some independent adjusters act as front men for construction companies and steer you to a particular company to make repairs, even if that company may not be best for you. So in considering an independent adjuster, the best advice is to be wary and beware. And, be sure to follow the regular claims procedures outlined below under If You Have Problems Collecting before going to an independent adjuster. If You Have Problems Collecting Once you ve put in a claim for a loss, problems can often come up when you try to collect. You and the insurance company may disagree on the amount of the loss. Or the company may be slow in processing your claim. How can you resolve these problems? Here are some suggestions: 1. Call your agent. Your agent should always be the first one you contact whenever you have a problem with your insurance. An agent has experience dealing with insurance companies and with claim difficulties and should be able to help you. 2. Contact your insurance company. If your agent can t help you, go directly to your insurance company for help. Insurance companies usually have special departments set up to handle complaints. If the complaint department can t help you, insist on speaking to someone higher up in the company. 3. Use your policy s grievance procedure. Many times insurance plans sponsored by associations provide for a grievance appeal process that can help resolve disputes. Typically, representatives of your association and of the insurance company will get together and try to settle your problem. If they can t reach a solution within a specified time, the problem will be referred to a specially selected grievance panel organized by the association. This panel will make nonbinding recommendations to the company about resolving the dispute. 4. Consider an independent adjuster. If you aren t getting anywhere processing your claim through regular channels, consider using the services of an independent adjuster. This will cost you and could present certain problems already mentioned, but it could bring results. 5. Take your problem to arbitration. Should you and your insurance company fail to agree on a claim, you can use the arbitration procedure found in your policy to resolve the problem. Let s say you have a loss that 20