Homeowners Insurance Q&A

Homeowners insurance is one of the broadest types of risk coverage you can buy. In general, it covers the roof over your head, the shirt on your back and yes, even the kitchen sink! Homeowners insurance also protects you, your family members and your pets, if someone else is hurt at your home or away from it. But, most people don't have any idea what is covered in their policy and maybe even more importantly what isn't covered.

The following questions and answers cover most of the basics, but it's critical that you do annual check-ups with your agent or company representative to review your policy and coverage limits.

• Do I really need insurance for my home?
• Since my homeowners insurance is part of my monthly mortgage payment, I am confused over who decides what insurance to get. Is it my responsibility or is the decision left up to my mortgage lender?
• What does a homeowners insurance policy cover?
• Are the backyard shed and my television covered in my homeowners policy?
• Who decides how much my property is worth?
• How much will I be paid for damage to my personal property?
• Does my homeowners insurance cover my possessions even when I go on vacation?
• I rent out my basement. Are my tenants covered by my homeowners policy?
• My mother-in-law lives with us. Are her possessions covered under my homeowners insurance?
• What about our vacation home in another state - is it covered?
• I work out of my home. Are my inventory and business property covered?
• Help! I've lost everything! Where do I start?
• Why does my insurance company want to know where the nearest fire hydrant to my home is located?
• Who keeps an eye on insurance companies?
• What do I do when my property is damaged or stolen?
• Is there anything I can do to lower my premiums?
• What if I'm sued or found responsible for injuring another person?
• I own a condo. How is my policy different?
• What should I look for in an insurance company or agent?
• What isn't covered?

Q. Do I really need insurance for my home?

A. Yes. Insurance is your protection against the many property and liability risks you face as an owner or renter. For example, if somebody sued you for an injury or damage caused by you or your property, the cost of defending that suit could run into thousands of dollars just for legal fees-regardless of the outcome of the suit. And if you were to lose your home due to a fire or to have the contents damaged or stolen, you probably could not afford to replace everything all at once. That's why mortgage lenders, as a rule, require homeowners insurance.

Q. Since my homeowners insurance is part of my monthly mortgage payment, I am confused over who decides what insurance to get. Is it my responsibility or is the decision left up to my mortgage lender?

A. You decide on what insurance to get and keeping the policy updated is your responsibility. It is your home and your insurance policy. As a means of protecting their investment, some mortgage companies collect a set amount from you each month, put it in escrow, and then pay your insurance and taxes when they fall due. However, the policy is still yours and you should select the insurance you feel offers the best coverage at the best rates.

Q. What does a homeowners insurance policy cover?

A. With about 900 insurance companies writing property/casualty policies in the United States, individual homeowners policies vary. However, 80 percent of homeowners policies are based on a standard form, and all homeowners policies cover two important areas: property and liability. Moreover, your policy may cover you for additional living expenses should your home not be livable for a period of time due to a covered peril.

At a minimum, homeowners insurance usually covers damage caused by:

• Fire or lightning
• Windstorm or hail
• Explosions
• Aircraft
• Vehicles
• Smoke
• Theft or vandalism
• Falling objects
• Weight of ice, snow or sleet
• Freezing of a plumbing, heating, air conditioning or other such household system

Q. Are the backyard shed and my television covered in my homeowners policy?

A. Yes. Real property and personal property are covered. The value of your real property—your home, garage, shed and other structures-is generally based on the value of the main structure, the house itself. So, if the house were insured for $75,000, other auxiliary structures would be covered for 10% of that, or $7,500 worth of damages.

Covered 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.

Q. Who decides how much my property is worth?

A. 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. But if your 7year-old TV set gets damaged in a fire, it might have depreciated 50 percent prior to the damage. Therefore, you would be paid $250 for that set.

• Replacement Coverage. The cost of replacing an item without deducting for depreciation, but limited to a maximum dollar amount. 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. (It's important to remember that there are limits on this policy and you need to keep up-to-date on your coverage).

• Extended Replacement Cost. An extended replacement cost policy, one that covers costs up to a certain percentage over the limit (usually 20%). This gives you protection against such things as a sudden increase in construction costs.

Important Note: 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 or extended 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. Your agent can advise you of the costs and benefits.

Q. How much will I be paid for damage to my personal property?

A. Your policy lists the specific monetary limits for personal property under what is called "Special Limits." Those limits usually are:

• $200 for money, bank notes, gold and silver (other than gold ware and silverware), platinum, coins and medals.

• $1,000 on securities, accounts, deeds, evidences of debt, letters of credit, notes (other than bank notes), manuscripts, passports, tickets and stamps.

• $1,000 on watercraft, including their trailers, furnishings, equipment and outboard motors.

• $1,000 on trailers not used for watercraft.

• $1,000 for loss by theft of jewelry, watches, furs, precious and semiprecious stones.

• $2,000 for loss by theft of firearms.

• $2,500 for loss by theft of silverware, silver plated ware, gold ware, gold-plated ware and pewter ware.

• $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 $1,000), you may wish to talk to your agent about additional coverage for specific items.

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 collections under standard homeowners policies, we would all end up paying higher premiums to cover those expensive items.

Q. Does my homeowners insurance cover my possessions even when I go on vacation?

A. Yes. Homeowners insurance 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, you're covered.

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 and unintentionally cause a tumble down a San Francisco hill or a fall in an Indiana barn, for example, your homeowners policy likely will cover you.

As in the property section of a homeowners policy, there are limits and exclusions to personal liability. Your business activities, for example, are not covered under your homeowners policy. You also are not covered for injuries or damage you deliberately cause. Your policy lists specific exclusions and limits.

Q. I rent out my basement. Are my tenants covered by my homeowners policy?

A. 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 leaser or a renter, you should check with your agent to make sure you have the coverage you need.

Q. My mother-in-law lives with us. Are her possessions covered under my homeowners insurance?

A. As a member of the family, she is probably covered under your homeowners policy. Likewise, your child away at college is covered for personal liability and property loss. However, you should check with your agent to be sure of the extent of coverage.

Q. What about our vacation home in another state, is it covered?

A. Because insurance companies can operate in more than one state, 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 needs to cover only property. This second 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.

Q. I work out of my home. Are my inventory and business property covered?

A. Yes, within certain limits. Both inventory and business property 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. Click here for information on Home-Based Business Insurance.

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.

Q. Help! I've lost everything! Where do I start?

A. The best place to start after a great loss of property is with an inventory of that property. And the best time to make an inventory is before all is lost. 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, for example, that you counted the number of shoes or CDs you own, not to mention furniture, dishes, drapes, and audio/video equipment? 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 house, hold items and possessions. To make the job easier a home inventory form is available by clicking here. Where possible, it is wise to list the items' serial number, the date and the cost of purchase and the receipt.

Perhaps an even easier way to inventory your home is to use a still or video camera. As you take the video, you also can talk about the items, when you purchased them and how much they cost.

Whatever method you choose, have a copy made. Ask a friend or family member to hold on to it. Store your copy in a safe deposit box. Check with your agent, who may be able to store a copy for you. If the worst happens and your home is destroyed, the inventory will be safe at another location.

Also visit: Home Inventories

Q. Why does my insurance company want to know where the nearest fire hydrant to my home is located?

A. 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 proximity 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. Rural homeowners may even have difficulty obtaining insurance.

The age and the construction quality of your house are also factors. Generally, brick and stone homes are cheaper to insure than ones constructed of wood.

The number and dollar amounts of lawsuits in your state also can 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.

Q. Who keeps an eye on the insurance companies?

A. Insurance is a heavily regulated industry. Every state has some sort of department, administration or agency 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. Click on these links to access state insurance departments for Colorado, New Mexico, Utah and Wyoming.

Your insurance company and agent work closely with your insurance department to make sure you are getting the best and most fair service possible within the state's guidelines. If you ever have difficulty settling a claim, your agent should help resolve the difficulty. You also can contact your state's insurance department, for more information on your options and rights as an insurance consumer.

Q. What do I do when my property is damaged or stolen?

A. Contact your agent or company representative 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. 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 making 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 have you get an estimate from an independent contractor.

If your property is stolen, notify the police immediately and call your agent or company representative.

Q. Is there anything I can do to lower my premiums?

A. Yes. 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. Click here for Keys to Saving on Homeowners Insurance.

Q. What if I am sued or found responsible for injuring another person?

A. 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. You may owe medical expense payments, such as first aid, to the injured party. Should you be sued as a result of your negligent actions or suspect that you might be sued, contact your agent or company representative immediately.

Q. I own a condo. How is my policy different?

A. Condo owners insurance (an HO-6 policy) 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 your unit from the "walls in." That means you must cover your personal liability, your personal property and the interior of your unit - essentially whatever is excluded from the condo associations policy.

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 were destroyed, and the condo association did not have it insured, you could be assessed for a "share" amount needed to replace it. You might want to check with your agent about adding such "loss assessment coverage" to your condo owners policy.

Prices for condo insurance are generally less than homeowners insurance, as you are not insuring an entire building. Nationally, the average price for an annual premium is just under $300. The price you pay will depend on how much property you cover and your liability limits.

Q. What should I look for in an insurance company or agent?

A. Agents and companies are there to help you. At the most basic level, any agent or company representative should be able to answer all of your questions about insurance, provide you a thorough assessment of your insurance needs, and offer you a choice of insurance products to meet those needs. Also, any insurance agency or company should provide you with prompt, quality service in the case of a claim.

Just as important is the level of professional confidence and personal comfort you feel with the company representative or agent.

A sometimes overlooked, factor to keep in mind is that there are two kinds of insurance agents and two kinds of insurance companies. There are companies who sell insurance directly to you (i.e. by 800 number or internet) and there are companies who sell insurance through agents. There are also two different kinds of agents: those who represent one insurance company and those who represent more than one insurance company.

Agents offering through their agencies the policies of one insurance company often are referred to as "captive agents." Agents offering through their agencies the policies of more than one insurance company (but limited to companies who sell through independents) are called "independent agents."

Q. What Isn't Covered?

What about floods, earthquakes and other catastrophes?

A. Many homeowners policies cover damage caused by "just about anything," unless specifically excluded. Most catastrophes are covered. For example, wind damage from hurricanes or tornadoes is covered as a windstorm peril.

But, flood damage and earthquake damage are NOT covered by a standard homeowners policy. A separate policy is required.

Why aren't floods and earthquakes covered by my homeowners policy?

A. Flood and earthquake activity is more widespread than many people realize. Nine out of ten Americans live in seismically active areas. Since 1900, earthquakes have occurred in 39 states and caused damage in all 50. And if your home is located in a flood-prone area, you are 26 times more likely to suffer flood damage than fire damage.

You may want to check with your agent about special catastrophic policies for normally excluded conditions like floods and earthquakes.

Are there any other exclusion I should know about?

A. There may be other exclusions spelled out in your policy such as neglect, intentional loss, "earth movement (landslide)", general power failure and even damage caused by war. If you neglect to take care of your property (i.e., a leaky roof), you may not be covered. Obviously, if you intentionally 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 that drive up the cost of rebuilding or repairing 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 you must replace all the wiring in your home following a fire, and the current building code in your area requires a higher grade of electrical wiring, 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.

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.