Homeowners Insurance

Things to consider

It is best not to skimp on insurance on your family's biggest asset, your home. Ask anyone who has ever lost a home to fire, hurricane, tornado, or other cause, and they will tell you to make sure you have adequate coverage before you need it. After you buy your homeowners policy, be sure to review it periodically to make sure it remains adequate.

Named Peril Versus Named Exclusion

A Named Peril policy is a policy that says that perils that are listed in the policy are covered, and no others are. A Named Exclusion policy says that All sudden and accidental damage is covered, unless the peril is specifically excluded, such as flood, earthquake, normal wear and tear, defects in materials or workmanship, nuclear accident, war, sewer backup, damage caused by animals, and a few others. The Named Exclusion policy is much better coverage, and you should insist on this type, unless Named Peril coverage is the only kind available. Many policies are Named Exclusion for dwelling, and Named Peril for personal property.

Replacement Cost Versus Actual Cash Value

If available, you should always choose Replacement Cost Coverage on both house and contents. Replacement Cost coverage means that damage to your home or personal property will be repaired or replaced without a deduction for depreciation. Actual Cash Value coverage means that there will be a reduction in the amount paid for damages based on the age and expected life of the item or component. For example, let's say your roof is 15 years old, and that the normal life of a roof is 20 years, and that the cost of a new roof is $6,000. In a storm, the roof is blown off:

Replacement Cost Basis:

Cost of New Roof = $6,000

Minus Deductible   -    $500

Payment for roof:      $5,500

Actual Value Basis:

Cost of New Roof = $6,000

Depreciation (75%) - 4,500

Minus Deductible   -   $500

Payment for roof:     $1,000

As you can see, there can be a substantial difference in the payout for a homeowners claim between Replacement Cost Basis and Actual Cash Value Basis, and this is just for the roof. Think about what would happen if the whole house burned down, and it and all the personal property inside was insured on actual cash value basis. The owner of the property would suffer a tremendous financial loss--all for the small difference in premium between replacement cost and ACV coverage.

Replacement Cost Versus Guaranteed Replacement Cost and Extended Replacement Cost

There are at least three different types of Replacement Cost Coverage. In the event of a covered loss,

        Replacement Cost Coverage will pay to repair or replace the dwelling up the amount of dwelling coverage on the policy.

        Guaranteed Replacement Cost Coverage will pay to repair or replace the house, no matter how much it costs.

        Extended Replacement Cost Coverage will pay a percentage above the dwelling coverage amount, usually 115% to 125%, in the event of a total loss.

Obviously, Guaranteed Replacement Cost Coverage is the best, however, it is hard to find on new policies. Most companies stopped offering it a few years ago, after experiences they had in California fires, and various hurricanes. If you have a policy that includes Guaranteed Replacement Cost Coverage, you should probably keep it, because you will have a hard time getting a new one like that. One note - if you have any kind of replacement cost coverage, if you build onto your house or otherwise increase the living space of your house, you should contact your insurance agent right away, as it is probably a requirement of your policy.

The next best type of replacement cost coverage is Extended Replacement Cost Coverage. When an insurance company insures a house, they try to estimate the cost to replace, but it is only an estimate. Over the years, even if your dwelling coverage increases some each year with an Inflation-Guard feature, your dwelling coverage can become insufficient. Extended replacement cost provides a safety net of additional coverage in case it is needed. That additional coverage is usually limited to 15% to 25% over the dwelling coverage stated in the policy. Even with extended coverage, it is still important to review your coverage periodically, and adjust where necessary. Most of the best homeowners insurance being sold today offer this feature.

Basic Replacement Cost Coverage just means that damage will be repaired without a deduction for depreciation up the limit of dwelling coverage on the policy, and not a dime more. In this case, it is crucial that you review your coverage regularly, and make adjustments as needed. If available, you should always ask for extended replacement cost coverage.

Other or Appurtenant Structures

Structures on your property that are not attached to the house are considered "Other Structures", and are usually covered for an amount of up to 10% of the dwelling coverage on the policy. If that amount is insufficient, you can increase your Other Structures Coverage to cover things like in-ground pools, workshops, storage buildings, garages, etc. Above-ground pools are considered personal property, and not an Other Structure.

Personal Property Coverage

Personal property consists of personal belongings that are not permanently attached to and part of the dwelling. For example, a refrigerator is personal property, but an undercounter dishwater is part of the dwelling. Replacement Cost on Contents means that personal property will be repaired or replaced with a new item of similar type, without a deduction for depreciation. Again, always ask for replacement cost coverage on contents, if available. For example, if lightning hits your 10 year old computer, on a replacement cost policy, it would be replaced with a new computer. On an ACV policy, a 10 year old computer is virtually worthless. On a replacement cost policy, normally the contents coverage amount will be 70% to 75% of the dwelling coverage amount. If your personal property coverage amount is 50% of the dwelling coverage, you likely have only ACV coverage.

Additional Living Expense or Loss of Use Coverage

Most homeowners policies include a coverage known either as Additional Living Expense or Loss of Use Coverage. This coverage is usually stated as either a dollar amount or a time period. Normally, the one based on time period is better. If your house is damaged so severely that you can't live there, you will still have to make your house payment, but will also have to pay motel costs or other type of rent. You may also have to eat your meals out at least for awhile, and have other living expenses that are over and above what you would normally spend if you lose the use of your house due to a covered loss. On some policies, you will be reimbursed for those expenses up to a dollar limit, usually 10% of the dwelling coverage. On others, if you are out of your house for a year or less, there will be no dollar limit on the amount you can be reimbursed. Again, this is only for covered losses. Losing the use of your house for a non-covered loss, such as flood, is not covered. There is normally no additional deductible on this type of claim, because it is the result of a physical damage claim to home or contents, for which a deductible has already been applied.

Family Liability Coverage

As in auto insurance, adequate liability coverage is very important. If an injury to a non-resident or damage to a neighbors property occurs due to something that happens on your property, then you may be liable for the damages. There are even cases where a person can be injured away from your home by your negligence, and your homeowners liability coverage may protect you. Several years ago, we had a homeowners customer that was playing golf in Virginia. He hit a drive which hit another golfer in the head, and we ended up paying $60,000 for the claimants injuries under our customers homeowners liability coverage. With the US becoming every more litigious all the time, you need liability coverage to cover these situations. Generally, the insurance company will pay the costs for attorneys to represent your case in court, and will also pay up to your liability limit if they lose. Most homeowners policies include $100,000 of liability coverage, which may not be adequate in many cases. You can usually increase your liability coverage to $300,000 or $500,000 for $20 to $50 per year. The Personal Umbrella Liability Policy mentioned under auto insurance will usually also extend to cover your home. There is usually no deductible on a liability claim. By the way, some policies exclude certain things from liability coverage, such as dog-bite, so make sure you understand what is covered and what is not.

Guest Medical Payments Coverage

If a visitor or guest is injured on your property, regardless of fault, their medical expenses will be paid up to the policy limit, usually $1,000 to $5,000 per person. There is normally no deductible on a medical payments claim.

Deductibles

In many areas of the State of Georgia, deductibles of $500 or more are available. In coastal counties, most companies require a minimum deductible of $1,000, and many also have a Wind and Hail Deductible of 2% to 5% of the dwelling coverage. This means that if you have a $300,000 house, have a 2% wind and hail deductible, and suffer a hurricane loss, you are likely to have a $6,000 deductible to deal with,  or a $1,000 deductible for claims for losses other than wind or hail. Many customers with older policies may still have a $250 (in some cases $100) deductible. You should contact your agent and find out how much you could save with a deductible of $500 or more. You may be surprised at the size of the savings. If you still have a very low deductible, it is very likely that your whole policy should be reviewed to  make sure it is up to date.

Coastal Properties

Due to the extreme exposure to huge losses in a given area from one hurricane, many companies have stopped writing property insurance altogether in coastal counties, and others have stopped writing homeowners insurance except for existing customers. Insurance companies doing this are trying to manage their Probable Maximum Loss, and thereby protect their ability to pay potential claims, and the viability of their company. The potential for losses due to disasters such as hurricanes, and earthquake is so huge, that it is beyond the capacity of individual insurance companies to accept this exposure. In cases like this, only the Federal Government can assist. Hopefully, one day they will implement a program for hurricane and earthquake similar to the National Flood Insurance Program. Until then, it is a good idea to have your homeowners insurance, auto insurance, and other lines of insurance with the same company. This will make you more valuable as a customer to the insurance company, and less susceptible to the negative effects of further coastal insurance restrictions. You are also likely to receive additional discounts if you have multiple policies with the same company.

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