Protecting Your Home and Everything in It
Without enough insurance, you’re betting your
savings that nothing bad will happen. I’d rather
bet a few extra bucks that something might.
I have a friend whose house burned down. Luckily, he’d increased his home-owners insurance just a few months before. Unluckily, he’d made the mistake of pegging his coverage to the resale value of his house. He figured that, for insurance purposes, his house was worth what he could sell it for, minus an estimate for the price of the foundation and the land.
A lot of people make that mistake. The resale value of your house is often less than the cost of rebuilding it from the foundation up—and rebuilding a house is what homeowners insurance is all about. The limits on my friend’s policy turned out to be too low. His error cost him plenty.
Home owner or tenant, you’re living in a dream world if your property isn’t fully protected. It doesn’t matter that you’ve drawn up a nice financial plan. It doesn’t matter that you’re saving money and living smart. One pretty day, you might come home from work and see nothing but fire engines and flames. In a few shocking hours, your house is gone. And so are your savings if you don’t have enough homeowners or tenants insurance to make good the loss. You’ll have to start building up capital all over again.
Some people deliberately play the odds. It’s rare for a home to be totally destroyed so they don’t insure for the full rebuilding cost. Sometimes they feel they can’t afford it. But a financial plan is only as sound as its backup systems. When you insure something for less than 100 percent, you are holding your savings hostage to luck. If your coverage slips below 80 percent of cost, which it easily might, even your lesser losses may not be fully insured (page 530).
Whoever said “A person’s home is his or her castle” (it was said that way, right?) knew what he or she was talking about. Your home deserves “castle” coverage because it’s worth that much to you.
Each insurance company has a slightly different contract, but all policies follow the same broad outlines (except in Texas, which has special forms; page 527). Buy the best you can afford, and recheck your coverage every couple of years or when you build an addition or make a major renovation.
Policies on the following forms will repair or replace covered structural losses up to your policy limit, provided that you keep your home sufficiently insured (page 529). You’re covered for the cost of living in a hotel, motel, or mobile home while your own home is being rebuilt, as well as for your liability to anyone injured on your property except for family members. You are not covered for the cost of normal maintenance. Your furniture, clothing, and other personal property are typically insured for 50 to 75 percent of the amount of insurance on your home. So if you carry a $300,000 limit on the house, the contents are insured for up to $150,000 or $225,000.
How much are you paid for each loss? Less expensive policies cover actual cash value, which means replacement cost minus depreciation. If your house burns down, you don’t get the full rebuilding cost; the insurer deducts something to account for the fact that you had an older house, and you have to plug the repair gap with your own income or savings. Ditto for used furniture: you’re paid its secondhand value, not the cost of replacing it. So you’re not as well protected as you think.
If possible, upgrade your coverage to replacement cost. That way you’ll secure the full cost of replacing your home and restocking your personal belongings, up to the dollar limit of your policy. To get replacement cost coverage, you must insure for at least 80 percent of what it would cost to rebuild (page 530), but that’s still too little to protect you. Insure for 100 percent of the rebuilding cost. Add inflation protection, to raise your coverage every year in line with an average of local building costs.
Even better, go for guaranteed replacement cost coverage or some variant of it. This pays for costs that exceed your policy’s face value. Most policies have ceilings, such as 20 or 25 percent above the policy limits. For example, on a $200,000 policy, you might be covered for as much as $250,000 in replacement costs. For more on guaranteed replacement cost coverage, see page 529.
Broad coverage (HO-2) insures some 16 or 18 risks to your home and personal property, ranging from fire, wind, and living in the path of a volcano to burst pipes and a short-circuited electrical system. It normally covers the actual cash value of your loss, although you usually can upgrade to replacement cost (see page 525).
Special coverage (HO-3), the most widely sold, costs just a little bit more than HO-2 but is a better deal. On the house itself, you’re protected from all risks except a few that are specifically excluded, such as earthquakes, floods, sewer backups, and wars. Check your policy for the exclusion list. A few high-end insurers provide all-risk coverage for personal property too. Usually, however, your personal property is insured for the 16 or 18 specific risks included in an HO-2. HO-3 typically offers replacement cost coverage but lets you upgrade to guaranteed replacement cost.
Tenant’s coverage (HO-4) protects against 16 or 18 risks to your personal property, although a few insurers give you all-risk protection. You can also get coverage for built-in improvements you make to the apartment, your liability to anyone injured there, your potential liability if you negligently cause an accident that damages the landlord’s or other tenants’ property, and living expenses if you have to move out while your apartment is being repaired. (For more on personal property, see page 536.) Most insurers put roommates—be they lovers or just friends—on a single policy.
Condominium and cooperative apartment coverage (HO-6) protects your personal property and any part of the structure you own or are responsible for. You can insure against 16 or 18 specific risks, but an all-risk policy is better. Show your insurer the condo agreement, which stipulates what you’re responsible for. Sometimes the condo or co-op insures the unit as it was originally built, so you have to insure only the changes (yours and those made by previous owners); sometimes you have to insure everything from the bare walls out. Normally, only 20 percent of your policy’s face value can be used to make repairs on your own additions or alterations. If you’ve renovated your unit, consider boosting this part of your policy.
The building itself, the common areas, and the owners’ common liability should be covered by insurance bought by the condo or co-op board. But consider buying your own unit loss assessment coverage. It pays if your condo or co-op suffers damage or loses a lawsuit for which it was underinsured, requiring the unit owners to kick in.
Unique or old-home coverage (HO-8) is for hard-to-duplicate houses such as Victorians or true Colonials. They’d be far too expensive to replace in their original form. So instead of basing your coverage on replacement cost, most policies insure only for the home’s market value. In a few states, insurers have to pay actual cash value (replacement cost minus depreciation) if that comes to more than the market value. Your coverage might also be defined as modified replacement cost. It replaces carved oak banisters, plaster walls, and fancy hardware with the building materials commonly used today.
Your house is usually insured only against the limited risks commonly used for HO-1 policies. That leaves out burst pipes and faulty wiring, which older homes are especially subject to. You might not even get replacement cost coverage (page 533) for personal property or for lesser losses, like those from a kitchen fire. Nor can you usually insure your personal property for more than 50 percent of the policy’s face value. HO-8, in short, is mediocre but sometimes the best that you can get.
Some insurers impose HO-8 coverage on older houses that aren’t unique. This can be a sign of illegal discrimination. An old house in the suburbs might get an HO-3, while the same house in a less desirable urban area might be offered only an HO-8. HO-8s are more expensive, per $1,000 of coverage, than HO-3s, so you’re paying more for less.
Replacement policies do exist for rebuilding old or historic homes in their original form, but they’re superexpensive.
Mobile homes are generally covered by a costlier form of HO-2 or HO-3. You can cover the home for its replacement cost (the price of a new home) or for its actual cash value (the market value of your older home). Total loss policies let you insure for a fixed dollar amount, which may or may not cover your home’s replacement cost.
In Texas, coverage comes in three basic forms: HO-A insures against 8 classes of risk to your home and its contents, paying only their actual cash value or the cost of repair. HO-B insures against all risks to your home except those specifically excluded, and 12 risks to personal property. On the home, you get replacement cost coverage; on contents, you get actual cash value. HO-C covers all risks to both home and personal property except those specifically excluded. Premises are covered at replacement cost or actual cash value, whichever is greater, and contents at actual cash value. With HO-B and HO-C, you can buy replacement cost endorsements for the contents of your home (an endorsement modifies your coverage). Many other endorsements are available, including—at some companies—guaranteed replacement cost. There are variants of HO-B and HO-C for tenants and condominium owners. Mobile home owners generally buy a variant of auto insurance.
One-form coverage (HO-W), introduced by State Farm, abolishes all the separate HOs. There’s a single contract, with coverage linked to how much of your home’s replacement cost you choose to insure. If you cover 100 percent, you get superprotection; in a total wipeout, payments can even exceed the policy’s face value (page 529). If you cover 80 to 99 percent of replacement cost, your losses will be replaced, in full, up to the policy’s face value. At less than 80 percent, your loss is repaired up to the policy’s face value but with common building materials, perhaps of lower quality than you had before. Your premium is adjusted depending on your insurance percentage and amount.
Basic coverage (HO-1) is a dinosaur. I list it last because it’s no longer sold by most insurers. Where available, it typically covers only 11 or 12 specified risks to your home and personal property, leaving out such common happenings as burst pipes, falling tree limbs, and sudden leaks from an air-conditioning system. Some policies cut you down to 8 or 9 risks, excluding vandalism, glass breakage, and theft. The latter coverage is usually reserved for remote or one-season cottages that are uninhabited for months at a time. Buy HO-1 only if it’s all you can get. It covers the actual cash value of your loss, although you might be able to upgrade to replacement cost.
Some policies today come with automatic inflation protection. At every renewal, your policy’s face amount goes up, in line with an index of area construction costs. Naturally, your premium goes up too. But that’s better than having a major fire and finding that you’re underinsured. A few insurers let you decline this inflation guard. Don’t.
There’s no guarantee, however, that these increases will hit the mark. Your coverage may rise too slowly, leaving you more exposed than you had thought. Or it may rise faster than local building costs, forcing you to buy more insurance than you need. So even with an inflation guard, get a replacement cost appraisal every few years, to be sure you’re still on track. And be sure to report any additions or renovations to your insurer.
For superprotection against inflation and other price risks, get guaranteed replacement cost coverage. It promises that if your house is destroyed, the insurer will repair or replace it in virtually every detail, even if the cost exceeds the policy’s face value. If the house was custom-built for you, the insurer might even pay the same architect and interior designer to supervise the reconstruction. This coverage saves your skin if you’re underinsured because you and your agent underestimated your rebuilding costs. It’s especially valuable for homes that might be caught in a widespread disaster, such as a wildfire. When a lot of homes need rebuilding at once, builders inflate their prices.
Some insurers don’t offer guaranteed replacement cost coverage on houses more than 25 years old, houses worth significantly less than the cost of rebuilding them, or unusually detailed and expensive homes. The latter might find coverage, however, through companies that cater to the carriage trade. Some insurers offer what they call extended extra replacement cost or an increased insurance amount. Here your payment is capped at 20 to 50 percent over the policy’s face value. You may have to negotiate how much over face value the company is going to pay. To claim this coverage, you typically have to start rebuilding within six months of the loss.
To get guaranteed replacement cost coverage, you have to insure for 100 percent of the expected rebuilding cost. The face value (and price) of your policy will rise automatically every year, in line with the general increase in construction costs. If you improve your home in some way, you have to notify the insurer so that that extra value can be covered too.
From time to time, the insurer may reevaluate the cost to rebuild. Don’t accept a big increase that seems unjustified. You’re required to cover only the cost of reconstruction today. If you think the insurer overestimated costs, take your case to your insurance agent or get a replacement cost appraisal of your own.
Warning: The local building code may have changed since your house was put up. Guaranteed replacement cost policies typically pay for repairing your house but not for bringing it up to code. Ask about an ordinance or law endorsement, which covers needed code improvements too.
In my opinion, your policy should equal 100 percent of your home’s rebuilding cost. You can’t go by market value, which includes the land as well as the house. You need to know what it would cost to rebuild from the ground up. In the superhigh heat of a fire, even the foundation may be damaged.
You’ll get the best answer from a builder or appraiser (tell the appraiser you want building costs, not market value). Alternatively, you could use your insurance agent’s rules of thumb. If the agent steers you wrong, however, and you find out too late that you’re underinsured, the problem is entirely yours.
Guaranteed replacement cost coverage keeps you fully insured for the right amount. Second best is automatic inflation protection. Third best is to use your insurance company’s worksheet every time your policy comes up for renewal to figure out how much more insurance you need to buy.
You’ll probably have to increase your coverage even though housing values fell. No matter how bad the real estate market, building costs generally rise.
That depends on how much less.
If you’re covered for 80 percent or more of replacement cost, your insured losses are normally paid in full up to the limits of your policy. Say, for example, that your home’s replacement cost is $200,000 and you’re insured for 80 percent, or $160,000. If a fire in the kitchen costs you $10,000, your insurer will pay the entire bill, minus the deductible. (A few companies require 90 percent coverage before smaller losses will be paid in full.) If the house burns to the ground, however, you collect only $160,000. Please insure your home for 100 percent of replacement cost.
Many home owners think they can’t afford 100 percent coverage. But you probably can if you increase the deductible. The average person files a claim only once in every 8 to 10 years. It’s better to pay for smaller repairs yourself than to get less money than you need to rebuild your home from scratch.
If you’re covered for less than 80 percent, you will not collect in full on any loss, even a small one. On a kitchen fire that costs $5,000 to fix, you might get $4,000 or less. The exact amount will depend on the age of the house and the payment formula used. People who insure for less than 80 percent are gambling that the worst won’t happen. I think you’re nuts. But maybe you know more about the future than I do. At the very least, keep your policy at 90 percent of replacement cost. That ensures full coverage for anything but a catastrophic loss and avoids philosophical discussions with your insurer over whether your coverage met the crucial 80 percent test.
You don’t have to rebuild exactly what you had before. You don’t even have to rebuild in the same location, depending on the policy provisions. If you decide not to rebuild at all, you can simply take the money (usually the actual cash value).
Policies differ. So do state laws governing what has to be covered. The depth of your protection depends on what your policy says, so be sure to read the list of covered items. Here’s a general look at what it might include.
Detached garages, sheds, driveways, fences, and other detached structures, typically insured for 10 percent of the coverage you carry on your house.
For home owners—trees, shrubs, and plants worth up to 5 percent of the policy’s face value, with a maximum of $500 per item. For renters or condo owners, it’s 10 percent up to a $500 maximum per item. They’re not protected against storm damage, only from theft, fire, lightning, vandalism, and so on.
The contents of a house—typically covered for 50 percent of the policy’s face value. Some insurers have raised that limit to 75 percent. You’re insured for losses both at home and away from home, including things stolen from your bank safe-deposit box.
Water damage that’s sudden and accidental, from burst pipes, air conditioner leaks, or a flood in the basement. You’re also covered if accidental damage to the roof lets in the rain, and for the havoc wrought by firefighters’ hoses.
The cost of protecting your home against further damage or loss—for example, boarding up broken windows or gaps in the wall that a fire burned through.
Reasonable living expenses if you have to move out of your house while it’s being repaired. Ditto if the authorities move you out of your house because of direct damage to a neighbor’s house by a peril that your policy insures against. For example, your company would pay your hotel bill if the police or fire department prevented you from going home because your neighbor’s house was on fire. You’re covered only for extra expenses (restaurant meals), not expenses you’d normally incur (groceries). Reimbursement is generally limited to 20 percent of rebuilding costs. Insurers set limits on how long these payments can last.
Lost rent if you rent out part of your house and those quarters become uninhabitable because of a fire or other insured damage. But you don’t get the full amount; the insurer deducts the business expenses that you normally would have incurred.
Removing debris from your property.
Up to $2,500 if your fire department charges for calls.
Medical payments coverage, for the minor medical bills of visitors or employees hurt on your property or injured by your family or pets away from home. If your dog bites the window washer, you can send your insurer the doctor bill, and maybe he won’t sue. Typically, you’re insured for up to $1,000. For a few bucks more, you can raise that to $5,000.
Theft or damage to the personal property of a guest or a domestic employee.
Up to $1,000 for a loss to your condo or co-op building if your owners’ association assesses you for it. You can beef up this coverage if you want.
Up to $2,000 in cash, stored-value cards, or other legal tender.
Damage done by your pets to the person or property of others.
Different policies have different exceptions. But in general, here’s what might be ruled out:
A separate structure on the property that’s used as a business office or rented out.
Losses due to a power failure from a source outside your home.
Water damage not arising from an accident. That includes floods, tides, sewer backups, and seepage from groundwater. You can buy a separate endorsement to cover backups of sewers or drains.
Losses from mold or other fungi. You might have limited protection if the mold arises from damage that’s covered, such as a burst water pipe. Otherwise buy a separate mold rider.
Losses from neglect—for example, property that’s stolen because you walked away from a partly burned home without boarding up the windows.
Damage you deliberately do yourself.
Earthquake, except by special endorsement.
Ice or snow damage to awnings, fences, patios, and swimming pools.
Vandalism to houses left vacant for more than 30 days, depending on the policy.
Frozen or burst pipes in a house you’ve left unoccupied without maintaining the heat or draining the pipes.
Damage from settling or cracking in foundations, pavements, or patios.
War.
Normal wear and tear.
Damage done by birds, rodents, insects, or your own pets (although the policy will repair your porch if it collapses due to hidden insect damage).
Smoke damage from nearby factories or agricultural smudging.
Claims on policies obtained by misrepresentation or fraud. So don’t lie if you’re asked whether your dog bites or whether you’ve had any previous losses.
A continuous leak from the plumbing, heating, or air-conditioning system (you’re covered only for sudden leaks).
Nuclear explosion—although if you’re nuked, the exclusions in your home owner’s policy will be the least of your troubles.
Clothes, furniture, and other personal effects are normally insured for up to half the face value of your home owner’s policy. A few companies insure them for 75 percent. With a $200,000 policy, then, you get $100,000 to $150,000 worth of personal property protection. There are fixed maximums for special items such as jewelry and furs (page 537). You can increase your coverage by buying endorsements (to raise particular policy ceilings) or floaters (for special items such as jewelry). You may also have $500 of credit card coverage in case a crook gets your card number and it costs you some money.
If you’re a renter or own a condominium or cooperative apartment, you are insured for the full value of your personal property.
Your policy covers damage or a theft reported to the police. It protects property in your home, temporarily out of your home (say, when you’re carrying it in your handbag), or with one of your children at school or college. You’re generally not covered, however, for personal property that you merely lose or break. There has to be vandalism, theft, or an accident that you or your family didn’t cause. If you accidentally break someone else’s valuable property, however, the policy should pay.
What are you covered for per item? In standard policies, less than you think.
When your insurer reimburses you for an item, you normally get its actual cash value—officially defined as its replacement cost minus depreciation. In other words, its value as used property, not new.
Your fire-damaged living room couch may have cost $1,200, but that was five years ago, before it was clawed by your cat and used as a trampoline by your kids. Its actual cash value, as priced by standard insurance formulas, might be only $650. The additional cost of a new couch will come out of your pocket.
Almost everything new loses value over the years: furniture, clothing, electronics, cameras, carpeting. Your insurer will repair the damaged item or reimburse you for its actual cash value, whichever is less. But you won’t get the money you need to buy something new. To refurnish your house after an expensive loss, you need replacement cost coverage.
Good antiques, on the other hand, should increase in value as the years go by. Your basic insurance will generally cover their current appraised value, even though it’s higher than when the policy was new. But you’ll have to prove your claim with a proof of purchase, a new appraisal, a picture, and other details about the items. The insurer can also decide to repair an item rather than replace it.
If you can afford it, this is definitely the coverage of choice. You get whatever money you need to start over from scratch. If your $1,200 couch goes up in flames, you might collect $1,800 because that’s what it costs to buy a couch of similar quality, new. The insurance company will also make repairs if the item can be restored to its original condition.
Only replacement cost coverage can restock your closets, rooms, and china cabinets after a major wipeout. The only articles not covered are those that are obsolete and in storage (your old Schwinn bicycle) and articles not in working condition (the broken TV set in the back bedroom).
Where possible, the insurer sends you an actual replacement of the item. If you know the make and model of your TV set, for example, the insurer will send you another one or one very similar. These goods are purchased at a discount. If you want cash instead—say, to put toward a larger-screen TV—the insurer gives you only the discounted price. That’s more than you’d get with a regular policy but less than full retail value. Where standard replacements aren’t possible, however, you get the full retail price of the substitute.
In standard policies, insurers pay a fixed, maximum price for the theft or covered damage to certain items, no matter how large your total coverage is. The typical limits: $2,500 for silverware, goldware, pewterware, and gold and silver plate; $200 for all bullion coins, rare coins, cash, and gold, silver, or platinum bars; $1,000 for all securities, deeds, manuscripts (which might include rare books), tickets, letters of credit, accounts, evidence of money owed you, and stamps; $1,000 for boats and their trailers, furnishings, equipment, and motors; $1,000 for other trailers; $1,000 for grave markers; $2,000 for guns; $2,500 for business property on the premises; $250 for business property away from the premises (such as a laptop computer stolen at an airport); and $1,000 to $2,000, collectively, for the theft of jewelry, watches, gems, and furs.
These limits apply to valuables in your bank safe-deposit box as well as to property kept at home. To raise your coverage, read on.
For a small extra payment, you can raise the limit on most of the categories just listed. For example, you might want to cover $10,000 worth of jewelry without listing all the items, but with a $2,500 limit per item. If something is stolen, you’d report the loss, substantiate its value, and collect. No proofs of ownership are required in advance, but you’ll need them if you make a claim. So keep sales slips and take pictures of your valuables or get appraisals, just in case.
Particular items of special value should be individually insured. Have each one appraised and listed separately: sterling silver flatware, $5,000; mink coat, $6,000; Dream Diamond, $7 zillion. If any scheduled item is stolen or damaged, the insurer pays its scheduled value, with or without a deductible, depending on the policy. You’re also paid for items that you merely lose. But there may be no coverage for accidental breakage unless you buy extra coverage.
Other valuables, such as antiques, collectors’ items, fine china, guns, musical instruments, or golfing equipment, don’t have to be scheduled to be fully covered. You can insure them for their actual cash value (including any appreciation in value) right along with your other personal property.
The Advantages of Scheduling Your Valuables
1. They’re covered if they merely disappear. If they’re not scheduled, there has to be a likelihood of theft.
2. They’re protected against practically all forms of damage, not just the 16 or 18 listed in your regular policy. This includes accidental wine or ink stains on an Oriental rug.
3. If they’re included in your basic policy, they might push the value of your personal possessions above the policy’s maximum limit. It’s often cheaper to schedule a few items than to raise the ceiling on your total coverage.
4. You won’t have to haggle with the insurer over whether you really owned the items and what they were worth.
The Disadvantages of Scheduling
1. It costs extra money.
2. You’re covered for no more than the exact amount of the appraisal. If your Picasso lithograph was listed at $2,500, that’s what you’ll get—even if the appraisal is old and the lithograph is worth $4,000 today. Had it not been scheduled, you’d have gotten its current market value minus the policy’s deductible.
3. You may wind up paying for insurance that you don’t really have. Say, for example, that you scheduled your mink for $5,000. It’s now three years old and worth only $3,500. If it’s stolen, you’ll normally get only $3,500, even though it’s insured for more. Solution: Buy replacement cost coverage for scheduled items. You’ll then be paid the full value that they were insured for.
All scheduled items should be reappraised regularly so they won’t be underinsured. Special items you don’t schedule need to be appraised only once and their pictures taken. If they’re damaged, their value can be updated based on the work that was done before.
You’re insured only against the specific risks listed in the contract—as few as 9, as many as 18. A few insurers sell all-risk coverage, which actually should be called almost all-risk. It leaves out things such as floods, war, and wear and tear. But only all-risk coverage protects you against paint dropped on the carpet or wine stains on your pink velvet love seat. Ask your company about cigarette burns. Some cover them under the “fire” clause in your basic policy; others pay only if you buy all-risk insurance. Also ask about breakage: what’s covered, what isn’t? You pay for minor damage, under your deductible.
If a guest damages your property, his or her policy might pay under the property damage clause or the liability clause.
Policies vary on this point, but here are some likely examples:
Ask about any special items in your home. A computer. A satellite dish antenna. A wine cellar. A coin collection. Ask about family members. Does the policy cover your mother who lives with you? Clarify your coverage before any damage is done.
What if a spare camera is stolen from your house and you don’t want to buy another one? At the very least, you’ll be paid its current, flea market value (replacement cost minus depreciation). If you carry replacement cost coverage, there may or may not be limits on what you can collect. Some policies pay full cost whether you buy or not; others pay up to a ceiling, say, $1,000.
You can give it to the insurer and keep the money. Or you can keep the property and give back the money. It’s your choice.
Some policies (HO-5s) are specifically aimed at the well-to-do. You get replacement cost coverage on both your house and its contents. You get protection against all risks. In addition, there might be:
Higher payments for valuable items. For example, jewelry and furs may be covered up to $5,000, silverware up to $10,000, and guns up to $5,000.
Coverage for damage from a power outage in your neighborhood.
Tarping your house right after a hurricane.
Free fire protection consultations in wildfire areas and brush-cleaning services at a discount. They might spray the roof with fire retardant if you’re near the path of a wildfire.
Coverage for food lost when the power to your freezer went out.
A bit of liability coverage for a small, part-time business run out of your house. The policy might also pay toward replacing data lost in an accident to your personal computer.
Coverage for damage from the backup of a sewer or drain—not included in the average policy.
Higher limits on your coverage for personal liability.
Recompense, up to $2,500, for the cost of changing the locks when your keys are stolen.
Medical treatment for pets injured in a covered loss.
The additional cost of rebuilding a damaged or burned-out portion of your house to meet the standards of a new building code.
“Green” replacements. When you have losses, the policy will upgrade you to energy-efficient Energy Star appliances, lighting, and heating and cooling equipment.
Reimbursement for items not obviously stolen but simply missing.
Homeowners, auto, and umbrella insurance, bundled together for a single package price.
You can get much (but not all) of this upper-crust coverage by increasing the limits on your regular policy or by buying endorsements. Which choice to make depends on what you need. Ask the insurance agent to make a list of all the extras in the higher-cost policy. Cross off the ones that aren’t essential. When you’ve pared down the list, find out what it would cost to add those extras to a standard policy. There’s no point buying more insurance than necessary.
Even with upper-crust coverage, you may have to schedule valuable items such as silverware, jewelry, and furs.
This is your “banana peel” coverage. You’re protected if someone—not a family member—slips on your banana peel, breaks a leg, and sues. You’re covered for injuries on your premises. Your family members (and pets) are also covered for their actions (or bites) away from home. Some states require that you carry workers compensation to cover domestics, painters, gardeners, and other full-time or occasional employees. You’re also covered if you negligently damage someone else’s property—for example, if your wheelbarrow gets away from you on a slope and smashes into your neighbor’s new Mercedes.
Only unintentional damage and injuries are covered unless the perpetrator is under 13. So you can’t slash your neighbor’s tires in a driveway dispute and expect your insurer to replace them. But it will pay in full if your small daughter hits your neighbor in the eye with a rock.
What if that same daughter, at 14, vents her emotions by deliberately setting fire to your neighbor’s porch? The property damage won’t be covered, but injury to your neighbor might. Your lawyer (you’ll need one!) will argue that, although your nasty daughter meant to scorch the porch, she didn’t intend to send anyone to the hospital for smoke inhalation, so the injury was unintentional—hence, insured. Right now, some policies pay if a court holds a parent financially responsible for children’s evil deeds. Other policies don’t.
If your dog bites the United Parcel Service driver, your insurance pays. If the dog lunches next on the driver for Federal Express, it pays again. But at that point, the insurer may cancel your policy, refuse to renew it, or try to exclude the dog (I say “try to” because it’s not clear that such an exclusion would stand up in court). In some states, courts can levy extra, punitive damages after a second bite—your punishment for keeping a dangerous dog. Those extra damages might not be covered by your insurance. After a dog bite, find out what your liability could be if the sweet pooch bites again. Some insurers won’t sell policies to owners of so-called vicious breeds: pit bulls, akitas, Dobermans, and others.
Your basic policy probably includes $100,000 of liability coverage. That’s not much, especially if you own a swimming pool. For a small additional fee, you can have $300,000 of coverage or even $500,000. Some companies take you up to $1 million.
Alternatively, you can buy umbrella insurance, which covers losses in excess of the limits on both your homeowners and auto policies. You’re required to carry certain minimums on your basic policies, maybe $250,000 on auto and $300,000 on your home. After that, the umbrella goes up. The ceiling can be $5 million or more. The insurance might also cover your liability if you’re charged with invasion of privacy, false arrest, libel, or slander. Average price: $200 to $300 a year.
Employees and clients if you run a business from home. Ditto if you run a child care service. Even that Federal Express driver bitten by your dog won’t be covered if he or she was delivering something for your business. For business risks, you need separate business or child care insurance.
Aircraft.
Injuries from most boats and motor vehicles (they have to be insured separately). But off-road vehicles such as golf carts and dirt bikes might be covered. Ditto small boats or boats parked in your yard.
Claims by one family member against another.
Damage to your own property.
Any disease that someone catches from you.
Damage done by a leaking water bed to an apartment you rent, unless you cover the bed with a special endorsement.
If you’re sued, your insurance company not only pays the damages up to the limit of your policy, it also covers all the legal costs of reaching a settlement or going to court.
Your policy probably doesn’t insure you against floods. If flooding is a risk and your community has met federal flood prevention standards, most home owners can insure themselves—for home and contents—through the government’s National Flood Insurance Program (NFIP). For information, see an insurance agent. In 2009 the most you could insure for was $250,000 on a house or condominium and $100,000 on its contents. There’s normally a 30-day wait before your coverage takes effect, so don’t put off applying until you hear the waters rising. There’s no waiting period, however, if you apply and pay for a policy in connection with a mortgage loan.
Consider buying flood insurance even if you live in a low-risk area. The feds say that 25 percent of all flood loss claims are filed by home owners living in places considered low to moderate risk. To determine your risk, go to Flood Smart.com (www.floodsmart.com) and type in your address. Some high-end insurers such as Chubb and Fireman’s Fund will piggyback additional coverage onto your government policy. They even offer complete replacement coverage in low-risk areas.
If you’ve ever received federal disaster insurance after a flood and don’t buy this coverage, you won’t qualify for disaster aid again.
Insurance companies may sell earthquake insurance as a separate policy or as an endorsement to your homeowners policy. Deductibles run from 2 to 20 percent of the home’s insured value. In California, most residential policies are placed through the California Earthquake Authority (CEA), with a 10 or 15 percent deductible, no coverage for outbuildings and pools, only $1,500 for living expenses while your home is being repaired, and no more than $5,000 (above the deductible) for replacing your home’s contents. Higher coverage limits are available, for a price. Some California insurers may offer modest wraparounds to cover certain losses that CEA-approved policies don’t.
Find out if you live near a geological fault (there are some in states other than California). If so, consider buying this coverage. Premiums are lowest for policies on wood-frame houses, which can sway with a quake and aren’t too expensive to rebuild.
What’s the very best earthquake insurance? Move to Dallas, where the earth doesn’t move.
Home owner’s policies normally cover wind damage except in places where windstorms are especially bad—for example, along the Gulf and South Atlantic coasts. There you may need special beach or windstorm coverage. Beach plans help protect coastal properties against wind and water damage during hurricanes. Wind plans protect only against hail and windstorm damage.
Some companies “shoreline,” meaning they don’t write beach policies at all. Others insist on a large deductible if you’re damaged in a hurricane rather than an ordinary windstorm. As a condition of coverage, you may be required to take special steps, such as adding shutters, to better protect your house against wind.
The devastation wreaked by major hurricanes in recent years has led many insurers to quit insuring homes along the coastal areas in many states, including Massachusetts and New York. Those that do offer coverage have raised their premiums in shore communities by as much as 100 percent! Increasingly, people with moderate incomes are selling shore homes and migrating inland because they can’t afford the policies.
Thousands of home owners in inner cities, high-risk coastal areas, wildfire zones, or along earthquake faults find good policies hard to get. Only a handful of companies may offer insurance at all. Those that do may provide bare-bones coverage or charge a painfully high price. Still, buy the best coverage you can. Losing your home will cost you more than paying a high premium for insurance. It’s a rock-bottom rule of real estate: never buy a property you can’t insure.
If one insurer rejects you, try another. They have different rules for accepting applicants. But you might not get coverage anywhere if you haven’t paid your property taxes for a couple of years, if a past policy was canceled because you didn’t pay your premiums, or if your house has been vacant for a while.
If you’re switching companies, keep your old policy for a month in case your new company reneges. For example, the new company might back away because of something it sees on your credit report.
People who can’t get normal homeowners or tenants coverage or are offered it only at a prohibitive price generally have access to risk pools organized by the state. These are bare-bones policies too. You buy them through insurance agents. They include:
Fair Access to Insurance Requirements (FAIR) plans—available in 32 states and the District of Columbia, for protection against such perils as fire, rioting, wind, hail, smoke, and theft. Some offer beach and hurricane coverage. A few include crime insurance. The plans typically assess the state’s insurance companies to help pay claims.
Policies from state underwriting pools—for broad-based coverage in areas where individual private insurers have pulled out. But even the state pools are writing rules to exclude high-cost properties, such as million-dollar beach houses in most vulnerable hurricane zones, unless they can’t get coverage anywhere else, at any price.
Policies from private companies that the state subsidizes—to insure high-risk properties that couldn’t otherwise get coverage. Some states require participating insurers to take over policies that are currently in the state risk pool.
The surplus line or nonadmitted market—for coverage not offered anywhere else. These companies, such as Lloyd’s of London, lie outside the jurisdiction of state insurance regulators. Typically, they’re for people needing unusually large amounts of coverage or coverage in high-risk areas. If you take this turn, read all the fine print and follow the rules to the letter. You may have gotten a credit for having hurricane shutters, but you won’t get paid if you didn’t get the shutters up in time.
More than 20 million people are believed to work from home at least part-time. A fire, a burst pipe, or a tornado could wreck not only their living quarters but also their livelihood. A lawsuit brought by an injured customer or employee could wipe them out financially. A thief might vanish with their computer or inventory.
Some self-employed people think that special business insurance will cost more than they can afford. But you might find bare-bones coverage for computer equipment for as little as $25 to $50 a year as an endorsement on your homeowners policy. More comprehensive coverage might cost around $100 to $400.
Home-business insurance is an industry in transition. New types of policies are being developed, targeted at the new workplace’s special needs. So when looking for comprehensive insurance, it’s important to speak with a couple of different agents. Some can offer more inventive policies than others. Here are your options:
1. Your current homeowners or renters insurance. You may think that your policy already covers the contents of your home office, but that’s not necessarily so. It typically protects only $2,500 worth of business equipment and a $250 loss off premises (for example, if a pickpocket lifts your cell phone). The equipment is insured against the risks named in your homeowners insurance, such as fire, theft, windstorm, and so on, but not flood—that comes under federal flood insurance—and not if your toddler dumps his spinach into your laser printer. There’s no protection against business lawsuits and no income replacement if your business shuts down because of damage to your equipment or home.
Nevertheless, simple homeowners insurance may be enough for a one-person craft or service business. Read your policy to see what’s covered. Strictly speaking, a business computer is often excluded. But if you also use it for games, balancing your checkbook, and other personal matters, the insurer may accept it as covered personal property.
2. Endorsements to your homeowners or renters insurance. You can usually raise your home-business coverage limits to protect equipment worth up to $10,000 or $15,000, and $1,000 or $1,500 off premises, at very low cost. There may also be endorsements for limited types of liability, such as injury to customers on premises or damage you accidentally do when calling on customers or setting up at craft fairs. But you don’t get protection against broad business risks such as false advertising or product liability. To qualify even for limited liability coverage under an endorsement, your business might have to be incidental, meaning very small. Liability protection for home day care is written separately.
3. Stand-alone home business policies. You get more comprehensive coverage for liability and equipment than beefed-up homeowners policies offer. They also reimburse you for the loss of important papers and records. Some cover the income you lose if your home has been so badly damaged by a fire or other disaster that you can’t do business there, plus the cost of temporarily locating elsewhere.
Ask the carrier that insures your home what it offers for home businesses. For a specialist in home businesses, try RLI Insurance Company in Peoria, Illinois. Among other things, you get coverage for anywhere from $5,000 to $100,000 worth of in-home business equipment ($1,000 to $50,000 off premises); $300,000 to $1 million worth of business liability protection for personal injury and property damage (although there’s a long list of exclusions); and loss-of-business income for up to 12 months if a fire or hurricane shuts down your office at home. Prices run from $170 up.
4. Business owner’s policies. These policies cover the works for businesses with more than one location. You’re covered for loss of equipment, inventory, computer files, business property, cash up to $5,000 or $10,000, a broad range of business liability risks, and off-premises losses of equipment worth $15,000 or more. You get all-risk protection, meaning that you’re covered for any loss not specifically excluded. If there’s a fire in the warehouse where you store inventory, you put in a claim. These policies also reimburse you for 12 months of lost income if your business shuts down because of damage to your home plus the cost of setting up shop in a new location. Stepped-up coverage may cost $1,000 a year and up.
5. Automobile insurance. If you’re using your car on business, let your agent know. And beef up your liability coverage. Clients don’t take kindly to being injured in accidents.
Make a day of it—maybe a rainy Saturday in March. Lay in plenty of diet soda. Plenty of chocolate bars to keep up your energy. Photograph everything in your house. Open every drawer, every cabinet, every closet, and take pictures from a close enough range to show all the contents. Make overall views of your rooms and what’s in them. Take close-ups of special items such as good china, Waterford crystal, and antiques. Don’t forget the cellar, attic, and garage. When it stops raining, take pictures of the outside of your house—the landscaping, driveway, sidewalks, toolshed, pool.
Old-fashioned film works well (if you can find a place to develop it). When the pictures come back, you can describe the items briefly on the back. With digital pictures, label the most important ones. Put down the model numbers and prices of any costly items and when you bought them.
Go to KnowYourStuff.org (www.knowyourstuff.org) for free software that lets you keep your inventory online. You can import your digital pictures into your online list. E-mail the list to another location, to protect it in case your house burns down.
If you have a video camera, use it instead. Talk about each item as you show it, recording the model and price.
The inventory is your guarantee that you’ll collect all the protection you paid for. With it, you can make a full list of all of your losses. Insurers will generally accept a list reconstructed from memory. But you’ll never recall every single item, and those little things add up. Pictures also show the quality of your furniture and prove that your modest home really did contain an antique Oriental rug.
Keep a copy of the inventory—along with sales slips for the more expensive items and any appraisals or descriptive material about them—in your safe-deposit box or at the house of a relative or friend. You’d be chagrined if these records burned in the same fire that destroyed everything else.
Total up the rough value of everything you own. It’s probably double what you thought. When buying property insurance, most people focus only on their few expensive pieces of furniture. But what drives up the price of refurnishing a house are the pencils and potholders, jackets and mittens, baseballs and houseplants. Your family’s clothing alone may be worth $10,000 or more.
All special items should be separately described and appraised: furs, good jewelry, antiques, paintings, Oriental carpets, rare books, special collections, and so on. Take pictures of them in relation to other things in your home to prove they were there. To find an appraiser, ask your insurer, a local jeweler, and a furrier, look in the Yellow Pages, or search online. Keep the pictures and appraisals in your safe-deposit box.
The first appraisal is the most expensive because everything has to be written up. After that, you can coast. The only appraisals that have to be updated regularly are those for the items that are separately scheduled (see page 535). Leave everything else alone. When something is stolen or damaged, just give the insurer the description, the picture, and the original appraisal. The appraiser will update the value for you. The only reason to reappraise everything is to run a check on whether you have enough personal property insurance to cover all of your possessions.
Compare prices! In any city, the most expensive insurer may charge 50 percent more than the least expensive for the very same policy. Many consumers don’t realize this or don’t take it seriously. You might waste hundreds of dollars if you can’t be bothered to shop around.
There are four sources of homeowners insurance: (1) Companies that sell only by phone or e-mail, such as Amica in Providence, Rhode Island (www.amica.com or 800-242-6422), specializing in better risks, GEICO in Washington, D.C. (www.geico.com or 800-841-3000), and AARP (for members only). Anyone associated with the U.S. military should call USAA in San Antonio, Texas (www.usaa.com or 800-531-8722—see page 512). (2) Companies that sell exclusively through their own agents or their own Web sites, such as Allstate, State Farm, and Progressive. (3) Companies available through general Web sites such as Insure.com, InsWeb.com, esurance.com, and InsureOne.com. (4) Companies that sell through independent agents. These agents work with several carriers, although they usually specialize in two or three.
Prices vary depending on your circumstances and where you live, so the same company may not be the cheapest for everyone. Amica and some other insurers pay a dividend at the end of the year, so their true cost is lower than it seems (although dividends aren’t guaranteed).
I like checking Web sites because you can get so many quotes. Be sure you give each company the same information, so that the quotes will be comparable. Quotes should come to your e-mail. Sometimes an agent will call; tell him or her that you’re gathering quotes and will return the call if you’re interested. Price shopping on the Web takes a little time but gives you a good look at the competition. It’s also a reality check on what an agent might tell you. Both agents and Web sites will check your credit report before proffering a quote, but that won’t affect your credit score. The scorekeepers ignore all insurance-related inquiries.
Price isn’t everything, of course. You also want your claims handled promptly, fairly, and without any hassle. Ask your friends how they like their own insurers. Some states publish data on customer complaints.
1. Buy your auto, homeowners, and umbrella policies from the same company. You may get a package deal.
2. Install deadbolt locks, smoke detectors, a fire extinguisher, and burglar alarms. You get a 5 percent discount if your house is protected.
3. Pay annually. It’s cheaper than paying semiannually or quarterly.
4. Raise the deductible. The standard deductible is $250, meaning that you pay the first $250 of any claim. The price of your policy goes down if you take a $500 or $1,000 deductible, but the saving may be only $50 or so. Ask yourself whether such a small price cut is worth the risk.
5. Quit smoking. Many insurers give nonsmokers lower rates.
6. If you have a second home, place both homes with the same insurance company. That way you pay only once for liability coverage.
7. Retire. Many companies charge retirees less than workers because they’re more likely to be home during the day.
8. Call your state insurance department. A few states help you price-shop by publishing booklets that compare what various companies charge.
9. Buy a recently built house. Discounts are often available for insurance on newer homes.
10. Don’t automatically take any coverage offered through your company’s payroll deduction plan. It’s not always cheap. Compare prices before signing up.
11. Build or rebuild your house right. Some insurers give discounts to coastal homes with storm shutters, shingles that are nailed down rather than stapled, and roofs that are strapped to the walls. California homes may need fire-retardant roofing.
12. Don’t overinsure! You might be paying for more coverage than you can use. Check it out if you insured your house for its full market value or something close to it. Your purchase price covered the land as well as the house, and there’s no point insuring your yard against fire and theft. Get a replacement cost appraisal of the value of the house versus the value of the land, and cover only the cost of rebuilding the house. If you’re paying your insurance premiums through your mortgage lender, you’ll probably need a letter from the appraiser if you want to reduce your homeowners coverage.
13. Don’t underinsure. Lower coverage costs less up front but will leave you stranded if you have a major loss.
14. Check your credit report for accuracy (page 260). Most insurance companies now consider credit scores when deciding whom to cover and how much to charge. Pay bills on time. A couple of missed credit card payments may result in higher insurance costs.
15. Think twice before filing a small claim. Insurers can look up how many claims you’ve filed by searching automated claims history databases, such as the Comprehensive Loss Underwriting Exchange (CLUE) or the Automobile Property Loss Underwriting System (A-PLUS). If you file more claims than average (more than one in every 8 to 10 years), you may be labeled high risk (experts call this the “use-it-and-lose-it” syndrome). You might be turned down for coverage or not renewed by your current carrier. The reports also cover how many claims, if any, have been made on your house in the past seven years, including claims by previous owners. That shows the insurers whether the house has structural or other problems. Too many claims on the house can put your rates up too. You can’t order a CLUE report on a house you want to buy, but you can ask the seller to get it for you.
Order a free copy of your CLUE report from ChoiceTrust.com at www.choicetrust.com (click on “Review Your FACT Act Disclosure Reports”). CLUE also wants to sell you an “insurance score,” but knowing your credit score is enough (page 260). For your free A-PLUS loss history report, call 800-627-3487.
16. Buy a house near a fire hydrant. You’ll pay less than your neighbors at the other end of the street.
17. Clear the brush around your house if you’re in a wildfire zone. In California, some insurance companies require a cleared area of as much as 1,500 feet.
A good insurer lets you make every weather-related claim you deserve. Your premium shouldn’t go up just because you’ve had repeated damage. After some bad storms insurers may raise rates generally in your area, but that will happen whether you make claims or not. A few insurers, however, do raise individual rates after two or more weather-related claims, so ask about it. You may have to make your house more wind- and storm-resistant as a condition of continued coverage.
If you have too many fires or thefts, however, your insurer might conclude that you’re a careless person (or a cheater). It might raise your premium or deductible, or even cancel your coverage. Ask your agent about your company’s rules on this point. Many companies won’t accept you if you’ve made several claims of this kind on other insurers.
When applying for new coverage, you’ll be asked about past claims. As a double check on your truthfulness, the insurer will run your name and address through the Comprehensive Loss Underwriting Exchange (CLUE) or a similar service, where insurers report the claims you’ve made over the past five years. If you “forget” to mention a claim that CLUE reports, the insurer may decide that you can’t be trusted and turn you down.
If you’re rejected for coverage or charged a higher rate based on information from the claims-reporting service, you have to be given the service’s name and address. Write or call for a free copy of your record to be sure it’s correct. It may list claims made from that address before you owned the house.
As you’re standing in the street, staring at the smoking ruins of your house, someone may shove a card into your hand. It’s a public adjuster. He or she helps you evaluate your losses and bird-dogs your insurance claim. The fee: 10 to 15 percent of what you recover.
Some people figure it’s worth the price to have the adjuster round up proofs of value and handle the paperwork needed to process a claim. But you shouldn’t need an adjuster to get a fair settlement.
Your insurer or agent will give you advice on filing the claim. In the normal course, you’ll be paid in full without having to hire a consultant. If you don’t agree with your insurer’s appraisal, you can get one of your own and demand a referee. If you do decide to turn to a public adjuster, make sure that he or she is licensed by your state and ask for references. Base the fee on the extra money the adjuster gets for you, beyond what you were originally offered.
1. After a fire or storm damage, board up the broken windows in your home so that the remaining property can’t be stolen. Your insurer will pay for it.
2. After a theft, notify the police.
3. Call your insurance agent.
4. Make a list of everything you lost, approximately when you bought it, and what you paid for it (or smugly produce the inventory you made in advance). The insurer will help you estimate current cash value.
5. Keep a list of all your expenses.
6. Get estimates for repairs.
7. Don’t sign any contract to work with a public adjuster until you’ve first tried working with your insurance company. But if the company squeezes you, get help.
8. If anyone is injured, don’t take the blame without first calling your insurance company.
Some homeowners insurance companies have gone broke, and more will in the future. Your policy is covered by the National Conference of Insurance Guaranty Funds (www.ncigf.com), but you’re usually insured for no more than $300,000 and perhaps only $100,000, depending on your state. You’re protected only for claims in the pipeline. If your insurance company fails, your policies will be canceled and you’ll have to search for coverage somewhere else. Save yourself the grief. Buy only from an insurer that has high ratings for safety and soundness and that is licensed in your state.
When you get an insurance policy—any policy—double-check it to see that you got what you ordered. Large numbers of policies come through with mistakes: wrong amounts, wrong endorsements, wrong types of coverage. When you put in a claim and find you’re not covered, it’s too late to argue.