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Homeowner's Insurance - Are You Really Covered?

Financial Planning

July, 2010

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Homeowner's Insurance - Are You Really Covered?

As a homeowner, you probably do everything you can to protect your home, from taking care of maintenance items to locking the door when you leave.  But how often do you check the adequacy of your homeowner's insurance?  More importantly, do you really know what is included in your coverage?

That is what we will discuss this month: exactly what is included in your homeowner's coverage?

The first thing you should know is that there are various standard policies on the market.  HO-1 is the most basic and covers very little; thus it is rarely used.  HO-2, the "broad Form", covers 16 casualties.  These include damages caused by:

  • Fire or lightening
  • Windstorm or hail
  • Explosion
  • Riot or civil commotion
  • Aircraft and vehicles
  • Smoke
  • Vandalism
  • Theft
  • Volcanic eruption
  • Falling objects
  • The weight of ice, snow or sleet
  • Overflow of water or steam from plumbing, heating, air-conditioning or fire-protection systems, or household appliances (accidental)
  • Sudden  tearing apart, explosion, cracking or burning of a water heater or air-conditioning system
  • Freezing of pipes, heating and air-conditioning systems or household appliances
  • Sudden and accidental damage from electrical current

In addition to the "broad form," there is also an HO-3 or "special form" policy.  It is more popular because it covers everything except certain specified perils.  The perils typically excluded are losses from:

  • An ordinance or law
  • Earthquakes, shockwaves, landslides
  • Water damage, including floods, sewer backups and water seeping through your foundation
  • Power failure
  • Neglect
  • War
  • Nuclear hazard
  • Intentional loss (arson or any other act you do with intent to create a loss)
  • Governmental action
  • Zoning changes, bad repairs or workmanship, construction and defective maintenance

If you are beginning to get the idea that you may need a lawyer just to tell you what is covered, you are close.  Typically though, your insurance agent will be able to help you understand your coverage just as well, but make sure you thoroughly discuss both the actual coverage and what other coverage options may also be available to you.

Whenever you purchase homeowners insurance, you have a choice between actual cash value and replacement cost.  If you get actual cash value coverage, it will be cheaper, but if you have a loss, you will only receive the depreciated value of your property - and that probably won't get you anywhere near enough to recover from the loss.  Replacement cost, on the other hand will pay whatever is necessary to put you back in the same position you were just prior to the loss, subject to certain conditions.  Always get replacement cost.

An added reason to get replacement cost coverage on your house is that coverage on the contents is based on your insurance for the structure.  Generally, contents coverage starts at 40% of the insured value of the home, but, for a price, you can get a higher percentage.  So, for example, say you insure your home for $150,000.  At 40%, you would receive $60,000 to replace the contents of your home in the event of a complete loss.

Even though your policy may say it covers all the contents of your home, you will find there are still various exclusions.  For example, jewelry is typically limited in the amount of coverage.  If, you have a substantial amount of jewelry or collectibles, you will need to investigate acquiring additional coverage.  Policies often limit coverage on computers as well.  In most cases, you will need to list the items to be covered and their value. It may also be necessary to obtain appraisals if you ever need to support a claim.

Are you running a business out of your home?  If so, check with your insurer to see what business property is excluded.  Additionally, the general liability portion of your homeowner's coverage may exclude damages to any customers if they are injured in your home.

Homeowners insurance is an important part of your personal risk management strategy.  Take a moment to review your coverage and discuss any possible gaps with your agent - after a loss, itÂ’s too late to make any changes.

Speaking of risk management, be safe with those fireworks on July 4th.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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