Published May 24, 2013
The right homeowners insurance can protect your assets in the event of a natural disaster or a catastrophic loss. But finding the right plan with adequate coverage can be difficult depending on where you live.
If you live in an area prone to natural disasters, like fires or earthquakes, experts suggest knowing what your insurance covers. Some events, like flooding, require separate insurance from the government or private insurer, so it’s important to review your vulnerabilities and get coverage.
“Insurance companies can provide information about what natural calamities you’re at risk for, like flooding, fires or sinkholes,” says Eric Vaith, assistant vice president of product management at USAA.
Insurance companies are willing to work with homeowners to find the right policy. “No matter how good of a job we do at settling a claim, would rather not have a claim at all,” says David Spencer, vice president of Premier Client Services at ACE Private Risk Services.
When considering plans, your coverage and premiums are key. Even though your mortgage company will likely pay your premiums out of escrow, experts recommend reviewing policies annually and when you’ve a major life event. If you decide to increase deductibles to lower your premiums, Jim Towns, Allstate agency owner, recommends making sure you have that deductible amount in savings.
To get the most protection from your homeowners policy, experts suggest knowing the coverage you need, as well as what your insurer offers. Here’s how to pick the right plan:
Your basement is covered if there’s damage in your basement due to a fire or burst pipe, according to Vaith, but not for flooding from water backing up or a broken sump pump. You may need to purchase an extra rider to cover damages in your basement.
Floods. As most policies don’t include floods, you can buy insurance through the National Flood Insurance Program (NFIP). “The only people who buy it will be the most exposed,” says Vaith. Some insurance companies will write the government policy for you and service the claim.
NFIP provides up to $250,000 coverage on a home and $100,00 coverage on contents based on an item’s actual cash value or depreciated cost instead of the replacement cost.
Some carriers do provide broader flood coverage in lieu of purchasing a government policy, says Spencer. “Much like other government programs, it’s intended to serve the masses, but not everybody.” Some private polices provide a much higher replacement cost coverage on a very limited bases for people living in certain flood zones.
Heavy Rains. “Heavy rains can cause backup of sewers and drains,” says Spencer. This damage isn’t covered by NFIP or is very limited by a few thousand dollars. Carriers providing coverage may have a special deductible. “If you’ve a finished basement, this is coverage you should seek and get good counsel from a trusted insurance advisor.”
Earthquakes. Most homeowners policies don’t cover earthquakes, says Vaith, but in California, you can purchase insurance through the California Earthquake Authority (CEA).
CEA provides coverage on a mini quake and broad quake—one is a more limited form because earthquake insurance is so expensive, says Spencer. “Earthquakes don’t always cause total loss.”
Wildfire. While wildfire is covered under most homeowner’s policy, there’s an industry drive to provide better protection where wildfires occur to prevent homes from burning and get people to a safe location, says Spencer. “A little scorching is better than a pile of rubble.”
Hurricanes. “In Florida, you can get wind coverage with a special deductible,” says Spencer. Citizens Property Insurance Corporation is run by the state government and provides coverage for those who can’t purchase private insurance.
Homeowner's policies typically cover liability for bodily injury, personal injury and property damage, says Spencer, and personal injury can include libel, slander, character defamation, and invasion of privacy, whether these occur online in social media or in another public forum.
Homeowner policies generally cover up to $500,000 in damages but oftentimes this amount isn’t enough. An umbrella policy is an affordable way to protect against potential damages in excess of your homeowner or auto policies, including legal fees.
If you employ a nanny or other help, says Spencer, your homeowners policy will not protect you if your helper sues for discrimination, sexual harassment or some other wrongful act. Employment practices liability insurance or an option in your umbrella policy would protect you against this risk.
If your home is valued at $100,000 and you’re insured to that value, Vaith says rebuilding your home may cost more than what you paid. Most insurance companies add 25% above the replacement cost just in case construction costs are higher than expected.
Base the replacement value to rebuild your home on your home’s square footage, says Towns. “It’s not market value but how much it costs to rebuild your house.” Tell your insurance company about any home renovations, like custom cabinets, new kitchens and new bathrooms. If your policy includes building codes coverage, when you’ve a covered loss, the insurer will upgrade what you have to keep it up with new building codes.
“Knowing what you have is important,” says Towns, when determining how much coverage you need and documenting any losses. Without pictures and descriptions of your possessions, a claim is difficult to process, so be sure to take an inventory of your home and your valuable possessions and keep a record online or somewhere outside the house.
Replacement coverage is typically between 50% and 75% of your home’s value. Insuring items for the cash value instead of replacement cost can lower your premiums, says Vaith, but if you file a claim, you won’t be reimbursed for the amount required to buy the item new. “It’s a more affordable option to go with a cash value for certain items but as a consumer, you need to understand the details.”
Collectibles. “Scheduling specific collectible items, like jewelry, art, furs, musical instruments, expensive clothes, cameras, silverware, antiques or wine, is a very inexpensive way to get the broadest coverage,” says Spencer. Depending on your carrier, you may not need an appraisal for items valued less than $50,000. Experts recommend asking your agent about this limit to help you make an informed decision.
Items listed on a valuable personal property (VPP) rider do not have deductibles. “If you’ve a beautiful walk-out basement and water backs up, if you’ve musical instruments that are specifically scheduled, they’re covered at the replacement cost,” says Spencer.