Understanding Your Homeowner's Insurance Policy

Now is as good a time as ever to take a serious look at your coverage and make sure your limits are accurate and updated. Homeowner's insurance policies contain several different coverage areas, each with different policy limits. To make sure you're properly insured, it's important to review each part of your policy.

April 30, 2008

If your homeowner's insurance policy is filed away in your desk, cabinet or just stashed away someplace "safe", now is as good a time as ever to find it, take a serious look at your coverage and make sure your limits are accurate and updated.

So it may not be the most exciting way to spend an evening or an afternoon, especially when the house needs cleaning, laundry is piling up, the fridge is empty and there's a million things on your ‘to-do' list, but don't underestimate the importance of reviewing your homeowner's insurance on a regular basis. A frightening 2 out of 3 American homes are underinsured by as much as 33%!

Homeowner's insurance policies contain several different coverage areas, each with different policy limits. To make sure you're properly insured, it's important to review each part of your policy.

Dwelling Coverage

The most obvious coverage is protection against damage to or destruction of your residential structure, your dwelling. If your home is destroyed by fire, lightening or whatever other perils your policy covers, the insurance company will cover the cost to rebuild or repair your home.

The most important reason to keep your homeowner's insurance policy updated – especially your dwelling coverage – is because, in the event of disaster, the insurance company will only reimburse you for what your home is insured for, or in some cases up to 125% of the dwelling coverage.

Now it's time to take a step back. Let's say you purchased your home (and your home insurance coverage) 15, 10, 5 or even just 2 years ago. Now, consider how much the cost of everything has been steadily increasing (don't forget inflation) – are you frightened yet? If not, you should be! In the calendar year of 2007, lumber costs throughout the nation increased by approximately 15% -- did you increase your dwelling coverage accordingly?

What about that bathroom that was redone, the kitchen renovations or the major home improvement project you've been working on since you moved in? Now that it's a part of your home, and in the event of a total disaster, you would include in your cost to rebuild, has it been included in your home insurance policy limits?

The bottom line is that it's essential to keep your homeowner's insurance policy up to date and make sure that your home is insured for at least 100 percent of the replacement cost. While it is easy to let that dust settle over your policy from year to year, keep in mind that putting it aside could cost you much more in the end. Your homeowner's insurance policy may make heavy reading, but it will be even more burdensome should it be out-of-date.

Make a point of having an insurance agent perform an industry-standard costimator (or cost estimator) on your home at least once a year, and after any type of home improvement.

Additional Structures

In addition to covering your residence (dwelling coverage), your homeowner's insurance also includes protection for damage to additional, detached structures on your property. Whether you have a detached garage, gazebo or shed, your homeowner's policy will generally cover those structures as well.

For detached structures, the average homeowner's policy includes coverage for anywhere from 10% - 25% of your home's dwelling coverage. For example if your Coverage A (Dwelling Coverage) is $200,000 and your policy provides coverage to other structures for up to 10% of the dwelling cost, your Coverage B (additional structures coverage) would be $20,000. Again, every homeowner's policy is different, so be sure to ask your agent or your insurance company what your specific coverage limits are.

Unfortunately if your detached structure is used for business, it most likely is not covered. It is possible to purchase additional coverage for your additional structures. It is essential to know exactly what you're covered for because each homeowner's insurance policy is different. You need to know what is limited or excluded.

Contents Coverage

In addition to covering your home and detached structures, your homeowner's insurance may also include coverage for theft of or damage to your personal property (Contents Coverage).

The average coverage for personal items in the typical homeowner's insurance policy usually ranges from 50 to 75 percent of the price your home is insured for, depending on your individual policy. This part of your home insurance policy covers the items in your home such as your televisions, radios, linens, silverware, etc. (the contents).

If you have any additional valuables, they may not be covered – or may be covered only up to a certain limit – so be sure to let your insurance agent know about any high-ticket items or collections.

Additional Living Expenses

In the event of a total loss (if your home is destroyed by a covered peril), you'll need clothes, food and even a place to stay. That's where your Additional Living Expenses Coverage comes in.

Since every homeowner's policy is different, your Additional Living Expenses Coverage may vary. Some insurance companies will allow unlimited cash flow in this area of coverage, while others will offer provide coverage for a percentage of your total homeowner's insurance coverage, and still others may not provide any at all.

Personal Liability

The personal liability coverage in your homeowner's insurance protects you from lawsuits resulting from bodily injury or property damage to others on your property – situations in which you are legally responsible to pay.

A personal liability case can stem from a number of different reasons, for example, if a delivery person slips and falls on your property, a friend trips down the stairs or your dog bites someone. The list of potential liability issues goes on and on, so you need to make sure your covered – otherwise, in the event of a major lawsuit, you could end up losing your house!

You can't predict where or when a lawsuit will originate. That's why it's so important to have enough liability coverage. The general rule of thumb: max it out! Ask your insurance agent or insurance company how much more it would cost you to increase your liability limits to their highest range. You'll be surprised to learn that it will generally be under $100. For maximum protection you could also add an Umbrella Policy (with limits upwards of $1 million in liability protection). Umbrella Policies must be purchased separately, but can also be surprisingly inexpensive.

In the end, it is essential to know what you're covered for because each homeowner's insurance policy is different. You need to know what your policy limits or excludes.

While it's easy to throw your policy in a drawer or stash is someplace "safe," remember that you should take the time to review your policy each year. Putting it off cost you in the end.