Homeowners’ Insurance is a very important aspect of any real estate purchase. Lenders generally require mortgagors to carry a policy to cover them - and pay off the mortgage - in the event of a total loss. It is wise to consider more than just lenders’ coverage when shopping for insurance because your home’s value and replacement cost are usually far greater than what the lender will require. Here are a few shopping tips for homeowner’s insurance:
Know What Your Policy Covers
A typical policy will pay for damage to your property and your possessions from storms, fire, theft or vandalism. It will usually provide liability coverage if someone gets hurt on your property and decides to sue. Often there is coverage for temporary housing, so you don’t have to face hotel bills if you’re temporarily displaced from your house.
Sometimes homeowner’s insurance can protect belongings outside the home, too. If something is stolen from your car, auto insurance won’t cover it—but your homeowners policy may. Many times there is coverage for your items when travelling. For example, if you were to leave your laptop in a diner, it might be covered by your homeowner’s policy.
Know What Your Policy Doesn’t Cover
A standard policy has exclusions, including earth movements (landslides, earthquakes, sinkholes), power failure, war, nuclear hazard, government action, faulty zoning, bad repair or workmanship, defective maintenance and flooding. Windstorms are typically covered, including tornadoes, although insurance companies sometimes exclude tornadoes or hurricanes in high-risk areas.
Water damage is tricky. As a rule of thumb, water from above (rainwater or a burst pipe in an upstairs apartment) is usually covered, but water from below (backed-up sewers or ground flooding) generally isn’t. In areas where flooding or earthquakes are possible, supplemental coverage is usually available.
Actively Work To Reduce Premiums
It may sound like common sense to have a working smoke detector, but did you know that it might also help you land a lower insurance quote? The same goes for a burglar alarm. According to industry experts, you can sometimes reduce your premium by about 5% if you install something as a simple as a deadbolt, and up 15-20% for a burglar alarm system.
Insurance companies price your premium based on how much risk they foresee, so you can reduce the premium by reducing your liability risk, thanks to some smart preventive measures.
Replacement Cost or Actual Market Value?
There are two key distinctions that every homeowner should know: “replacement cost” versus “market value.” Replacement cost covers repairing or replacing your entire home. Market value is how much someone would pay to buy your home and accompanying land in its current downtrodden condition.
When you’re considering the type of coverage to take out, a policy that’s based on market value is typically less expensive but will pay less in the event your home is a total loss or substantially damaged. A good compromise between the lower coverage of a Market Value policy and the higher premiums of a Replacement Cost policy might be a Replacement Cost policy with a high deductible, IF you have a good emergency fund in place.
File Claims Promptly
Many policies have a time limit for reporting certain kinds of claims, especially if the problem is made worse by waiting. For example, if you see a water problem and decide to take care of it yourself rather than report it and a month later mould sets in, you might have difficulty filing a claim. Always ask what time limits apply for reporting claims.
Keep Good Records
If you experience a loss, become obsessive about keeping track of the details. Keep every receipt, every note and document the steps you took to mitigate the damage. Every time you have a conversation about the claim, write down the date, time, person with whom you spoke and the gist of the conversation. Photos of the damage and the repair process can also be helpful.
Watch Out For Jewelry - Art, Too
Often limits for coverage on jewelry are different than on other items. If you have expensive pieces be sure that your limits are at least at their value. It would be a shame to lose, say, $8,000 worth of jewelry and then discover that your jewelry limits are set at $3,000! The same is true for art. If you have original pieces that are very valuable, they may require a special rider or separate policy. These are the kinds of things about which you must talk with your insurance agent during the purchase process.
Special Caution for Condos and Other Multi-Family Situations
Water damage is a particularly sticky issue in most multi-family housing units. Leaks are so common that many insurers limit what they will and won’t cover. Make sure you are covered should your upstairs neighbors’ leak affect your unit. Also make sure you are covered when your leak affects the units below you. Of course, the key issue is often whose leak is it? Generally speaking, if the leak is in the wall, it belongs to the HOA and repairs are their responsibility. If the leak is in a fixture - a faucet, feed line, toilet, tub drain, and the like - it is generally the homeowners’ responsibility.
The overall structure of your multi-family unit is usually covered by a policy paid by the HOA. It is important that you know what limits and deductibles apply on that policy before you buy. If your building is inadequately insured, you may end up with a big problem in the event of a loss.
A good checklist to use when talking with your Insurance Agent is located HERE.