The past few weeks have been overwhelming for many people due to the devastating consequences of wildfires and hurricanes Irma, Harvey and Maria. For some, it will take weeks or months to recover; for others, the return to “normal” will be much longer.
There are many take-aways from these unfortunate events; one is ensuring that your homeowner’s insurance policy provides sufficient coverage. If you’re like most homeowners, you probably view your house as your single most valuable asset, but don’t truly understand the policy you own. At best, there’s a passing familiarity with the way it’s structured and the language used to construct it.
Not understanding the specifics of your policy can result in unpleasant surprises, so here’s some basic information to give you a baseline and explain what to look for when reviewing a policy.
General Types of Coverage
- Basic coverage includes damage caused by things such as: theft, vandalism, fire, smoke, lightning, wind, cars and planes. This is the least comprehensive of options and only covers the perils specified in the policy.
- Broad coverage adds several additional risks to basic coverage including: ice, snow, sleet, falling objects, accidental water damage, heating and air conditioning systems, and domestic appliances. Similarly, the risks must be named to be covered.
- Open coverage is the most liberal and common type of homeowner insurance. It includes all hazards that aren’t specifically excluded in the insurance contract. Exclusions typically specified with this type of coverage are: flood, earthquake, war, neglect and nuclear hazard.
How Much You’ll Recoup if You File a Claim
- Replacement cost is the amount it would take to replace or rebuild your home or repair damages with materials of similar kind and quality, without deducting the depreciation. Many insurers recommend coverage of 80% of a home’s replacement cost.
- Actual cash value is the amount it would take to repair or replace damage to your home after depreciation. In other words, if a serious disaster occurs, this policy probably won’t cover a complete rebuild your home.
- Sudden and accidental is a term often used in policies stating that, for something to be covered, it must be a “sudden and accidental” incident. For example, if you knew you had a leaky faucet and didn’t fix it, the damage caused over many months probably won’t be covered because the reason for the loss was your carelessness.
- Floods from groundwater generally aren’t covered, so if you want this coverage, you’ll need to buy a separate policy for it. In many places (even flood-prone areas), numerous homeowners don’t purchase flood insurance, which is a gamble.
- Earthquakes usually aren’t covered; however, you can add it to your existing homeowner policy.
- Personal belongings coverage is limited to items such as jewelry, electronics, silverware, etc. Coverage generally is limited to $1,000 – $2,000. If you have items like these that are worth significantly more, consider purchasing a rider – an optional add-on to an insurance policy.
- One often-overlooked type of coverage that isn’t included in your homeowner’s insurance policy is umbrella insurance. Also called excess liability insurance, it helps protect you from major claims and lawsuits. It does so by providing:
- Additional liability coverage above the limits of your homeowner’s, auto and boat insurance policies. It kicks in if you exhaust the liability on these other policies.
- Coverage for claims that may be excluded by other liability policies, including false arrest, libel, slander and liability coverage on rental units you might own.
To add umbrella insurance to your coverage, contact your homeowner’s or auto insurance agent/broker.
Homeowner’s insurance may not be an exciting topic, but it is an important one. To discuss this topic in more detail, you can contact your insurance agent/broker. Our Redwood team can assist you as well, so please use us as a resource for insurance questions or inquiries about any financial planning-related topic.
ROSS HUGHES, CFP®