What You Need in a Homeowners Insurance Policy
If you own a home or are buying a home, you will need homeowners insurance. It will protect you against fire, theft, wind damage, broken water pipes and lawsuits resulting from an injury on your property, among other things. Your mortgage lender will require that you have a homeowners insurance policy. But not all policies are created equally. We are going to break down exactly what you need.
Dwelling Coverage (Coverage A)
Coverage A on your policy covers the dwelling or structure of the home. In the event of damage to your home from a covered peril (cause of damage) such as fire, windstorm, or hail damage, your dwelling coverage will pay for the repairs. Your agent will use a calculator to determine the replacement cost of your home using information like square footage and quality of kitchens and bathrooms. Depending on the market you are in, the replacement value of your home could be significantly less than the sales price. We do not include the value of the land in the dwelling coverage.
How much coverage should you have? Your dwelling coverage limit should be enough to completely rebuild your home should there be a total loss of the structure. You can ask your agent to give you a replacement cost report to see how they came up with the amount. Make sure you let your agent know if you've added an addition, renovated a kitchen or bathroom, or replaced the roof or furnace as these items impact the value of the dwelling. We advise our clients to also hold a 50% Additional Replacement Cost coverage. This gives you an increased limit of 50% should rebuilding a home cost more than anticipate. This is common when there's a large disaster like a hurricane. Materials and labor costs can increase dramatically after such an event.
Other Structures Coverage
Coverage B on your policy covers any structures that are not attached to the home, such as fences, detached garages, and sheds. Common damage to these other structures are trees falling, fire, and wind. Coverage B is typically about 10-15% of the amount of the coverage A amount depending on the policy.
Personal Property Coverage
Coverage C on your policy covers all of your personal property. This includes any items in the house or on your property that are not nailed down such as clothing, electronics, furniture, appliances, and other valuables.
Coverage C is typically about 50-70% of the coverage A amount depending on the policy.
Loss of Use Coverage
Coverage D on your policy covers expenses you incur when you cannot use your house due to a loss. Loss of Use will pay for lodging, food, and other expenses until you can return back to your home. Coverage D is typically about 25-30% of the coverage A amount depending on the policy.
Liability coverage is financial protection for you and your family. It provides coverage for bodily injury or property damage sustained by others for which you or your covered residents are legally responsible. Common liability claims include injuries on your property, injuries to others caused by covered residents, a tree or limb falling on your neighbor's property and causing damage, damages cause by pets, and damage to other's property by covered residents. Liability coverage can pay for medical bills related to injuries, replacement or repair of property, and defense costs for related law suits.
How much coverage should you have? Liability coverage is typically offered as 3 different options, $100k, $300k, and $500k. The general rule of thumb is how much you have to lose. A judgement against you from a lawsuit could cause hundreds of thousands. One of my favorite quotes is, "Just because you aren't a millionaire doesn't mean you can't be sued like one." We always suggest buying slightly more liability insurance than you think you need. Do you have children, own a business, own multiple cars or multiple properties? You should consider an Umbrella Policy to increase your liability coverage. Umbrellas can be purchased in $1M, $2M, $3M, $5M, or $10M policies and kick in when you've exhausted the liability limits of your home or auto policy. More on that in another post.
Other Coverages and Endorsements
Additional coverages can be added to your home policy through endorsements or through an additional Personal Article Policy. Those may include additional protection for identity theft, personal articles such jewelry, art, sports equipment, high end electronics and other collectibles like wine or antiques.
Replacement Cost Contents Coverage: Most home policies have two options when it comes to your personal property coverage: actual cash value or replacement cost. Let's say you had a pipe leak and damage everything in your living room. With "actual cash value" coverage, the insurance company would only give you what your personal property is worth after depreciation. We advise that you make sure your policy includes "replacement cost" coverage so that the insurance company give you enough money to replace each item.
Back Up of Sewers and Drains Coverage: This is another endorsement we usually recommend. Most home policies do not cover damages resulting when there's a backup from a sewer or drain pipe in your home. These backups can be very disgusting and destructive. We especially recommend this endorsement if you have a basement, septic system, or older home.