Let’s make insurance simple.
We’re going to hit on home owners policy coverage and how that works today.
So what you’ll learn?
We’re going to hit the home owners policy coverage, how coverage works for your home, and how protecting your home and your stuff.
Of course, I strongly suggest that you dig up your actual home and have it in front of you right now.
Obviously we’re talking about homeowners coverage in this video, and so, if you have your homeowners policy in front of you specifically the deck pages.
It’s really going to help you out, as you hear, all these different coverages and try and figure out what you have, what you don’t have, what you might want to talk about adding, or maybe subtracting from your insurance policy.
So, have that policy out in front of you.
This post is meant to provide a general advice, I’m in no way confirming details about your specific insurance policy.
Those conversations should happen between you and your insurance advisor.
Let’s get going.
Table of Contents
THE HISTORY OF HOMEOWNERS INSURANCE
Now, super fun fact: I’ve experienced this one myself.
In the 1800’s homeowners insurance at that point was only four fires.
So if you didn’t have fire a fire insurance policy, the fire department wouldn’t help if you had a fire.
So, I was in Washington DC a couple years ago, and we went to Alexandria Virginia and if you look, they still have this kind of metal symbol on the frame of the door, and some have it and some don’t have it.
I was going up and looking at it, trying to figure out what this was and realized that this was the plaque that said, whether you had insurance for your home or not.
So, when a fire happened, the fire department would look and see that plaque, and if the plaque was there, the department would show up, they’d get their hoses out, they’d try and put the fire out as quickly as they could.
Yet, if the plaque wasn’t there, then it was up to the homeowner and neighbors and all that kind of stuff to put the fire out themselves.
So, homeowners insurance was really started at the very beginning of having fire departments and those kinds of groups of people to help you solve problems in your home.
So, fire departments were based on whether you had insurance for your home or not.
That’s a pretty cool fun fact that I enjoyed exploring in Alexandria Virginia a couple years ago.
DWELLING COVERAGE (REPLACEMENT COST)
Home property coverage starts with your “Dwelling Coverage”, and your dwelling coverage is simply coverage for your house itself.
It’s covered for the structure of your house itself and people get confused about how this number is set up all the time.
So if you’re, looking at your homeowners declarations pages right now, the first thing you see is dwelling and then you’re going to see a number there.
That value looks like maybe about how much you bought your house for
So people are think: “Okay. This is the appraised value of my house or the cost, the market value of my house.”
But this coverage has nothing to do with the market value of your home.
What it does have to do with, it’s all about what the insurance company feels it would cost to completely rebuild your house.
So, it doesn’t have to do with what you could sell it, for it has to do with what the “brick and mortar“ is going to be, hiring a contractor, putting in the frame the wood, the drywall, the kitchen, all that kind of stuff.
And insurance company figure that out by using a Replacement Cost Estimator (RCE) and that’s why it’s called “replacement cost”.
Because it’s the cost of replacing your entire home, and your dwelling coverage should reflect the cost of replacing your entire home.
Now we obviously don’t know exactly what it would cost to replace your entire home.
So, insurance company going to create an estimate for what it would cost replace your home.
So that is where your dwelling coverage comes from.
Dwelling coverage is coverage to replace the actual structure of your home.
The second coverage is for “Other Structures”, and so this is the coverage limit for other things that aren’t attached to your house.
Other structures on your property that aren’t attached to your house are covered under other structures.
This could be pools, it could be a barn or barn small sheds, a detached garage, etc. Also, your landscaping is often covered under other structures, gazebos would be covered under “other structures”, and if you have a workshop very similar to a detached garage there, carports, and so on.
Any of those kinds of things would be considered “other structures” and would be covered under your “other structures coverage limit”.
This coverage limit is generally figured by just taking the dwelling coverage and usually it will be 10 % of the dwelling coverage.
So, if you’re dwelling coverage was $210.000, then your other structures coverage is probably $21.000.
If you only have a little shed, or something like that, you know, $21.000 is more than enough, but if you start getting a pool, a detached garage, and those kinds of things, your other structures coverage could be low if your insurance agent hasn’t raised the other structures coverage above the 10 %, which is commonly included in a homeowner’s policy.
So, think about that, if you have significant other structures.
The third of the four coverages on your homeowners policy is “Personal Property”.
This is coverage limit for your belongings and your stuff.
So, this is your dishes, your tables, your Barbies, your piano, your art stuff, your couch, your bed, your chairs, your bookshelves, your Vampire Diaries videos and the whole book series that you have in the office, your iPad, fridge, hockey pucks that you have in the garage, your stuffed animals, your lamps, your TV, your clothes, so – your stuff.
All the things you have inside your house.
If something was to happen to your house, that all needs to be replaced.
That’s your personal property and the coverage for that is right there on your deck pages, and it’s generally between 50 % and 75 % of your dwelling coverage
So, there’s a number in there and we go back to that $210.000 dwelling coverage house.
So, if it was 50 %, your personal property coverage would be set at $105.000, and you know somewhere in between that and 75 % is generally where it’s set at.
You should definitely think about your stuff, and most of the time, homeowners policies, if it’s between 50 and 75 percent will probably cover your belongings.
But if you have a lot of nice things, or a lot of expensive things, then talking to your insurance agent about raising your personal property coverage is definitely a good idea, and something you should think about.
The other thing you should think about when you’re talking about personal property is – what you know about your personal property?
If you do nothing else to document what you have, walk through your house with a video camera, and then save that video on “web cloud”, or take pictures of each room, because if something bad happens, an adjuster from the company is going to come and say: “What did you have?”, and the better you can answer that question – the more money they’re going to give you to replace your stuff.
Insurance companies realize that you don’t have a picture of every single thing that you have and they’re not going to say: “Well, if you don’t remember you have it, we’re not going to give you any money for it.”
There’s some general things that they will pay out for, but the more you know about your stuff, some more money you will get in a claim all the way up to that coverage limit.
So, definitely document the things you have as best you can, so that you can have a better claim experience.
Speaking of claim experiences, your policy should have “replacement cost coverage”, and not ACV.
So, this is the first coverage thing that I’m talking about here, and it’s real simple.
Here’s how it works.
If your house burns down, and insurance company want to replace your dining room table that was lost in the fire, if you have “replacement cost coverage” and that dining room table is going to cost a thousand dollars to be replaced, the insurance company is going to give you a thousand dollars.
If you DON’T have “replacement cost coverage”, then you probably have a coverage called ACV.
ACV is the lesser of the coverages, and in that same example, your thousand-dollar dining room table, they’ll say: “Well, but you had that dining room table for fifteen years. So we’re going to depreciate for the period of time that you had it, and that’s going to take that thousand dollars down to six hundred dollars and you’ll have to figure out how to replace it with the six hundred dollars we give you.”
So, ACV depreciates the value of your personal property, and that means you don’t get as much money as you need to replace it
So, definitely check out your policy, see if it says “replacement cost” on it, and “Replacement Cost for Personal Property” is usually the line you’ll see on your deck pages, and that’s an important thing to have.
LOSS OF USE (LOU)
And finally, the fourth of the homeowners property coverages is simply called “Loss Of Use (LOU)” or “Additional Living Expenses (ALE)”, which is another term that sometimes you’ll see on declarations pages, and this is simply the coverage for the cost of living somewhere else while your home is repaired.
The insurance company pays for that as part of the “loss of use” or “additional living expenses coverage”, and if you have a total loss, that can be paid for up to like a year, or whatever reasonable amount of time for It to take for the damage to be fixed.
So, that’s “loss of use coverage”, and so those were the four basics of the homeowner’s property coverage.
WHAT TYPES OF BAD THINGS ARE COVERED?
Let’s talk about what is covered, since this is maybe one of the most interesting parts of this post, and one of the things you may not have a real idea about it, and I’m going to make it real easy for you.
I will give you two terms right now that will carry us through this conversation.
The first term is “perils”.
The perils are bad things that can happen to your home and property.
So, a tornado is an example of a peril, a fire is an example of a peril, etc.
And second term is “occurrence”.
Occurrence is a period of time during which a peril happens.
So, if a tornado came through, and was to damage your home on October 13th between the time of 12, 10 and 12:15, then that would be the occurrence, and the peril would be tornado.
So, you have those two things, and when insurance companies look if something bad that happens and whether it is covered on your insurance policy, they’re going to use those two things as how they figure it out:
- What was the peril?
- When did it happen?
3 TYPES OF HOMEOWNERS POLICIES
There are three different kinds of policies that cover your home, and they all have different structures of what perils are covered.
The first one is called “Basic (HO1)”, the second one is called “Broad (HO2)”, and the third the best and the one you always want to try and have is called “Special (HO3)”.
So, the Special (HO3) one is the one you want.
Now, let’s talk about the coverage options that are in those.
BASIC (HO1) COVERAGE POLICY
The Basic (HO1) covers 11 named perils.
I’m not going to go through those 11 things right now, and you can look them up on the web, but for example fire, tornado, lightning and so on, are some of the most common perils are on that list.
And if it’s not one of those 11 things when something bad happens, it is not covered by your policy.
BROAD (HO2) COVERAGE POLICY
Broad (HO2) expands your policy a little bit to 16 named perils and the biggest difference between the Basic (HO1) and the Broad (HO2) is coverage for “burst pipes”.
So, if you have a basic policy, you live somewhere that freezes during the winters and your pipes freeze and then, when they thaw they pour water into your home.
Basic polity policy doesn’t cover that, but Broad policy does cover that.
So, one of those added five perils is “burst pipes”.
SPECIAL (HO3) COVERAGE POLICY
And finally, like I said, Special (HO3) coverage is the best one, and this flips the description of how the policy responds.
It says simply: “if it’s not excluded – it’s covered’.
So, we don’t have named perils in Special (HO3) coverage policy.
What it says is, if a bad thing that happened and it is not excluded, then it’s covered, and this is great because, of course, it covers all the 16 named perils that are on Broad (HO2).
But it covers for example, even if an elephant sits on your chair, or weirdest things you can come up with, and everything is covered as long as it is not excluded.
The other nice thing that Special (HO3) coverage does is, in a case where an insurance company and you disagree, and it ends up in court, the insurance company’s going to have to prove that it wasn’t covered, whereas with Basic (HO1) and Broad (HO2) you’re going to have to prove that it was covered.
So, the onus, the burden of proof changes in a court case with Special coverage as well.
That’s just one more reason why having special coverage is super important.
WHAT KIND OF POLICY IS YOUR POLICY?
So, those are the three different kinds of things that are covered and how they’re set up.
Now, is your policy “Basic”?
Is it “Broad”?
Is it “Special”?
Can you not tell?
In many times, it’s very hard to tell on a lot of declarations pages, and if you can’t tell, then make sure you talk to your insurance agent about what kind of policy you have.
HOMEOWNERS LIABILITY COVERAGE
Now, let’s talk about Homeowners Liability Coverage.
Whereas with Auto Liability, there were a lot of kind of details to it, Homeowners Liability is pretty straightforward
There are two different kinds of coverage for homeowners Liability.
On the first line is just Basic Liability Coverage.
Just the Basic Liability Coverage that you have on your policy.
Generally, the current coverage limits are between $100.000 and $1.000.000.
It is usually suggested $500,000 as a place to start with your homeowners liability coverage
This is coverage for if bad things happen to other people, because of you, your home or your animals, etc.
If any bad things happening to other people, you end up in a lawsuit or major medical costs.
Whatever coverage limit you choose, is what you’ll have available from the insurance company to pay for that situation.
Now, homeowners policies have another kind of coverage.
That is also liability coverage, and strangely it has the same name, but it covers bad things that happen to people because of you, your family or your animals, that I said that both ON and OFF your property, it’s important to know.
Okay, now we’re getting into the second kind of liability coverage.
Unfortunately, it has the same name “Medical Payments” as one of the auto policy coverages, but it’s totally different, so please ignore the fact that these words are the same.
Medical Payments in a home policy is a smaller amount of liability coverage, often times 5 thousand or 10 thousand dollars, and it’s much easier to access than the full liability coverage.
Medical Payments are quick and easy, so this is nice to have it.
Now, let’s talk about endorsements.
you know, till now, that was the basics about homeowners insurance.
There’s 4 different property coverages on your home policy, and those 2 different liability coverages.
So, that’s pretty simple.
But there’s a whole bunch of endorsements as well.
I’m not going to talk about all of them.
I’m going to talk about 3 that I feel are the most important and if you want to get more details about more types of endorsements, you can talk with your insurance agent, or look it up online.
There’s lots of endorsements, and here’s a few that I think are important.
WATER AND SEWER BACK UP
We start with “Water and Sewer Backup”.
Depending on where you live, and the way your home is structured, water and sewer backup may be more important for you
For example, if you have a basement, and that basement is furnished, so you’ve got your nice couch down there, and carpet, and a big old screen for watching sports or whatever, than you absolutely should have water and sewer backup coverage, and you want to have probably at least $10.000 of coverage.
The coverage limit for water sewer backup is different than the rest of the policy, and this is cover specifically for sump failure, but also for sewer and septic back up.
If you don’t have water and sewer back up, then you have problems with coverage, if you don’t have coverage in those types of situations.
So, I would suggest talking about water and sewer back up with your agent, especially if you have a basement that’s furnished
The next one is Natural Disasters, and it covers earthquakes, natural floods and brush fires.
Now, depending on where you live, one of these 3 things is probably a factor in your world.
Certainly, if you live in California, you’ve got brush fire issues and earthquake issues.
If you live in Florida, hurricanes can bring along, natural floods very easily as well.
So, those are the types of things that are excluded on normal homeowners policies, and often then are able to be added back as endorsements.
It really depends on where you live.
For example, in the places that have the highest occurrence of earthquakes, you often times have to buy a completely separate earthquake policy.
So, it’s NOT going to be added on as endorsement to your homeowners policy, you would have to buy a completely different earthquake policy, usually from FEMA or something like that.
The same goes for natural flood anywhere around the United States, and you cannot buy natural flood insurance on your homeowners policy, you have to purchase that from FEMA.
Brushfire can be the same way.
So, those are 3 big things, as the natural disasters that happen a lot in your area, will be excluded from your homeowners policy, and maybe they can be added back or maybe they have to be purchased completely separately.
Now, let’s go to special personal property.
We’re going to go back to where I broke down those 3 different kinds of coverage, and we had Basic, Broad and Special.
So, if you see HO 3 on your policy, that means that your dwelling, the structure itself, has special coverage and any perils that happen that are not excluded are covered.
But most the time, even in a HO 3, your personal property is not that highly covered, and your personal property is often Broad Coverage (HO 2).
In that situation, you can endorse the policy to make sure that you have special personal property as well.
I think it’s incredibly important because Personal Property coverage is a great way to make sure when something bad happens, your stuff is protected, as well as the structure of your house itself.
You know, I see all these insurance packages, and all different companies have their different homeowners packages and they’re all different, and they all have all these nerdy details in them.
But, the fact is that most of those packages are worth what you pay for them, so they can be an extra hundred bucks or something like that per year, and it’s easy for you to say: “Oh, you know, I don’t even get what’s in there. I don’t understand any of it. I’m just going to take that off and save myself 100 bucks…”
You know, I think, that’s a rookie mistake.
I think that you have to add the package in there.
Usually, your agent can explain what actual coverages are in there, and if you really want to dig into it, you can.
It has Water Backup a lot of times.
A lot of times it has Special Personal Property coverage.
So, you want to level up that package!
By doing that, you’ve got better coverage and it’s worth the cost, and every company has some different name for all that packages.