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About Homeowners Insurance

    Homeowners insurance is a package policy consisting of different types of coverage for the house, its contents, additional living expenses, personal liability claims against the policyholder and other members of the household, and medical payments to others. The policyholder pays a single premium amount for the combination of these coverages.

    When you purchase insurance, it is important to remember to shop for insurance in the same way that you shop for any other consumer product. Make sure to compare prices, features, and reputation. Also, donít ask for "the best coverage." Someone may give you what they think you need, rather than what you actually need. It is always wise to compare coverages on your own to determine the best product for you.

    Always try to plan ahead when you need to purchase insurance. Donít make such an important decision on the spot. Remember, this is your home, not the insurance agentís or lenderís. You should take the lead in deciding what sort of insurance to buy and how much of it you need.

    Not All Insurance Companies Charge the Same Price

    Each insurance company calculates its own rates, subject to your State's Department of Insurance approval. Since each companyís loss experience differs, the rates will differ as well. Therefore, it is wise to shop for the best price and coverage available in relation to your insurance needs.

    Discounts

    Many companies offer discounts for burglar alarms and fire protection devices such as smoke detectors, alarms, and sprinklers. Ask about the discounts available through the companies you are considering.

    What Is Covered By Homeowners Insurance?

    Typical homeowners coverage insures your dwelling, other structures and contents, and may cover against losses such as
    • Fire or lightning
    • Windstorm or hail
    • Breakage of glass
    • Explosion
    • Riot or civil commotion
    • Theft
    • Aircraft
    • Vehicles
    • Smoke
    • Vandalism and malicious mischief
    You may elect to buy broader homeowners coverage, which can provide additional protection for your dwelling and contents, or special homeowners endorsements such as building code upgrade coverage. Also, earthquake coverage can be considered. Your policy also covers loss of use, including increases in living expenses due to fire or other insured loss. Liability coverage protects you for injuries or damages to others caused by you, a member of your family, or pet. Medical payments insurance covers medical expenses to non-family members injured at your home. Important: Read exclusions in your insurance contract. Earthquake, flood, mold, earth movement, and "wear and tear" are some of the perils that are usually excluded. When an insurer writes your homeowners coverage, the insurer is legally obligated to offer you earthquake coverage for an additional premium. Tenants (renters) insurance covers the loss of personal property and loss of use due to the above-mentioned perils, and may include liability and medical payments coverage.

    Condominium insurance is similar to tenants insurance and covers personal property and improvements. Loss of use is generally limited to 40 percent of the contents limit. The condominium association generally purchases insurance for the building structure and common areas, such as corridors. Loss Assessment Coverage can be an important policy provision for you. It covers you for certain assessments the condominium association makes. However, you should check if it covers you for earthquake losses and how much it will provide you in the event of an earthquake loss. You should also carefully analyze the type of insurance your association has and how it would affect you in the event of a loss. Most condominium association policies cover the common areas and walls. Your condominium ownerís policy will cover interior damage to your unit.

    What Limits Should I Set on My Policy?

    The "dwelling" limit should be the amount it would cost to replace your home. This may have nothing to do with the purchase price or the current market value of your home. Your insurance policy is not governed by the real estate market, but by the cost of the materials and labor involved in rebuilding your home. Insurance companies have in-house formulas that they use to evaluate the replacement cost of your home if you do not come up with a limit. These formulas are not necessarily precise, so different insurers are likely to suggest or require different limits of coverage for your dwelling limit.

    As for the "contents" limits, it is usually around 50% of the dwelling amount; however, only you can evaluate the replacement value of the things you own. Be sure to take into account such things as your books, clothing, and appliances. Often, people concern themselves with things such as jewelry, computers, furniture, and stereo equipment and donít account for some of the more commonplace household items.

    Two major problems suffered by homeowners on their Residential Property/Homeowners insurance policies are:

    (a) Many of the dwellings were under-insured, i.e., insured for amounts inadequate for rebuilding. Insurers sometimes refer to this as inadequate insurance-to-value.

    (b) The problem of increased cost of construction was evident in many situations. When rebuilding, homeowners have to comply with new building code requirements, which in some instances necessitated new foundations being built, neither of which may have been considered when setting the replacement limits.

    It is very important to know and understand the coverage you have. Make sure values are current and satisfy policy requirements. Ask if coverage is provided for building upgrade/code changes.

    Costs and Payments

    Most companies sell their policies through independent agents, who are often representing several companies and should be able to get the most competitive prices. However, some companies deal directly with the consumer and can offer competitive prices because of lower expenses. Again, premiums can vary greatly between insurers!

    Many companies have their own methods of premium installment or payment plans, so ask for the details regarding premium installments or payments available through the company you consider for coverage. You can use this information to compare with premium financing options.

    Will My Policy Completely and Totally Replace My Home If It Is Destroyed?

    This depends on whether your policy is a replacement cost value policy or an actual cash value policy. If your policy is an actual cash value policy, it will not. Courts have decided that actual cash value, unless otherwise specified in the insurance contract, is the fair market value. Fair market value can be loosely defined as the amount that a knowledgeable, willing buyer would pay and that a knowledgeable, willing seller would take for an item, neither being under unusual pressure to buy or sell. Insurers are permitted to provide an alternate definition of actual cash value in the policy if another method of determining value is to be used.

    If you have a replacement cost policy, the chances that you will be able to completely rebuild your home are better, but there are many types of replacement cost policies, so you need to be careful. A policy cannot be sold as a "guaranteed replacement cost" policy unless it will pay to completely rebuild the home. Other types of replacement cost policies will pay your policy limits, plus a certain percentage above those limits. Some policies do not have building code upgrade (ordinance or law) coverage. Cities and counties periodically change their building codes. Unless your policy has this coverage, your insurance company may not pay for changes you may need to make to the structure of your home to bring it up to current building codes.

    Your insurer or agent should assist you in establishing a limit that is adequate to rebuild your home. It is important to update that limit periodically to maintain a limit that reflects current construction costs. Ask your insurer or agent if limits are automatically reviewed or increased.

    Read your policy carefully and understand the coverage it provides. If it is not clear, contact your agent or company. You can call our Consumer Hotline for further clarification and confirmation.

    In short, there is no substitute for reading your policy and your renewal declarations carefully. Discovering after a loss that you did not have the right coverage is not a situation you want to experience. Your insurance policy is a contract. In the event of a loss, the contract language will prevail. Anything promised verbally or representations not documented in writing will be difficult to prove.

    For more detailed information on residential claims, please see the CDIís Residential Property Claims Guide. This brochure helps you navigate the claims process and discusses hot topics such as water damage, mold, and replacement cost.

    If you only shop by comparing prices, you are doing yourself a disservice. Your home is one of the most important purchases you will make. Take the time to get the facts before you purchase insurance to protect it.

    Some Final Tips

    Shop around for your insurance needs. CDI premium surveys can help.

    When you call for a quote or fill out an application, give the complete and correct information requested. After the application or any finance agreement is complete but before you sign it, read it again to see if everything is correct and nothing is left out. Never sign a blank form. After you sign the document, keep a copy for your records. When you get your policy, read it. Donít file it without checking to see that the coverages, limits, premium, and other information is correct. Also, read through the policy to know your rights and the companyís rights under the policyís terms. Remember to keep an inventory of personal property (belongings, furniture, etc.), listing all of the items you own, the dates purchased, and the price. If possible, take pictures of important and valuable items. Keep these records in a safe place away from home, preferably in a safe-deposit box. Also, periodically update your inventory, appraisals and photos. This will help you to file and settle your claim quickly and efficiently.

    Glossary of Homeowners Insurance Terms

    Actual Cash Value (ACV) - Unless otherwise defined in the policy, actual cash value means fair market value. The fair market value of an item is the dollar amount that a knowledgeable buyer (under no unusual pressure) is willing to pay, and a knowledgeable seller (under no unusual pressure) is willing to accept.

    Agent - A licensed individual or organization authorized to sell and service insurance policies for an insurance company.

    Binder - A short-term agreement that provides temporary insurance coverage until the policy can be issued or delivered.

    Broker - A licensed individual or organization who transacts insurance on your behalf.

    Claim - Notice to an insurance company that a loss has occurred that may be covered under the terms and conditions of the policy.

    Declarations - Usually the first page of an insurance policy that contains the full legal name of your insurance company, your name and address, the policy number, effective and expiration dates, premium payable, the limits of insurance, covered property, deductibles, and any applicable lienholder information.

    Deductible - The amount of loss that the policyholder is responsible to pay up-front before covered benefits from the insurance company are payable.

    Depreciation - A decrease in value due to age, wear and tear, or obsolescence.

    Endorsement - A written agreement that changes the terms of an insurance policy by adding or subtracting coverage.

    Exclusion - A contractual provision in an insurance policy that denies or restricts coverage for certain perils, persons, property, or locations.

    Insured - The policyholder who is entitled to covered benefits in case of an accident or loss.

    Insurer - The insurance company that issues the insurance policy, and agrees to pay for losses and provide covered benefits.

    Premium - The price of insurance paid to the insurance company for a policy.

    Quote - An estimate of the cost of insurance based on information supplied to the agent, broker or insurance company.

    Replacement Cost - The amount that it costs to replace lost or damaged property with new property of like kind and quality in the local market.