Insurance: Insuring Against Disaster

6 Types of Home Insurance Policies

According to Webster’s Dictionary, insurance is defined as “coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” In Webster’s definition, the first party is usually an insurance company and the second party is you, your family or business.

In simple terms, insurance is designed to assist an individual, family or business in recovering from an unexpected loss. You can buy insurance for almost anything – medical, life, disability, automobile, business liability, fire and theft, worker’s compensation, homeowners (including condominium owners), and renters to name a few. For the purposes of this column, we will focus on insurance for your home.

As you will soon learn, simply having a homeowner’s insurance policy isn’t enough. Contrary to what many believe, an insurance policy isn’t a “cure all.” Unfortunately, many people become aware of this when they are most in need of help – after a crisis such as a fire, flood, earthquake or tornado. Thus, there is no time like the present to review your insurance policy to determine if you have the proper coverage.

Coverage is the term that is used to determine to what extent you will be compensated in the event of a loss. For example, if you are like most people and your home were to burn to the ground from a fire, you might expect your insurance company to pay for the construction of a new home and to replace all of the furniture and personal property that was lost in the fire. Not so fast! That’s not the way it works. Depending upon the type of policy, its coverage and dollar limits, you may find that you are, as they say, up a creek without a paddle.

How much coverage is enough? A better question would be how much are you willing to sacrifice? If the answer is nothing, as it should be, your coverage should provide you with full replacement of your loss. Pennywise consumers will often compromise coverage in an effort to save money. Unfortunately, the savings of a few hundred dollars a year can result in the loss of tens or hundreds of thousands of dollars when it comes time to pick up the pieces.

Not all homeowner’s insurance policies are created equal. Here’s how some of the most common types of policies shake out:

HO-1: Covers the dwelling and contents from 10 types of perils:

1. Fire and Lightning
2. Windstorm or Hail
3. Explosion
4. Riot or civil commotion
5. Aircraft
6. Vehicles (unless it is caused by the insured)
7. Smoke
8. Vandalism or malicious mischief
9. Theft (may have limits)
10. Volcanic Eruption

HO-8: This is especially for older homes. Covers the dwelling and contents from the same 11 types of perils listed in HO-1, but only for repairs, not for replacement cost. Usually written for homes with historical value that would be impossible to replace.

HO-2: Covers the dwelling and contents from 17 types of perils: the one covered in HO-1 and HO-8 plus

1. Falling Objects
2. Weight of Ice, Snow or Sleet
3. Accidental Discharge or Overflow of Water or Steam
4. Sudden and Accidental Tearing apart, Cracking, Burning or Bulging
5. Freezing
6. Sudden & Accidental damage from Artificially Generated Electric Current
7. (H01 Policy- Numbers 1 though 10)

HO-3: (Broad Form) Covers the dwelling and contents from the 17 perils listed in HO-2, plus any other peril not specifically excluded in the policy. Standard exclusions are flood, earthquake, war and nuclear accident.

HO-4 This is a renters policy. It covers personal property (no dwelling coverage) form the 17 peril types listed in HO-2.

HO-6 A condominium owner’s policy that, like the renter’s policy, covers personal property from the 17 peril types listed in HO-2. It is normally the responsibility of the owner’s association to insure the structure (walls, roof, etc.). Be sure to check the master policy for exclusions. You may need to cover the construction and improvements within the outer shell of your building.

Note that not one of the policy types listed will provide coverage for loss from a flood or earthquake. This may not be particularly important to you if your home isn’t located in an area that is prone to either one of these disasters. If, on the other hand, your home is at risk to such an event, flood and/or earthquake insurance might be the smartest investment you’ll ever make.

Federal flood insurance, purchased through your insurance agent or company, is the only guaranteed flood insurance coverage available for your home. Many people are reluctant to buy flood insurance because they believe that Federal disaster aid, available during and after a flood, will reimburse them for loss. WRONG! Federal Emergency Management Agency (FEMA) disaster aid is only available during Presidentially declared disasters. Moreover, Federal aid may often be in the form of a loan that you must pay back with interest. Flood insurance policies pay claims whether or not a disaster is declared.

When it comes to earthquakes, your best insurance is preparation. Making sure the foundation is in good shape, the frame is bolted to the foundation, the water heater is strapped and the structure is in good condition is your best defense. Unfortunately, even the best-prepared homes can sustain significant damage. Consequently, if you live in an area where earthquakes are part of the way of life, you may want to look into earthquake insurance. By comparison, earthquake insurance is costly and often comes with a large deductible. Where a standard homeowners policy might have a $500 deductible, the deductible for earthquake insurance can range from 5 to 15%. Using 10% as an example, that would equate to a $20,000 deductible on a $200,000 house. The lower the deductible, the greater the cost of the insurance. Generous discounts are offered where earthquake retrofitting (bolting, strapping, etc.) has been performed.

Which policy best suits your needs? Your best bet is to enlist the services of a reputable insurance agent who can discuss with you the coverage options available. For example, you can opt for a “replacement cost policy” which means the insurance company will pay the cost of replacing an item (less deductibles) rather than simply offering its depreciated current value.

Don’t forget a big part of being prepared for a disaster is ensuring that you have a full inventory of the construction elements of your home and its contents. Take photos or videotape each room. Pay special attention to details such as appliances, doors, trim, cabinets, flooring, ceiling treatment and other decorative finishes. Also, be sure to open cabinet and closet doors to photograph contents such as dishes, clothing, hinting gear and even your video collection.

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