If you feel like you’re reading a foreign language when you look over your homeowner’s insurance policy, you aren’t alone. Where simple language that’s easy for the layperson to understand will suffice, the typical homeowner’s insurance policy is loaded with industry jargon. Grab a cup of coffee to keep yourself awake while we pick that policy apart and see if we can come to grips with some of the terms.
Keep in mind that although not all homeowner insurance policies are the same, and they vary in their coverage, a policy typically covers the house and other structures on the property. Personal possessions inside the home are covered (although pricier items may require additional coverage), as is your liability in the event someone is injured on your property. Earthquake and flood damage is usually not covered and you will need to buy separate coverage for these events.
Pay very close attention to the conditions clause of your policy. This sets forth your obligations and duties. This may be the most important clause in the entire contract, for if these conditions are not met, your claim may be denied.
One of the common terms found in most homeowner insurance policies is “actual cash value.” This number reflects the amount the company will pay in the event of a disaster. It is typically equal to what it would cost to replace the house, minus depreciation. Many homeowners confuse actual cash value with replacement value, which is the amount the insurance company will pay without the depreciation deduction, yet still subject to policy limits. You will find a description of how the company arrived at this figure under the Claim Settlement Provision portion of the policy. The Functional Replacement Cost section of the policy describes the determination of replacement value.
We’ll Pay, but So Will You
Coinsurance is a term that confuses not only those in the market for a homeowner’s policy but health insurance as well. You may find this concept listed as “insurance to value” on a homeowner’s policy. The first thing to understand about coinsurance is that it only comes into play in the event of a partial loss. Described as a percentage, this provision defines the amount of the total damage that the company will cover. For instance, many insurers recommend that, if you don’t want to insure at full value, you should obtain a policy with at least 80 percent coverage. In this case, the insurance company will pay up to 80 percent of the loss while you are responsible for the remaining 20 percent. Now, to add even more confusion to the mix, this clause only comes into play when the loss and the policy limit fall below the coinsurance percentage.
Your policy’s deductible is the amount you pay in the event of a disaster. This amount may be listed as a specific dollar amount or a percentage of the home’s insured value. The choice of the deductible amount determines the premium (amount you pay for insurance), with the premium going down as the deductible goes up.
What happens if the home is so damaged that you can’t live in it until it is replaced or repaired? The Loss of Use portion of the policy spells this out, explaining how much you will be reimbursed for expenses incurred to find additional shelter during this time.
Endorsements are Only Good in Politics
Attached to your policy are the endorsements. These forms modify the terms of the policy in some manner. This is the toughest part of the insurance policy to understand for most homeowners. Some of these endorsements may negate policy clauses, or place conditions on them. It’s a bit like reading the Internal Revenue Service tax instructions. If you have any questions on this part of your homeowner’s policy, consult with your attorney.
The Perils of Your Insurance Policy
In going over your insurance policy you may notice references to “perils.” These perils are then classified as either “open” or “named.” And this is where jargon takes a turn toward the ridiculous. The peril is the event that caused the loss, such as theft or fire. If your policy provides for open perils, it will name which ones are excluded from coverage. If you own a named perils policy, on the other hand, the policy will list every one of the perils that’s covered. If you have concern about replacement of your personal possessions in the home, pay close attention to this part of the policy. You may have an open perils clause for the home and a named perils clause for its contents. This is why updating your coverage as you acquire new possessions is so important.
If you live in earthquake country or in a flood zone you will need to purchase an additional policy. You may not be able to purchase this policy on the open market if you live in a high-risk area, but there may be government-mandated insurance plans available. Check with your state’s insurance commissioner for details on these plans.
If you live in an area at high risk for hurricane activity, your insurance choices become even more confusing. While most policies cover damage or loss from the hurricane, they won’t cover any damage from the ensuing flood. The policies offered in hurricane-prone regions are definitely a mixed bag, though, with some offering limited coverage and some requiring a higher deductible. As with homeowners in regions prone to earthquakes, check with your state’s insurance commissioner about government-mandated insurance plans that provide coverage that can’t be obtained on the open market.
Due Diligence: It’s Not Just What’s For Breakfast
It’s important to take your time when purchasing a homeowner’s policy and to never make assumptions based on the word of the insurance agent. Learn how to read your policy and change it immediately if it doesn’t meet your needs. According to the insurance experts at United Policyholders, when shopping for insurance, make sure that you have enough coverage to replace your home (not the land) at full value, that you are protected against regional risks — such as earthquakes or floods — and that you have shopped around for the best price and have received all the discounts to which you are entitled.