Homeowners Insurance
Homeowners insurance is the one policy that we find tends to create the most confusion for insureds. It doesn't help that the actual policy itself is usually at least 10-25 pages in length and appears to be written in way that makes you think the insurance company doesn't want you to clearly know what it covers. In this section, we'll explain each of the main parts of the policy, which, for the most part, are nearly identical with all companies. Plus, we'll also highlight some of the major concerns that insurance companies have with homeowners, which ultimately could either lead to you being dropped/non-renewed by your insurance company, or significantly affect the price they charge to insure your home.
SECTION I - PROPERTY COVERAGE
Coverage A - Dwelling
Alright, so before we tell you what this coverage is, first we need you to understand what it is not. This coverage is NOT how much you think your house is worth or house much Zillow.com says your house could sell for. This coverage is also NOT how much you paid for your house or what your tax assessor says your house is appraised at, nor does it have anything to do with the land that the house sits on. Now that we’ve got that out of the way, let’s discuss what this coverage actually does cover.
The Dwelling coverage amount represents the amount of money that the insurance company determined it would cost them to pay a contractor to demolish your existing house, remove all the debris, and then build a brand new version of your existing house, after a worst-case scenario total loss. This figure is an estimate of the labor, materials, equipment, and construction overhead costs based on your area (state, region, county, etc.). Insurance companies have a pretty good idea as to how much they will have to pay for specific damage because that is what they do (pay contractors all across the country to repair and rebuild homes that they insure). Insurance companies use specialized software to compute these amounts based on information they obtained on the house, whether it be from you, online resources, or both. It is in your best interest to check and make sure that the information the company is using is accurate. You wouldn’t want a reconstruction estimate including the replacement of 4 bathrooms when you only have 2 bathrooms. You should expect the Dwelling coverage to be no less than $100 per square foot (sqft) of living space, anywhere. In some states, such as CA, CT, MA, NJ and NY, reconstruction costs can be as much as $200-300 per square foot (sqft), or higher.
But what if I don't want to rebuild?
The purpose of homeowners insurance is to indemnify you, meaning return you to the place you were in before the damage occurred. Most insurance companies are not just going to hand you a six-figure check so you can go buy a smaller house and pay off some bills. If you don't want to rebuild, sell the brand new house after it is built!
But what if I don’t want to insure it for that much?
Some companies may allow you to insure the house for a lower amount than they estimate by rejecting “Replacement Cost” coverage and purchasing "Actual Cash Value" (ACV) coverage. However, if you have a claim, depreciation will be withheld from the claim. How much depreciation will be withheld depends on the age of the materials and the condition of the materials. Some companies will depreciate materials, labor and taxes by as much as 50%! Imagine paying for homeowners insurance, filing a claim, and only to receive $4,000 for something that will cost you $6,500 to repair. This option wouldn’t make sense if you’re only going to save a $100 each year. We have seen people have to pay tens of thousands of dollars out of pocket because they chose "Actual Cash Value" over "Replacement Cost" coverage. You can guarantee that if you have a mortgage, your mortgage lender most likely will not allow you to have this type of coverage.
Coverage B - Other Structures
This coverage pays for damage to any structure on your property that is separate from your house. This money is provided to cover damage caused to any detached structure on your property. A detached structure, could be a garage, a shed, a gazebo, a pergola, fencing, etc.
But I don't have any detached structures!
This coverage is automatically provided to you regardless whether or not you actually have any detached structures. Most companies provide this coverage at an amount that is equal to at least 10% of the Coverage A-Dwelling limit, although some companies may provide more. Most companies allow you to increase this amount, obviously for an additional cost.
Coverage C - Personal Property
This may also be referred to as "Contents" or "Unscheduled Personal Property." This coverage pays to replace your personal belongings after they are damaged by a covered peril (water, fire, theft, etc.). What is personal property? If you tip your house upside down & shake it, whatever falls out is considered personal property. This coverage pays for the items that can be easily replaced at a fixed cost (clothing, furniture, TV's, etc.). Items that are "worth money", meaning they can increase in value, have limited coverage. For example, jewelry is limited to $1,500-$2,500 with most companies. The reason is that the insurance companies have no idea what the value of your item is, nor do they have any proof that you actually even own the item. The same goes for artwork, antiques, collectible firearms and silverware, to name a few.
If you have items valued greater than the amount covered, you can "schedule" the item for its full value by providing the insurance company with a legitimate appraisal, or receipt. We stress legitimate because we can't tell you how many times people have tried to submit something they typed up on Microsoft Word, with poor use of grammar and spelling errors. Other items, like computer equipment, have limited coverage because most computers today are portable and taken outside of the home. You should read your policy to determine the exact amounts that you are covered for.
Coverage D - Loss of Use
This may also be called "Additional Living Expense." This is money provided to you to cover all of the extra expenses you might incur, over what you would normally have spent, if you are displaced from your house after it is damaged. Most companies provide this coverage at an amount equal to 15-35% of the Coverage A-Dwelling limit. It can cover increased food costs, reimburse you for the extra miles you now have to drive, as well as the temporary housing (hotel or apartment) expenses. Realistically, you should have at least $100,000 or more for this coverage, especially if you live in high-rent areas, such as in Los Angeles, Seattle or New York City. When rebuilding a house, it sometimes can take up to 12 months, or longer, before you are back in your home. You should choose an amount of coverage that you are comfortable with based on a worst-case scenario.
Policy Deductible
This deductible applies to any kind of loss that is covered by your policy. Unless the policy has any other separate deductible, this would also include coverage for wind, hail and hurricane damage. Some companies may require separate deductibles for wind, hail, and hurricane damage. This is usually required in coastal areas, or areas where hail damage is a frequent occurrence. Most homeowners have deductibles that are around $1,000-$5,000. The higher your deductible, the lower the cost of your policy. Keep in mind, any claim on your homeowners insurance policy may affect your price for several years, just like an accident will affect your car insurance prices for a few years. Homeowners insurance is intended to cover you for a catastrophic loss, not minor things like a broken window.
Wind, Hail, & Hurricane Deductibles
This deductible applies to all losses related to damage caused by wind, hail or a hurricane. This deductible is almost always shown as a percentage, either 1%, 2%, 3% or 5%, however some companies may also offer a deductible with a flat dollar amount. Some companies may not require you to have this separate deductible, while other may have a minimum of 2%, or higher, depending on where you live.
My policy doesn't have any wind or hail deductible. Does that mean I don't have coverage for wind or hail damage?
No, wind and hail damage is covered on nearly all homeowner policies, unless your company specifically states that it is excluded. This could be a possibility with some companies insuring coastal homes, such as homes located in the states of FL and SC. If you don't see a separate deductible for wind and hail damage, then that is a good thing, because it means that the coverage would fall under your regular policy deductible.
SECTION II - LIABILITY COVERAGE
Coverage E - Personal Liability
This money pays for any bodily injury caused by you to others, or damage caused by you to property of others. Some examples could be someone tripping & falling, slipping on ice, drowning in a swimming pool, or falling off of a trampoline. It also covers you if your pet were to attack someone else. This coverage is usually paid to the other party in addition to the medical payments coverage. No deductible applies to this section.
Coverage F - Medical Payments To Others
This money pays other people for minor medicals expenses they incurred after an injury on your property. The keyword is minor. Most companies offer this coverage in amounts of $1,000-$5,000, in increments of $1,000, while some other companies may offer limits as high as $25,000. With today's medical costs, $1,000 won't even cover the cost of an ambulance ride. This coverage has barely any impact in the overall cost of the policy. When the difference in price between the least amount and the highest amount is so small, we recommend no less than $3,000 in coverage. No deductible applies to this section. No deductible applies to this coverage.
Coverage G - Damage To Property Of Others
This coverage pays for damages that you cause to the property of other people. Most companies provide this coverage at an amount equal to $500 per incident, however some companies may only offer $250 in coverage. For example, while doing some landscaping on your property, you accidentally damage your neighbor's fence, causing $300 in damage. This coverage would pay for the repairs to your neighbor's fence.
*Important*No deductible applies to any losses related to Section II - Liability claims.
COMMON ENDORSEMENTS
Extended Replacement Cost Coverage
This endorsement provides an additional amount of coverage that is added to the Coverage A - Dwelling amount. Most companies provide this coverage based on a fixed percentage, usually 15-50%. For example, if your Coverage A - Dwelling coverage amount is $200,000 and your company has Extended Replacement Cost Coverage of 20%, they will actually cover you up to $240,000 in the event that is actually costs more than $200,000 to rebuild your house. Companies provide this extra coverage because certain events, such as natural disasters, can drive up the cost of reconstruction when there aren't enough contractors in the area due to the amount of widespread damage. Contractors from surrounding areas know that insurance companies will be throwing money around due to the amount of damage, so magically everything cost more.
Water Backup or Sump Pump Discharge
This covers any damages you incur from waste pipe that backs up, or water that backs up in a basement because a sump pump failed to properly work. Most companies offer this coverage in amounts of $5,000, $10,000, $25,000 and $50,000. If you have a finished basement that has a sump pump, we would recommend at least $10,000 in coverage, or more, depending on the size of your basement.
Limited Fungi, Mold, Wet or Dry Rot, or Bacteria
Most commonly, this is referred as coverage for mold damage or mold exposure. There are two sections to this coverage:
Section I - Property
Most companies pay up to $10,000 for any unknown mold or bacteria damage that directly occurs to your house or your personal property within the house. If you know there is a water leak somewhere in the house and you don't take any measures to stop the leak, don't expect your insurance company to cover this. The damage needs to be unknown, or in other words hidden.
Section II - Liability
Most companies pay up to $50,000 for any bodily injury resulting from the inhalation of, ingestion of, contact with, or exposure to fungi (mold), wet or dry rot, or bacteria. Ever hear stories about people becoming very sick while living in a home with black mold? That is when this coverage might apply.
Ordinance or Law
This coverage pays for any upgrades that are required by the local building code to be installed after damage has occurred to your home. Most companies provide this coverage automatically at an amount equal to 10% of the Coverage A-Dwelling limit. Most companies also offer higher amounts of 25%, 50% and 100% of the Coverage A-Dwelling limit. Here's an example that will help make more sense of this.... Say you own an older house built in 1902 that has the dwelling coverage at $200,000. An old pipe bursts, causing enough damage to the electrical wiring that the entire house has to have the electrical system replaced. Back in 1902, electrical outlets were not required every six feet and GFCI outlets were not required throughout the kitchen. Your insurance company will pay to replace the wiring and the outlets that you had, but you will incur the expense for all of the additional new outlets required throughout the house, plus possibly upgrading the electrical panel. These are considered "upgrades." After you pay for the upgrades, your insurance company will then reimburse you up to 10% of the dwelling coverage ($200,000 x 10% = $20,000). Most companies will require you to pay for the upgrades first, and then they will reimburse you after the work has been completed. Keep in mind, your house doesn't have to be 100 years old for this to be a concern. Homes built in the 1980's, for example, may even require building code upgrades.
Loss Assessment
This coverage applies to condo unit owners who may be assessed a fee for damage that occurs to the building or any common areas on the property grounds. The HOA usually has a master policy to cover any damage, however, sometimes there may be losses where the total damage exceeds the coverage on the HOA's master policy. When this happens, all of the condo unit owners are equally assessed a fee to cover the damage that exceeded the HOA's master policy limits. Most companies automatically provide $500-$5,000 in coverage, however you should be able to increase this amount of coverage all the way up to $50,000.
Earthquake
This coverage pays for any earthquake damage to the house and/or the personal property within the house. Coverage is usually provided up to the Coverage A - Dwelling & Coverage C - Personal Property limits, subject to a deductible that is usually equal to 5%, 10%, 15%, 20% or 25% of the Coverage A Dwelling limit. Availability of this endorsement is most likely not available in CA with most insurance companies.
WHAT MAKES HOME INSURANCE SO EXPENSIVE?
Your Credit Score
Insurance companies use credit-based insurance scores (not your actual credit score) to predict how likely you may be to file a claim in the future. While you may, or may not, agree with this, insurance companies do it. Not all insurance companies use credit-based insurance scores, and some states actually prohibit insurance companies from using these scores as a rating factor in determining your price. However, most companies, in most states, do use credit-based scores. How much of an impact can it have? We have seen instances where it can cause the premium to be $500-$1,000 per year higher than those people who have better credit-based scores. Instead of complaining about this, which will do absolutely nothing to lower your price, try to work on increasing your FICO score, which will ultimately lower your cost of insurance.
Where You Live
We don't mean good neighborhood vs bad neighborhood. We mean whether or not your house is close to the coast, is located in an area where wind, hail & hurricane damage is frequent, doesn't have any fire hydrants near the house, doesn't have a full-time fire department within 5 miles of the house, is within close proximity to a high-risk wildfire area, or within a close proximity to any sinkholes. You cannot possibly expect a company to offer low prices to you if you live in an area that is considered high risk.
Number Of Claims Filed In Past 5 Years
Every time you file a claim for anything, it has the potential to affect the price of your renewal policy. With most companies, any claim over $500 will have some form of impact. However, the concern isn't necessarily how much money is paid in one claim, but is more so about how many claims you have had. Four claims for $1,000 each is 10x worse than one claim for $10,000. Pricing aside, too many claims can also get you non-renewed, aka dropped, by your insurance company, which will make it even harder for you to find a new company that will be willing to insure your home. Remember, the purpose of homeowners insurance is to insure against a catastrophic loss, not a broken window. Just because you can file a claim for a anything, doesn't mean that you actually should.
Your Deductible Is Too Low
The purpose of homeowners insurance is to insure against a major, catastrophic loss, not minor little things, like broken windows, small pipe leak, or a few damaged roofing shingles. People that are not going to submit claims for minor little things shouldn't have a low deductible because the lower the deductible is, the higher the cost will be. Increasing a deductible from $1,000 to $2,500 or $5,000 could save you as much as $500-$1,000, or more. At the end of the day, when you are dealing with a catastrophic loss that exceeds $100,000, a $2,500 or $5,000 isn't going to matter much. See, you don't have to pay your deductible if you can find a builder that is willing to do the work for the amount of money the insurance company paid to you. If you have a $100,000 claim and a $5,000 deductible, your insurance company will pay you $95,000. If you can get the work done for $95,000 then you never actually pay any deductible out-of-pocket!
The Age & Condition Of Your House
Most companies provide credits to newly built homes, or older homes that have been renovated. Credits are also provided to older homes with newer roofs, updated HVAC systems, updated plumbing and updated electrical wiring. If your house is more than 40 years old and has not had any updates, you shouldn't expect to receive the best possible price. Homes that have had the old galvanized or cast iron plumbing upgraded to copper, PVC and/or PEX piping are going to get a better price because proper homeowner maintenance was performed by the homeowner to protect the house from potential water damage. The same applies to your roof. Regardless what you may think, the average lifespan of a shingled roof is about 18-20 years, at which time they should be replaced by the homeowner as routine home maintenance. How do companies know 18-20 years is the average lifespan? It has something to do with the fact that they are in the business of paying contractors, on behalf of the homeowners, to replace roofs when they fail and leak. Most roof claims involve older roofs around this age span. A homeowner who proactively replaces their roof as part of normal homeowner maintenance will pay a lower rate for homeowners insurance than a homeowner who plans to let their roof go until it leaks. It's kind of like the automobile owner who puts safety aside and continues to drive the car on bald tires because they don't see the point in replacing the tires if they still hold air.
UNDERWRITING RED FLAGS
Neglected Roofs & Unprofessional Repairs
The roof is old, has curled or missing shingles, or multiple layers
"But my roof has a 25 year warranty! It's not leaking, so why would I replace it?" Yeah right, we've heard this one a million times. Responsible homeowners replace roofing shingles before they leak because most homeowners don't want their home to incur water damage. In the real world, which is the one where insurance companies pay hundreds of millions of dollars annually to replace damaged roofs, the average lifespan of an asphalt shingled roof is about 18-20 years. Think about it, do you wait to replace the tires on your car until they are so bald that the tire bursts while you are driving?Regardless of age, if your roof has cracked shingles, curling shingles, missing shingles, broken shingles, or serious granular wear/loss, that is an indication that you need to replace your roof. The worst ones we see are houses that have multiple layers on shingles. We have seen homes that have 2, 3 and 4 layers. That is absolutely crazy! Putting a new layer of shingles over an old or damage layer is only covering up a problem that will likely appear in the future. Not only that, it will likely void the shingle manufacturer's warranty. Plus, if you know that your roof has any of the problems mentioned above and you choose to ignore it, your insurance company could decline your claim.
Here's the key takeaway: Replacing your roof is just part of routine homeowner maintenance and your homeowners insurance policy isn't designed to be a roof replacement plan. We see countless people buying houses with old roofs, or even worse, not knowing how old the roof is. If you're buying a house with a 15 year old roof, you should be going into the purchase with the mindset that you are going to have to come up with $7,000 to $20,000 (depending on the size of the house) in the next five to six years to replace the roof. If that isn't possible, then maybe you should reconsider purchasing the house. If you're shopping for quotes with different companies and your roof is 20 years or older, you should expect to be denied coverage by some companies, or at least be required to have a higher deductible until you replace the roof. With some companies, having a newer roof can also save you money on your homeowners insurance.
Electrical Fire Hazards Are Present
Meaning it has either knob & tube wiring, aluminum wiring, an electrical panel that is less than 100 amps, an electrical panel that has the round replaceable fuses, or an electrical panel that is the brand Zinsco or Federal Pacific. All of these are notoriously known as fire hazards. Don't believe us? Google it. Insurance companies don't like fires, so if your home has any of these hazards, then you should expect to have a problem getting, or keeping, a homeowners insurance policy unless you replace the fire hazards with modern wiring and electrical panels that are capable of withstanding the loads of modern appliances and electronics. How much does it cost to re-wire a 2,000 sqft. house that has knob & tube wiring? It could be as little as $10,000 all the way up to $30,000, depending on accessibility and local building codes. If you're buying a house with any of these hazards, you better be able to afford to pay for these updates within the first 12 months of ownership, get the sellers to either replace the hazards prior to the closing, or give you a credit at the closing toward the purchase price. At the end of the day, your insurance company can replace your house, but they cannot replace the lives of those that live in it. Be smart, don't mess around with fire hazards.
Old Plumbing Is Present
If your house has galvanized metal pipes, old cast iron pipes, or polybutylene pipes, you should expect to be declined by insurance companies, or be required to replace it all within a certain time period. Water leaks can cause serious structural damage and mold damage to a home. These types of piping are notorious for failing, causing thousands of dollars in damage. If you're buying a house with old pipes, or pipes that show signs of active leaks, you shouldn't be surprised if your insurance company requires you to replace them immediately after the closing, if they even considering offering you a policy to start with. Again, responsible homeowners take proactive measures to eliminate hazards that can seriously damage their home by performing routine homeowner maintenance before damage occurs.
There Is A Trampoline On The Property
If you have a trampoline that has a safety net, is located within a fenced yard, is used by one jumper at a time while adult supervised, and is not visible from the street, then you shouldn't have a problem with your insurance company. Now, if you have a trampoline without a safety net, let multiple kids jump on it at one time, or in a yard that is not fenced and is visible from the road, then you should expect to be denied a policy by some companies. Trampoline injuries cost insurance companies millions of dollars annually in liability claims, which is why they have a problem with them.
There Is An Aggressive Dog On The Property
Pit bulls, American Staffordshire Terriers, or whatever you want to call them, are a concern with many insurance companies. When companies analyze the liability claims that are paid due to dog bites, they know what breeds were involved in the claims. Bottom line, if you have a Pit Bull (of any variant), a Chow, or any other breed dog that is aggressive, you should expect for insurance companies to give you some push back, or even outright deny offering you a policy. Also, regardless of what breed dog you own, if you have any claim in the past five years related to a dog bite, you can guarantee that finding a company to insure your house isn't going to be an easy task.
There Is A Swimming Pool On The Property
If you have a swimming pool and your yard isn't fenced, you should expect for some companies to have a problem with it, especially if it is an in-ground pool. Also, if you have a pool with a diving board and/or water slide, you should expect that some insurance companies will have a problem with it, as they are a liability risk. If you have a diving board/water slide and no fencing, well, you're going to have a really difficult time dealing with insurance companies.
The House Looks Neglected
You should expect your insurance company to drop you as a customer if you fail to take care of your house. unless you repair the things they ask you to repair. For example, if you have tree limbs hanging over your house, resting on the roof, your insurance company is likely going to tell you to trim the tree limbs away from the house to prevent damage to the roofing shingles. If their inspector drives by the house again and notices that you didn't do as they asked, you should expect to be dropped by them as a customer. The fine print on your homeowner policy states that you must take any steps necessary to prevent damage that is considered to be preventable.
No Fire Departments Or Hydrants Near The House
Most homes have a fire hydrant, or source of water, near the house so that the fire department can put out a fire. Some homes are located in more rural areas outside of the city limits where there are no fire hydrants and, in some cases, no fire department close by, or only a volunteer fire department. Having no source of water close by, or a fire department close by, is a major concern to insurance companies. It can mean the difference of your house being partially damaged, or worse, a total loss. If you're lucky, this will only affect the price of your homeowners insurance policy. If you're not lucky, you may be denied a policy by companies because the risk is just too high for them. Basically,if you live "in the sticks", expect that you may have some hurdles to cross when finding an insurance company. Your best bet is to looking locally for an insurance agent, since they wouldn't be able to stay in business if they could insure the area in which they are located.