Why You Need Homeowner’s Insurance

March 16, 2015

Buying a house is one of the major milestones in your life, and one of the biggest investments you’ll probably ever make.  So once you make that investment, you probably want to protect it with home insurance.  (And, in some cases, you’re going to have to.)

As with any other type of insurance, home (or homeowner’s) insurance comes in a variety of flavors with a seemingly endless array of options.  Read on to find out more about those options, and be sure you get the right suite of coverage for your home.

Should I get homeowner’s insurance?

In a word, yes. Homeowner’s insurance covers you in two main arenas – property (hazard) and liability.  If your home is damaged, you can recover for the cost of repairs or replacement of personal property (with certain limitations).  And if your super-litigious brother-in-law sprains his ankle at your family’s Fourth of July cookout, your homeowner’s insurance will help pay for the lawsuit he will inevitably file.

When is Homeowner’s Insurance Required?

If you have a mortgage on your home, the lender will probably require you to have at least hazard insurance, since your property is their property for the duration of the mortgage, and they have an interest in making sure it doesn’t get damaged or destroyed before you’ve paid off the debt you owe.  Furthermore, if you own a condominium or are part of a co-op, you might be required to protect yourself (and therefore, the others in your unit) with some degree of homeowner’s insurance.

When Do You Need Liability Insurance?

Liability insurance is not always required by lending institutions but is a wise choice no matter what your bank asks of you.  Liability insurance will protect you against claims by anyone who injures themselves while on your property – from the mail carrier to that brother-in-law.  It may also protect you if your kid’s baseball breaks the next-door neighbor’s window, or if your dog tears up their prize rosebushes.

There really isn’t any reason not to get homeowner’s insurance.  Most policies will let you choose your own deductible, so you can decide how much you want to pay in the event of damage to your home or property.  However, be aware: filing too many claims can cause your premiums to go up.  You don’t want to claim every little thing that goes wrong with your home on your home insurance; save it for the proverbial rainy-day, where the rain has come with damaging winds which knocked down a tree branch that destroyed half of your garage.

What does my homeowner’s insurance cover?

A standard homeowner’s policy covers the basics – the structure itself, any garages our outbuildings, and most of the contents of all of those buildings.  You’ll want to make an inventory of your personal property when you file your policy, so that you have an accurate assessment of what’s in your house.  Services like KnowYourStuff.Org help you better catalog and value your individual items of property; most people have far more than they think they do, and their home insurance coverage should reflect this.

Your property is covered against man-made peril (theft, vandalism, riots, fire, explosions, aircraft or vehicle strike, falling objects); natural disasters (windstorm, hail, weight of ice, snow, or sleet); or damage caused by malfunction of plumbing, air conditioning, or other appliances.

Personal Property Coverage and Homeowner’s Insurance

Homeowner’s insurance covers most of your personal property – the type of things that everyone has.  Furniture, electronics, and clothing are items that are traditionally covered with a basic policy.   If any of the hazards listed above (theft, vandalism, hail, appliance malfunction, etc.) occurs in or to your home and damages your personal property, the insurance will cover the cost of your personal items (within reason).  Unique or especially valuable items are not generally covered under basic homeowner’s policies, and must be scheduled and individually protected (see below).

Actual Value vs. Cost of Recovery

Be sure to familiarize yourself with the type of payout you’ll receive for your property in the event of irreparable damage.  The default on most policies is “actual value” coverage, which gives you the cost of the items at the time of the damage.  Depreciation and wear and tear can make the actual cost of replacement far greater than the value of the items when they were damaged or stolen.  For example, if your old iPhone4 is stolen in a burglary, the actual value of the phone is nowhere near the cost required to replace it with a new phone – assuming you can even get an iPhone4 anymore. Cost of recovery insurance will be more expensive, but will be more beneficial to you if you ever have to use it.

What is a Homeowner’s Warranty?

When you purchase your new home, your realtor may offer to include a homeowner’s warranty in the purchase of the home.  Despite the name, a homeowner’s warranty is not a warranty in the legal sense, but is more of a repair or services contract.  This contract usually covers all appliances and systems (electrical, plumbing, etc.) in the home against normal wear and tear.

A homeowner’s warranty is good protection for the fixtures in the home; however, it is a separate and lesser type of coverage than is provided by homeowner’s insurance.  Don’t skimp on one just because you have the other – understand the differences, and get the best and most comprehensive coverage for your property.

What is Accommodation Coverage?

In the event that some form of disaster forces you to live elsewhere for a while, your policy may offer you coverage for the costs of living away from home.  Being displaced from your home is stressful enough without having to worry about how you’re going to pay for the hotel room, food, and possible additional travel if you’ve had to go far.

What doesn’t my homeowner’s insurance cover?

The basic home insurance package covers the basic home: structure and ordinary personal property.  However, just as every home is different, every home policy should be different.  Consider the things that aren’t included in your policy, and be sure you have the right amount of coverage for your home and lifestyle. Additional policies, sometimes called “riders” or “endorsements”, are available for almost any eventuality.

Natural Disasters

Most homeowner’s insurance covers the risks from man-made and some natural disasters.  However, disasters like flood, earthquake, or hurricane are not generally covered by default. Depending on where you live, you will absolutely want to take out policies for these natural disasters; your premiums may also be far greater because of the heightened risk of these disasters in some locations. For example, flood insurance premiums will be a wise purchase – and more expensive – for a home on beachfront property, but maybe not for a mountain cabin.

Unique Valuables

If you have items in your house that are exceptionally valuable – jewelry, furs, artwork, collections, etc. – it they are probably not going to be covered by standard homeowner’s insurance.  These items should be appraised (either independently or through your insurer) and the insurance company will catalogue them and insure them separately – usually at a higher premium.  The process of listing the higher-value items with your insurance company is called scheduling, and scheduled items (or items that should be scheduled but aren’t) fall outside the coverage of standard homeowner’s insurance.  This is to ensure folks with less valuable property aren’t paying higher premiums to ensure the luxury goods of a few.

Business Materials

Do you run a business out of your home? Do you raise chickens and sell their eggs, for example?  Business items are not typically considered part of your home (that’s what a farm is supposed to be for), so they may not be covered under your homeowner’s insurance.  If a hailstorm damages your back yard and your rooster escapes, you may recover the lost value through a business rider on your home insurance.  Less dramatically, a fire that destroys inventory for a direct-sales business will also allow a claim on your home insurance for the value of the lost product.

Relatedly, if you run a business which involves inviting non-family members into your home – a daycare, for example, or a salon – you’ll want additional liability coverage to ensure that anything bad that happens to them on your property doesn’t come out of your pocket.  Even if it isn’t your litigious brother-in-law who wants to sue you, a parent whose child has a broken arm is also a formidable foe. Supplemental insurance on your home will allow you to avoid the cost of legal action against you.

Sewage Backup

It’s the kind of thing you don’t want to think about, but after a heavy downpour (especially if you live in an older neighborhood), you may have to.  Damage and general ick caused by an overflowed sewage system is not covered by most basic home insurance plans, and it really adds insult to injury when you have to pay out of pocket to have the mess carted out of your house and your carpets replaced.  It’s really not the kind of thing you should have to be dealing with, especially if it wasn’t a system failure you had any control over.

Ordinance exclusion

Some localities have what is called an ordinance exclusion, or law exclusion.  Because this type of exclusion varies by state, be sure to ask about it when you’re discussing your policy.  An ordinance exclusion states that if more than a certain percent (usually 50%) of your home is damaged, the entire structure must be rebuilt to the current housing standards.  That means potentially upgrading the electrical, water, or structural systems in your house, and this can be incredibly costly.  If you live in an area with historic homes, there may be an ordinance exclusion on your property, and the additional cost of bringing your home up to code may not be covered without an additional rider.

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No matter what kind of home you’ve purchased, it’s important to protect it to the fullest extent of your ability.  Understanding the type of property you own, the area where you live, and the possible hazards of that property are crucial for obtaining sufficient coverage to keep you in your home for a long time.

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