FOR LAWYERS

Guide to Insuring Your Home

If you own a home or are looking to purchase one, homeowners’ insurance coverage is almost certain to be a requirement, not an option. In fact, in order to protect their collateral, mortgage lenders will require that you purchase the insurance as a condition of receiving a mortgage loan.

When shopping around for the right insurance to suit you and your circumstances, it would be helpful to understand how insurers calculate your coverage limits, insurance premiums, and other terms under your policy. Insurers will have the property inspected and evaluated based on criteria such as its location, age, condition, building materials, and other factors. A risk level will be assigned to each property based on these levels, and premiums will be adjusted in accordance with how much risk the insurer assumes.

Standard coverages and exclusions

It is important to understand what is included and excluded under a standard homeowners’ policy so that you can determine whether you want to purchase additional coverage to mitigate your risks. Common inclusions (also referred to in the insurance industry as "covered losses") cover:

  1. Dwelling coverage: covers repairs and other costs for damage to your property caused by fire, wind, hail, and other accidental and unforeseen events. Standard policies generally also cover other attached structures, permanent fixtures, and installations such as water systems, plumbing, attached garages, swimming pools, and patios. Note that while detached structures such as standalone garages, sheds, and the like are usually covered, the coverage is subject to much lower coverage limits than the main dwelling covered under your policy.
  2. Living Expenses: This covers expenses incurred in connection with having to find a temporary dwelling due to an event constituting a covered loss, such as having to move into a hotel while your home is being repaired after a fire.
  3. Theft and burglary: covers the contents of your home in case of break-ins and the like. Note that it will be subject to limits that may be well below the actual replacement costs for these items. As such, if you own expensive jewelry, art, valuable collectibles, or other expensive items, you should probably consider obtaining umbrella coverage (explained in detail below).
  4. Premises liability: covers medical expenses, legal costs, judgments, and settlements for injuries to third parties occurring on the property, such as a slip and fall on loose tiles, for example, or damages caused accidentally by you or a family member. Note that this coverage only applies to visitors and other third parties and not to family members themselves; injuries they intentionally cause (as opposed to those they cause accidentally) are not covered.

Common exclusions are:

  • Damage from floods and earthquakes
  • extensive water damage (although damages caused by sudden and accidental occurrences, such as burst pipes, broken appliances, or water damage caused in extinguishing a fire, should be covered.)
  • Termites and other pests
  • Wear and tear
  • Dog bites.

Additional Coverages

  • Umbrella Insurance. The full extent of coverage options and covered events under umbrella insurance policies can be very broad (many of which are listed under the standard policy exclusions, above), so this list is far from comprehensive. Some of the more common ones would include: coverage of damages to a policyholder’s rental properties; liability insurance for lawsuits involving vehicle accidents occurring outside the property; and a number of other events and damages not generally covered under standard homeowners’ policies.
  • Excess liability coverage: raises the limits on the maximum amount your insurer must pay out for covered losses under your primary policy. It should be clarified that while excess liability and umbrella insurance both technically extend coverage beyond what is under standard policies, they differ in that the former raises the maximum payout amount for losses covered under standard policies, and the latter extends the scope of coverage beyond those covered losses.
  • Flood and earthquake insurance: these are generally not covered under standard or umbrella policies. In certain areas that are at high risk of flooding, there may not be any private insurers that are willing to take on those risks regardless of premium costs, in which case flood insurance may only be available through FEMA’s National Flood Insurance Program (NFIP).

Tips for lowering your premiums

  • Opt for higher deductibles in exchange for lower premiums. The deductible is the amount of money that you must pay out of pocket before your coverage kicks in, and your premiums are the payments you make for your policy (i.e., how much it costs you). Insurers will often accept lower monthly payments if it means that in the event of a covered loss, you will have to pay more out of pocket than you would have had to under the standard policy before the insurance company needs to start paying out on the claim.
  • Take risk reduction measures. This involves the installation of fire alarms, smoke detectors, or burglar alarms, thereby reducing the risks of fire damage and theft, or modifying your home to better withstand natural disasters, for instance, by reinforcing certain structural components of the home, such as its roof and foundation, to prevent or mitigate damages caused by hail, structural failures, and other covered losses. Because these measures reduce the insurer's risk of payout, they will accept lower premium payments for covering the property.
  • Bundle your policies. Bundling refers to the practice of purchasing multiple forms of coverage from the same insurer, for example, auto, life, umbrella, or other insurance coverage. Not only can this lead to significant discounts, but it also has the added advantage of making it more convenient to negotiate and manage multiple policies at once.

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