Brush up on home insurance basics

As a fake wizard once said, “There’s no place like home.” He may have been a humbug, but he was also right. We feel protective of where we live and attached to what’s inside. Your local agent can help put you on the (yellow brick) road to finding the right coverage. But in the meantime, it doesn’t hurt to know a few facts.

 

What is homeowners insurance anyway?

Say your home is burglarized or struck by lightning. Or, your own darling Toto goes rogue and scratches up your nice hardwood floors. Homeowners insurance — sometimes called home insurance or property insurance — could compensate you for your loss. It could replace your stuff, make repairs, or help you rebuild completely.

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What does it include?

Homeowners insurance can cover both damage to your property and the legal responsibility you might have for any injuries and property damage you, your family — or even Toto — might cause to others.

So, it covers a lot of things, but there are exceptions. For example, policies rarely cover flooding, earthquakes, or issues related to poor home maintenance.

So where do i get flood or earthquake insurance?

You can buy flood insurance through an insurance agent, but — it’s provided by the federal government. Earthquake coverage comes in the form of an endorsement.

What the heck is an endorsement?

It’s an amendment or addition to an existing policy that changes the term or scope of the policy. It’s sometimes called a “rider.”

What is usually covered by home insurance?

A standard policy usually covers these four key things:

1. Property (dwelling and other structures)

This part of a policy is designed to pay to repair or rebuild a home and even structures not physically attached to your home (such as sheds or garages) if they are damaged by a disaster listed in the policy. This also includes damage to fixtures such as plumbing, wiring, and heating.

2. personal property

Furniture, clothes, and other personal items are usually covered if they are stolen or destroyed by certain types of natural disasters. Most companies provide coverage limits of 50 to 70 percent of the amount of insurance on the structure of the home.

What’s more, your belongings could be covered anywhere in the world, unless you decide to opt out of what’s called “off-premises” coverage. Pricey items such as jewelry, antiques, and guns, are typically covered, but there’s usually a dollar limit if those things are stolen. You can also buy an endorsement for specific, high-dollar items.

Coverage often extends even to your trees, plants, and shrubs if they are stolen, catch fire, hit by lightning, vandalized, destroyed in a riot, or blown to pieces by falling aircraft (seriously). Typically not covered: Damage by wind or disease.

3. liability protection

Liability coverage helps protect you and your family from claims and lawsuits filed by other people. This clause could also include your pets. That means if your dog decides to nibble on the leg of the woman next door, your insurer could help pay the woman’s doctor bills, whether it happened on your property or hers. The liability portion of the policy pays for both the cost of defending you in court and most court awards up to the limit of the policy.

Liability limits usually start at $100,000. For even more protection, many insurers offer an “umbrella” (see “What’s an umbrella…” below) or “excess liability” policy, which may include claims for libel and slander, as well as higher liability limits.

4. additional living expenses

If your house is destroyed by a fire, storm, or other insured disaster, this could help pay the costs of living somewhere else until your house is rebuilt. It may cover hotel bills, restaurant meals, and other living expenses. Coverage for additional costs differs from company to company, so double-check the limits before booking that fancy-pants resort suite in Fiji.

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What’s an umbrella (other than a good idea on a rainy day)?

It’s a policy that’s designed to add liability coverage above the limits of your homeowners insurance. Like an actual umbrella, it helps protect you from the elements, but these elements are more along the lines of major claims and lawsuits.

What are my options when it comes to policies?

The different types of homeowners policies are fairly standard across the industry. They’re often named HO-1 through HO-8. However, individual states and companies may offer policies that are slightly different or go by other names, such as “standard" or “deluxe."

Some highlights of the policies (please note that not all carriers offer all these coverages):

HO-1 basic form

An HO-1 is a bare-bones homeowners insurance policy that is rarely written anymore because of the availability of other affordable options that offer better coverage.

HO-2 broad form

HO-2 homeowners insurance provides coverage only for “named perils.” If your home is damaged by events other than those actually listed on your policy, those losses will not be covered.

HO-3 special form

HO-3 homeowners policy is the most common coverage for people who own the home they live in. It provides coverage for the structures, personal belongings, and personal liability. It also provides the broadest coverage, protecting against 16 disasters. Owners of multi-family homes typically buy an HO-3 and add an endorsement to cover the risks associated with having renters live in their houses.

HO-4 tenant’s form

An HO-4 is created specifically for those who rent the home they live in.

HO-5 comprehensive form

HO-5 A: An “open peril” form that covers more than an HO-3. It covers all perils unless the policy specifically excludes them. It’s the broadest coverage you can get, so is typically more expensive than HO-3. It’s also not offered by as many insurers.

HO-6 condo form

The HO-6 condo form is designed for owners of condominiums and cooperative units. It provides coverage for belongings and the structural parts of the condo or co-op that the policyholder owns.

HO-7 mobile home form

An HO-7 mobile home form is the same as HO-3 but specific to the risks of mobile or manufactured homes that aren’t covered by standard homeowners insurance.

HO-8

An HO-8 homeowners policy is used for older homes that would be extremely hard to replace if destroyed. Historic homes and registered landmarks usually carry this type of policy.

Your agent can help you decide how much dwelling coverage to buy, but generally your coverage should equal the full replacement cost of your home. It’s a good idea to review your dwelling coverage occasionally to make sure it doesn’t drop below the cost to replace your home.

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Why am I purchasing so much coverage?

According to Grinnell Mutual Sales Manager Adam Hade, this is one of the most common questions from policyholders. To answer it, you’ll need to work with your agent to figure out at what level you want to be compensated if something does happen, and what you’re willing to pay for coverage. Knowing your coverage options will help you make the best cost/benefit decision for your situation.

Actual cash value

Actual cash value (ACV) means different things to different insurers so be sure to confirm which definition your insurer uses. Over the years, courts have defined actual cash value as one of the following:

  • Replacement cost (see below) minus depreciation (the one most commonly used)
  • Fair market value (what you could sell it for)
  • A combination of the two definitions above

Replacement cost

Replacement cost (RC) is how much it would cost to completely rebuild your home on the same lot, to the same quality with comparable construction materials, up to the original value. It factors in rising labor, material, and transportation costs.

Extended replacement cost

Extended replacement cost pays a certain percentage over the limit to rebuild the home. Generally, it’s 20 to 25 percent more than the limit of the policy.

Guaranteed replacement cost

Guaranteed replacement cost offers the highest level of protection. A guaranteed replacement cost policy pays whatever it costs to rebuild the home as it was before the loss — even if it exceeds the policy limit.

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What are the disasters (also called “perils”) that a homeowners policy typically covers?

  • Fire or lightning
  • Windstorm or hail
  • Explosion
  • Riot or civil commotion
  • Damage caused by aircraft
  • Damage caused by vehicles
  • Smoke
  • Vandalism or malicious mischief
  • Theft
  • Volcanic eruption
  • Falling object
  • Weight of ice, snow, or sleet
  • Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or automatic fire-protective sprinkler system, or from a household appliance
  • Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot- water heating system, air-conditioning system, or automatic fire-protection system
  • Freezing of a plumbing, heating, air-conditioning, or automatic fire-protection sprinkler system, or of a household appliance
  • Sudden and accidental damage from artificially generated electrical current (does not include loss to a tube, transistor, or similar electronic component)

Contact a local Grinnell Mutual agent to see if your current insurance gives you the coverage you need to protect the place you call home.

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Sources: Insurance Information Institute (III) and National Association of Insurance Commissioners (NAIC)

The summarized coverage descriptions are used for reference only and do not contain relevant policy conditions, exclusions, or limitations. Products and discounts not available to all persons in all states and are subject to underwriting guidelines, review, and approval.