Homeowner's Insurance - Are You Really Covered?

Financial Planning

September 2006

Homeowner's Insurance - Are You Really Covered?

On August 29, 2005, almost 1,200 lives were lost to Hurricane Katrina. Since that time, the United States Congress has approved spending $122 billion in the Gulf Coast recovery effort and that number is likely to increase. Add to that the estimated $25 billion in privately insured losses and it's easy to see why Katrina was one of the deadliest and most costly natural disasters in U.S. history.

If these losses aren't bad enough, consider the plight of thousands of Gulf States homeowners who thought their insurance policies would protect them, only to find out they were essentially uninsured. After years of religiously paying their insurance premiums, many residents are finding that damage they thought was covered by insurance is being characterized as caused by uninsured events - primarily flooding. A recent federal court decision drove that fact home.

How did this happen? More importantly, how can you protect yourself from equally devastating circumstances? The answer lies in the terms of your homeowner's policy.

It is no secret that homeowner's insurance is expensive and in our attempt to save money, we sometimes jump at lower cost insurance. Unfortunately, in insurance, as in life, you get what you pay for and saving a few bucks can ultimately cost you a bundle. Let's take a moment to discuss some critical concepts in homeowner's insurance.

First, let's take a look at what is included in a homeowner's standard package policy. It will include coverage for the structure of your home as well as reduced coverage for unattached structures, and coverage for home contents, liability protection and additional living expenses if your home is not habitable. Sounds good, so far, but what is not included in a standard policy is coverage for losses due to flooding, earthquakes, routine wear and tear and various other specified events. In some parts of the country, insurers are also limiting what they will pay for damage due to hail and windstorms.

To protect against certain losses, you generally have to pay an additional premium or purchase a different policy, as in the case of flood insurance. If your home is mortgaged, it is likely your lender will require you to purchase this insurance if you home is in an area susceptible to flooding.

Even if you get insurance coverage to protect against all possible perils, you may still be in danger of uninsured losses. Typically, you have a choice between purchasing replacement cost insurance or insurance based on the depreciated cost of your home. Even though you will pay more, purchase replacement cost coverage. This is particularly true of older homes.

For example, a home built in the 1940s may only cost you $150,000, but if it burns down, it may cost $210,000 to rebuild. The reason is the materials used to build homes many years ago are different and often costlier than what is used in new construction.

Contents coverage generally ranges from 50% to 70% of your home's insured value. That means if you have $200,000 of structural coverage, the contents are insured for somewhere between $100,000 and $140,000. This insurance covers losses due to theft, fire, and other covered events. It does not cover loss due to flood, which requires a separate policy.

Unfortunately, contents coverage is not extended to all of your household goods. An insurer normally places a limit on the amount it will pay for silverware, jewelry, cash, furs and collectibles. Normally, coverage is limited to $1,000 to $2,000 for these items regardless of the actual loss. If you have a significant investment in high dollar items, you may wish to purchase additional insurance to cover them.

Has a guest at your home ever fallen at a dinner party? Hopefully, they didn't sue, but, if they did, the liability portion of your homeowner's insurance should have come to your defense. While typical liability limits may start at $100,000, most experts recommend at least $300,000 of coverage and perhaps more. If you have a high earning capacity you may wish to consider an excess liability umbrella policy of at least $1 million.

Anyone who lost a home due to last year's hurricanes will tell you that additional living expenses paid by their insurer were well worth the premium paid. Typically based on a percentage of the insured value of your home, the benefits will normally pay for hotel bills, meals and other living expenses while you are rebuilding your home.

Properly structured, a good insurance policy is designed to protect you from losses related to foreseeable, and sometimes unforeseeable, events. When talking with your insurance agent, make sure you discuss all the possible causes of an insured loss. You may not be susceptible to hurricanes, but tornados, earthquakes and flooding occur throughout the United States. Learn a lesson from some of our very unfortunate neighbors in the Gulf States and thoroughly review your policy now, before a loss occurs.

Here's to a calm season for all natural disasters.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.