A Guide to Home Insurance

August 2, 2008

Buying Homeowners Insurance is one of the most important financial decisions a family can make. However, it is also a financial area in which many lose by default. Many people do not know how much insurance is placed on their home and nearly as many do not even know who their homeowner's insurance company is. The purpose of this writing is to encourage you to give some thought to your homeowner's insurance and ask some important questions in order that you might make a conscientious decision in this regard.

Before we can begin making the important choices that surround the homeowner's insurance decision, we must first put ourselves in the proper frame of mind. To do that, close your eyes and imagine nothing is left -- a fire has devastated your home. Don't imagine your home as it is now or even just partially destroyed. See it completely gone, as unpleasant as that might be. Now, ask this most important question. What policy must I have to rebuild my home?

How Much Insurance Should I Buy?

The first decision to make is the actual amount of insurance to carry on your home. How much is adequate? To repair your home after a loss will require money to pay for contractors and materials at today's prices, not what was paid for your home years ago or the home's value as it is today. How much will it take to build your home just as it is now? It doesn't make sense to insure the value of your land or the lot under the building. Making premium payments for the value of the land is a waste of money and should be avoided unless dictated by your mortgage company.

Some mortgage companies will require that you insure your home for at least your loan amount. If that is the case with your home, try to get the mortgage company to allow you to get a policy with a guaranteed replacement cost rider (that issue will be covered later) to meet the requirement for homeowner's insurance. The loan amount, if it is above and not below the amount required to rebuild your home, will become your limit of insurance.

Under no circumstances, however, should you let your mortgage company decide who your insurance carrier will be. The mortgage company's interests are different than those of its clients. I can not express the heartache we have viewed when homeowners have discovered their mortgage companies have placed insurance on their property to cover the structure only with no contents or additional living expense coverage.

What Should Be My Deductible?

Consider the deductible as the amount of the loss that YOU insure. Your insurance company will insure the balance of any loss. Deductibles on homeowners policies affect the cost of those policies. The higher the deductible, the lower the premium. We generally recommend that people buy policies with the higher deductible, but not just because premiums will be less.

Insurance companies keep track of losses. If you insure the first $500.00 (or even $1,000.00) of a loss, you will be less likely to have an insurance company keeping your loss as a statistic than if your deductible was $250.00 (or $100.00 for that matter). The reason for this is simple: you won't be turning in claims for these smaller amounts. Generally, higher deductibles result in smaller premiums and a better "loss ratio" on the records of an insurance company.

Our office adjusted a $750,000.00 loss. The insurance company's attorney told us that the claim could be denied because the insured, in the application for the policy that covered the loss, had failed to disclose several small prior losses and implied that there was some deception in obtaining the policy. The failure of the insured to identify those losses in the application was just an oversight that he had forgotten about because they were so small. Had the insured obtained a policy with a higher deductible these small claims might never had been submitted.

The above being said, State Farm has a new deducible program that computes deductibles based upon a percentage of the policy limit. This could make the deductible many thousands of dollars. We have adjusted claims for insureds who, for some reason or another, did not understand this and it has angered them and their contractors when they discovered how much would be deducted from the claim for the deductible. Many contractors will agree to work for what the claim is settled for but they won't with the new State Farm deducible program. This issue has concerned me so much that I called someone I trust who works for State Farm and asked why such a program was instituted. I was told it was so that State Farm could remain competitive in its premiums.

The point here is that we need to know what our deductible is and make a conscious decision as to what it will be.

What Insurance Company Should I Purchase my Policy From?

What Insurance Company to purchase insurance from is a most important decision. Because of a wide variance in the manner in which insurers adjust claims from coast to coast, we can no longer recommend a particular insurance company based upon our adjusting experience. Some insurance companies are difficult to deal with in Arizona but fight their insureds for every dime in Utah, to give you an example. However, we might suggest some issues that you should consider.

An insurer may be a "direct writer" or "non-direct writer". A "direct writer" is a company such as Allstate, Farmers, or State Farm, whose own agents write the company's policies. Such an insurer is much more responsible for its employees than an insurer which employs an outside agent. Our office recently adjusted a loss wherein there was a dispute about coverages. The insurance company's adjuster recommended that we "sue the agent," and walked away. That probably would not happen if your carrier was also the employer of their agent. However, there are no hard and fast rules here. Sometimes non-direct writers are as responsible for their agents as are direct writers.

An argument could be made that if a homeowner had all of his or her homeowners and auto insurance with the same direct writer, and, if a home and auto were both destroyed at the same time, auto rental coverage could be provided under the homeowners Additional Living Expense portion of the policy. This argument may be valid. If this argument were accepted, this would be another reason for obtaining all of your insurance with the same direct writer.

We have a concern with State Farm policies. State Farm started changing its polices some time back and we started seeing the impact of these new policies several years ago. The policy is revolutionary and that may not bode well for the consumer. For example, most policies have a provision for replacement with "like, kind and quality" while State Farm's is for "comparable construction". This new State Farm policy may be the subject of a future blog.

Even though the above arguments for a "direct writer" insurance company are obvious, does that mean you should exclude insurers who are not direct writers? Not necessarily. Most adjusters for the insured will tell you that most of the fairest insurers are those whose company's policies are written by independent agents who are not direct writers. Such a Company would be Chubb Insurance.

Whom Should I Select as an Agent?

Keep in mind that an agent's primary responsibility is to sell policies. Once the claims department receives your claim, your agent will generally be no more than an observer, especially on larger claims.

You should choose an agent with the same care you would use to choose an accountant or an attorney. Be certain your agent is competent. Ask him or her to explain some things and then analyze their response. Question your agent on several items. If the agent does not answer to your satisfaction, consult a different agent.

Find an agent who will return phone calls. Some agents put their phones on an answering machine on weekends. If your agent can't call a Saturday loss into your insurer until Monday, what will you do for those two days, especially if there is no "hot line"?

To minimize the chance of a later dispute, we recommend that, when you receive your homeowners policy, that you ask your agent to send you a letter which states "If your home was totally destroyed, your coverage is adequate to rebuild it completely." This letter might support your claim later if a dispute as to values might arise.

What Type Of Policy Should I Buy?

The type of policy that is generally best for a homeowner is classified as an HO-3 or HO-5. Study the differences in the below listed major types of policies that can be purchased to insure a dwelling.

• HO-1 (Basic fire policy): This policy covers the dwelling, other structures such as garages, and personal property against fire, lightning, vandalism, malicious mischief, theft, and glass breakage. Loss of use and additional coverages are also included in all of the homeowners forms.
• HO-2 (Broad): This policy covers the perils of HO-1 plus falling objects; weight of ice, snow, or sleet; accidental discharge from a plumbing, heating, air conditioning or sprinkler system (water from flood is excluded) or household appliance; tearing, cracking, burning, or bulging of a steam or hot water heating system; freezing of a plumbing; heating, air conditioning or sprinkler system or a household appliance; damage from artificially generated electricity; and volcanic eruption. Coverage for a number of the HO-1 perils (vehicles, smoke, glass breakage) is broadened in this form.
• HO-3 (Special): This policy covers the dwelling and other structures on an all-risk perils basis. Personal property coverage includes the broad named perils insured under form HO-2, plus the peril of damage by glass or safety glazing material. Coverage on personal property may be added by attaching a separate endorsement.
• HO-4 (Broad Coverage for Contents): This policy is designed primarily for tenants, and covers personal property and limited coverage for building additions, alterations, and improvements made by the insured. The named perils coverage on personal property is the same as that of HO-2.
• HO-5 (Special): This policy is similar to the HO-3 policy but covers replacement cost of structures, without deduction for depreciation, and offers structure payments in excess of policy limits . This coverage is greater and the policy is generally better than an HO-3 policy.
• HO-6 (For Condominium Unit Owners): This policy is especially for residential condominium unit owners.
• HO-8 (Modified Coverage): This policy is for homes not considered eligible for replacement cost coverage.

Should I add endorsements and additions to my insurance policy?

An endorsement is a form attached to to the policy that changes the language of the policy to fit special situations. Some endorsements may be automatically added by an insurer to the policy you select. Other endorsements may be available for some types of policies and not for others. Question your agent about what is available. Ask about Code Upgrade Insurance. If you have jewelry, art work, and other valuables, add insurance for these. Some policies cover payment of public insurance adjuster fees; if such an addition is available request it. If any such endorsements are available the insurer must feel that the premiums or investment of premiums for that endorsement will offset losses or extension of losses that might occur as a result of the additional coverage.

You should have replacement cost coverage (RCV) on every item insured under your policy. Guaranteed replacement cost is an addition to RCV and extends protection to include costs on your structure which are higher than the stated limits! We recommend that homeowners also obtain contents replacement cost coverage. Some companies feature a policy which covers replacement cost for contents, without deduction for depreciation. Such coverage might even be considered as prepaid depreciation insurance because an item need not be replaced to recover it's depreciation.

What Name Should the Policy be Under?

Generally, the policy of insurance obtained on a property should be in the name of the property owner, so why should this question be asked at all?

For various reasons, people live with other people. Sometimes these people are of the opposite sex and could be considered as common law marriage partners if they lived together in a State that recognized such a thing. However, depending upon the policy, your insurance company may or may not see it that way. Whose property is insured and whose is not? Consider including the names of both parties on the Declaration of Coverage sheet of your policy. The policy might then read: John Doe and Sally Roe. If you are so inclined, ask your agent to do this for you.

Making a decision on Homeowner's Insurance is a big deal. Don't take such a decision lightly.