In general, insurance is a pretty complicated topic. Yet most people know more about the intricacies of their health and auto insurance policies than they do about their homeowners insurance.
Perhaps this is because so few people actually file claims on their homeowners policies.
What does homeowners insurance actually cover? In the rare instance that you will need to file a claim, knowing the answer to that question is more important than you can ever imagine.
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What homeowners insurance typically covers
It’s almost impossible to generalize about what a typical homeowners insurance policy covers. While there are common provisions from one policy to another, exactly what is covered can vary from state to state and based on the type of policy that you choose.
But more specifically, a homeowners insurance policy only covers perils that are specifically listed as covered events in the policy. Or put another way, if a certain disaster is not listed as a covered event, you will not be able to make a claim should it happen.
Some of the more common covered perils include the following:
- Fire and smoke damage
- Weather related damage, such as wind damage or hail
- Water damage from internal sources, but not from flooding
- Theft of personal property
- Damage caused by snow or ice on the roof (such as a collapse)
- Damage from civil disturbances
- Explosions (like gas explosions)
- Damage caused by motor vehicles or aircraft
Most homeowners insurance policies will also include a provision for contents, which is personal property not affixed to the house. This is why theft of personal property is typically considered a covered event.
Most homeowners insurance policies will also cover damage to landscaping, fencing, and even outbuildings. This coverage is generally equal to up to 10 percent of your total policy amount.
There is usually a provision that will provide you with temporary living expenses if your home has been damaged to the point that you cannot live in it. The insurance company will reimburse you for your living expenses during the time that the home is being repaired.
Finally, homeowners insurance policies typically provide liability coverage in the event that you, a member of your family, or a third-party, are injured on your property. This also extends to someone being bitten by your dog, which is why insurance companies exclude such coverage if you have a breed of dog that is considered to be particularly aggressive, such as a pit bull.
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…And what it doesn’t cover
While the list of covered events above may seem pretty comprehensive, there are certain common disasters that will specifically not be covered by a typical policy.
Flood and earthquake insurance are the most common examples.
If you live in an area that has been determined to be prone to either threat, you will need to get a separate policy for each. But where these become complicated is if either threat strikes a property that is not located in either a flood or earthquake zone. For this reason, it can be advisable to add flood or earthquake coverage to a regular homeowners insurance policy. Since the property is not located in a threat zone, the premium will be extremely low. But in the event either calamity hits, you’ll be covered.
Examples of other threats that are not covered by the typical policy include landslides and mudslides, sinkholes, and damage due to warfare or nuclear accidents.
One other very important exclusion is damage that is the result of homeowner neglect. For example, if your roof has not been replaced in 40 years, and is destroyed in a violent storm, the insurance company could reject your claim based on the fact that the destruction of the roof was primarily the result of neglect, rather than the storm.
Unfortunately, it’s probably not possible to cover your home for every potential calamity that could strike it. And if you could, the policy would be prohibitively expensive.
What’s the right amount of homeowners insurance coverage?
What makes this part easy is that your mortgage lender will typically require you to have certain coverage. But even if you aren’t taking a mortgage to buy your home, you should make sure that your policy will at least cover the replacement cost of your home. This will ensure that you will be able to completely rebuild the home in the event that it is totally destroyed.
However, replacement cost is not the same thing as market value. Though there is usually a correlation between the two, replacement cost is your main consideration. This is especially true if your property has certain upgraded features, such as a premium kitchen and bathrooms, that aren’t necessarily reflected in the market value based on their cost.
Since the replacement cost of a home increases over time, your policy should also include inflation protection. This will allow the amount of coverage to increase based on the rise in building costs in your area.
You should also have an amount of contents insurance that will provide reasonable replacement costs for the personal effects that you have. However, if you have certain personal property that is particularly high value, such as jewelry and artwork, you’ll need to purchase additional coverage.
Liability coverage should be comparable to what is customary in your area. This amount can vary from state to state, since the laws of each state covering damages awarded are different.
Just as is the case with health insurance and auto insurance, homeowners insurance policies also come with deductibles. And naturally, the higher the deductible, the lower your premium will be.
Will your premium go up if you make a claim?
Homeowners insurance is a good deal compared to other types of insurance when it comes to making claims. Typically, your premium will not be increased when you file your first claim. There are, of course, exceptions, such as if your dog bites someone.
But usually, if the claim is the result of natural events, the insurance company will not raise your premiums. However, it is possible that your rates will be increased in the event you have two or more claims within a short span of time, such as three years or less.
What’s more likely is that an insurance company will raise its rates due to higher-than-normal claims in your area. In this case, the increase will be for the entire market and not specific to you personally.
For this reason, you shouldn’t not file a claim just to keep your premium down. The bigger concern will be paying the deductible. If you’ve taken a large deductible to keep the premium at a minimum, it’s always a good idea to make sure that you have enough extra cash in your emergency fund to cover that deductible in the event that you file a claim.