Homeowners' Insurance: What You Need to Know
The basics of homeowners' insurance in case your property is damaged or you get sued for someone's injuries.
Before finalizing a mortgage loan, lenders require homebuyers to purchase at least a minimal level of "hazard insurance," which is part of the standard homeowners' insurance policy. Hazard insurance will cover unintentional damage or destruction by fire, smoke, wind, hail, theft, vandalism, or another similar event.
To protect your own interests, however, you'll probably want to buy comprehensive homeowners' insurance, including liability insurance and more complete hazard coverage than your lender requires.
What Homeowners' Insurance Covers
In addition to covering the house itself, the hazard portion of a homeowners' insurance policy will typically protect furnishings and other personal items, as well as any other structures on the property, such as a pool or separate garage (unless you use such structures for nonresidential purposes, such as for your home business).
Most policies' hazard coverage doesn't include business equipment, damage caused by natural disasters, or loss of art or jewelry over a certain amount. You will want to purchase additional insurance if your house is in a high-risk area for fire, floods, earthquakes, or other natural disasters or if you have expensive art, jewelry, or business equipment at home.
Standard homeowners' policies also cover some types of personal liability -- if the mail carrier, for example, trips over your kid's skateboard or gets clawed by your cat, your policy will pay for the carrier's medical expenses and other losses, up to a certain limit. In fact, the damage doesn't have to have occurred at your home. If your kid rides the skateboard through the neighbor's fresh new cement path, or the cat shreds their screen door, those damages should also be covered. Unlike hazard insurance, this portion isn't required by your lender -- but is a good idea, since you don't want to lose your house to pay someone's medical bills.
Finding Homeowners' Insurance
Finding good homeowners' insurance coverage has become surprisingly difficult in some states, such as California and Texas. High payouts for mold and other disasters have made the insurance industry in these states skittish. If either you or the seller of the property have made claims for water damage (the usual precursor to mold), you might actually find that you can't purchase a policy -- or at least not a reasonably priced one. The same thing goes if you've filed many insurance claims in the past -- you might not be able to find a company willing to sell you insurance.
You can protect yourself against the possibility of not getting homeowners' insurance for a house you're buying by negotiating with your sellers to make your obtaining insurance a contingency or condition of finalizing the sale.
Plan Not to Claim Minor Homeowner Losses
Guard your policy well once you've got it. Don't file claims unless you have to -- if you file more than two or three claims, your rates will rise and your policy may be canceled. You are best advised to get a policy with a high deductible, so that you've got no reason to file lower-cost claims that will raise your premiums or lead to future cancellation of your policy. Your lender may, however, insist you not go higher than a certain deductible amount, such as $1,500. The lender wants to ensure that you won't get into a bind if you're unable to afford the deductible and therefore unable to make the repairs needed to trigger your insurance coverage, thus devaluing the lender's collateral (your house).
For more information on homeowners' insurance, see the website of United Policyholders (UP), a nonprofit information resource and voice for consumers of all types of insurance in all 50 states. (It doesn't take money from insurance companies!) Also helpful are the Insurance Information Institute's website at www.iii.org, and www.insure.com, a highly rated commercial site that provides actual quotes.
For detailed information on homeowners' insurance and other aspects of buying and owning a home, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart (Nolo).