FAQs About Homeowners' Insurance Coverage

You may need a combination of insurance policies or riders in place to protect you.

If you're not finding answers to your questions about homeowners' insurance elsewhere, check out these FAQs.

Question: After a disaster, will I get enough insurance money to rebuild the house?

I'm purchasing homeowners insurance, and have heard that a lot of people are underinsured. If a fire or other hazard destroys my house (or makes it unlivable), how do I make sure I'll get enough cash to rebuild with?

Answer

People tend to expect the insurance company to pay for the home to be rebuilt or restored to what it was before. But what will actually happen depends on the terms of the policy and what model of coverage it contains.

The norm: replacement cost coverage. The amount you receive to rebuild under a standard policy with "replacement cost" coverage will be a set dollar figure. It's calculated in advance, using the information you provide to the insurance company about the house's size, location, number and type of rooms, building materials, amenities, and more. However, when disaster strikes, this figure could be way off, particularly if building costs have gone up, a widespread natural disaster increases demand for contractors and thus the amounts they charge, you have remodeled and not updated your insurance, or your house has historical features that will be hard to recreate.

The ideal: guaranteed replacement coverage. If you look very hard (and pay more), you might just find a policy that guarantees payment of 100% of your repair or rebuilding costs, without limits. This rare and wonderful creature is called a "guaranteed replacement cost" policy. If your house has historical features that are hard to reproduce, finding such a policy will be especially difficult.

To be avoided: actual cash value coverage. Cash value policies are sometimes pushed on people with older houses or ones with an inadequate water supply (a fire danger). You'll get the house's replacement cost minus any depreciation or wear and tear that it's suffered since being built. That means that, for example, they might deduct for a roof that needed to be replaced. You are almost guaranteed not to have enough with which to rebuild.

You might check with a contractor about local construction costs, then compare these to what your proposed policy covers. Resist the impulse to downplay your house's finer features in order to bring your premium down, because it means those features won't be covered when you want to recreate them.

Question: Why should I buy liability insurance coverage?

I'm already paying plenty for the insurance that will keep my house covered in case of damage. Do I really need to pay for this so-called "liability" coverage, too? The odds of someone slipping on my pavement don't seem high.

Answer

Liability insurance compensates for two important, unpredictable, and potentially very expensive things:

  • Medical payments to others. This pays the medical bills of people from outside your household who are accidentally injured while on your property or by you or a household member, including a pet, whether on your property or elsewhere.
  • Personal liability. If you're sued, this covers both your legal fees and any amounts a court orders you to pay to someone who was injured or whose property was damaged by someone in your household (human or animal). (See Dog Owners' Liability for Bites and Other Injuries: An Overview.)

Standard homeowners' policies traditionally provide around $100,000 in liability coverage. You can easily imagine how an injured person's medical bills could top that amount. And if the person sues, you could end up paying even more. Rather than putting your house at risk of being sold to pay a court judgment, make sure your liability coverage is at a realistic level; between $500,000 and $1 million.

Question: What insurance do I need when renting out a home in a development?

I own a condo in a planned development. I plan on renting it out for six months while I travel. Do I need to keep my homeowners’ insurance policy? Or will everything be covered under either the HOA’s insurance or the renter’s insurance policy?

Answer

You probably won’t be sufficiently covered by either the renter’s or the homeowner’s association’s (HOA’s) policy. In fact, you probably won’t be adequately protected even if you keep your current homeowner’s policy. You’ll need to consider:

  • what your homeowners’ insurance policy will cover if you rent the place out
  • what the renter’s insurance policy (if any) will cover, and
  • what the HOA’s insurance covers with relation to your unit.

To be fully protected for loss or damage to your condo while you are away, you will likely need either an endorsement to your current homeowner’s policy or to purchase a new, “landlord’s” insurance policy. Check the terms of your current homeowner’s policy. Most say that coverage does not apply if you rent your home out (although some allow you to rent it out for an occasional, short period of time). Sometimes, an endorsement to the policy is available to cover a longer rental.

An endorsed homeowner’s policy and a landlord’s policy both typically cover losses from damage to, or theft from, your home. However, landlord’s insurance also typically reimburses you for rental income lost while any damage to your home is repaired.

You might also want to require any renter to have a renter’s insurance policy in place as a condition of signing the lease. Renter’s insurance policies are mainly meant to protect tenants from loss or damage to their personal property, though such policies can indirectly benefit you, as the landlord, as well.

Rental policies sometimes cover loss or damage to the home caused by renter negligence (for example, if water damage occurs because the renter forgot to turn off a tap). Liability coverage for the renter might also be included. If so, the policy might cover medical bills and other costs and expenses in the event that a renter’s guest gets injured on the property and sues the renter for damages.

Renter’s insurance typically doesn't cover loss or damage to the property not caused by the tenant, nor will it cover any of your personal property that remains in the unit. That’s where your insurance coverage will come into play. Also, even if the renter’s policy contains liability coverage protecting the renter, it typically won’t protect you, as the owner, in any liability lawsuit filed directly against you.

HOA policies typically cover only the common areas in the development (as defined in the governing documents). In a condo, the exterior walls are ordinarily considered common areas, while the unit interiors are considered property of individual owners. This means that if damage occurs to the siding or roof of the condominium building, for example, the HOA insurance might cover it. However, the HOA policy probably won't cover damage to the interior (such as ruined flooring, walls, or appliances).

The HOA insurance also won’t provide protection for any of your personal belongings in the unit. Without your own insurance coverage, you’ll pay out of pocket to replace things such as fire-damaged furniture or art.

To make sure you are adequately protected while renting out your unit, meet with an experienced insurance agent. Bring a copy of the development’s governing documents and the HOA’s insurance policy. Also discuss with the agent what type of policy and coverage you should require your tenant to obtain.

Question: Should I get insurance for my storage unit?

I am currently storing a lot of my stuff in a storage facility. Some of it isn't worth much, but some is antique furniture and family heirlooms. The storage unit is a little pricey. Is it worth it to buy separate insurance?

Answer

Many storage facility renters wrongly assume that the facility itself has insurance to cover losses for damage. This is sometimes but not always true. Check your agreement with the facility for the fine print. If you aren't already covered, you may be able to buy coverage directly from the storage facility. Many offer insurance as an add-on; for instance, an added $10,000 in insurance for a cost of around $10 to $30 per month.

Also check your homeowners' insurance policy. Many actually include a certain amount of recovery funds for “off-site” storage units.

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