The Simple Dollar Guide to homeowners Insurance

Anyone who’s bought a house or has shopped for one knows that homeowners insurance is a fact of life – some might call it a necessary evil; others peace of mind in times of crisis. And while most people are convinced or compelled by banks to purchase insurance on their homes, few people understand exactly who to trust, what their policy does, when to make policy changes, where to shop for it, why it is priced the way it is or – most importantly – how they can take control of the process.

 

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This guide will help cut through the jargon and the blizzard of paperwork involved in home buying to explain exactly how homeowners insurance works. In these six main sections, you will:

I. What Insurance Does

A. Definition

To begin, homeowners insurance, sometimes referred to as “hazard insurance” or simply “home insurance,” is property insurance designed to cover private homes and their contents.

Homeowners insurance is a multi-line policy, meaning that the premiums, or regularly scheduled payments made to the insurer, cover both property and liability insurance. The premium is usually determined by the replacement cost of the home and its contents.

There are three major reasons to buy homeowners insurance:

  • To provide property coverage – Homeowners insurance covers the physical structure of your home and your personal property if it gets damaged or destroyed.
  • To provide liability coverage - If someone who isn’t covered under your policy is injured or killed, or their property is damaged or destroyed while they’re on your property, your homeowners policy will cover your personal legal responsibility. This coverage extends to cases where damage or injury happens adjacent to your property, such as when the limb of a tree on your property falls on a parked car on the street.
  • To satisfy your mortgage lender - To get a mortgage from a bank, most lenders insist you have insurance as long as you have a mortgage; you also have to list the lender as the mortgagee on the policy.

The premium is usually determined by the replacement cost of the home and its contents

Additionally, your policy generally covers such expenses as staying in a hotel or renting an apartment during the period when your home is being repaired following a disaster. In most cases, it requires that at least one of the individuals named on the policy actually live on the premises.

B. Why Mortgage Companies Require Insurance

If you have a mortgage, it’s likely that your lender will require you to purchase homeowners insurance. Often, its cost will be rolled into your monthly payment, along with property taxes. If you do not purchase homeowners insurance on your own, lenders may “force place” insurance on the property, often at an extremely high cost to you.

One of the justifications lenders give for the high cost of forced-place premiums is to protect their investments. After putting up the money you used to purchase your home, they don’t want something like a natural or manmade disaster to damage or destroy the property before they get a chance to collect that money back through premium payments. Because force-placed insurance is often considered “high risk” by private insurers, the premiums usually come at a higher price.

This policy, however, has come into question in recent years, and several state insurance departments are considering changes in regulation to ensure that the pricing becomes more competitive. (See this NAIC article for more details on the subject.)

C. Why You Shouldn’t Do Without It

Of course, with the economy in its current state, it’s fairly normal to experience a case of sticker shock when that premium notice arrives in the mail, which could force you to actually consider “going bare“: an industry slang term for going without insurance. Most people shouldn’t even consider going without.

Sure, if you’re already independently wealthy and your home represents a small enough percentage of your net worth that it could easily be replaced, then by all means “go bare.” If you are affluent enough (and don’t have a mortgage), then you might consider opting for self-insurance, which involves setting aside a substantial sum each month toward future disaster losses and liability claims. Most “99 percenters” who have middle-class jobs, however, can’t afford the kind of funds that can replace an entire house.

Another thing to consider: If you drop your homeowners coverage now, insurance companies might not be willing to cover you in the future. They tend to assume that you either couldn’t meet your premiums in the past and will have trouble paying them now, or that you are only looking for coverage because you are anticipating a claim in the very near future. Either way, expect to pay substantially more for your coverage, if you can get it at all, according to Timothy Perr, managing principal of the consulting firm Perr & Knight, in this Bankrate.com article. Your credit could even be bruised, he adds, which could severely impact your financial standing for years to come.

II. Basic Homeowners Insurance Terms

Insurance can sometimes seem like a foreign language unto itself. Here is a glossary of definitions for some common terms used in this guide to make sure you know what your agents and adjusters are talking about.

Adjuster – A person who is trained to investigate losses and seeks to determine the extent of an insurer’s liability for that loss when a claim is submitted. Adjusters can represent specific insurance companies or can be a “public adjuster” hired by the claimant to work independently.

Appraisal – An evaluation of a home insurance property claim by an authorized person, usually an adjuster, to determine property value or damaged property value. Many policies require this appraisal process to resolve claim disputes.

Cancellation – The termination of a homeowners policy before its agreed-upon expiration date, most often for nonpayment of the premium.

Claim – A homeowner’s request for reimbursement under the terms of the policy.

Deductible – The amount that a policyholder must pay out of their own pocket before coverage kicks in – even when a claim is accepted.

Depreciation – The estimated decrease in value of property over time due to wear, tear, aging, and other factors.

Endorsement – A provision, document, or clause added to a homeowners policy that modifies the original coverage offered by the policy.

Exclusion – Items, conditions or circumstances that are specifically noted in a homeowners policy as not being covered.

Exclusive agent – An insurance agent who only sell the products of one insurance company.

Group policy – A policy sold through an employment-based group, an association or a special group insurance trust in which all participating members are included under one master policy. Each receives an individual certificate of coverage from the group policy.

Independent agent – An insurance agent who represents more than one company.

Individual policy – A policy sold directly to an individual.

Lapse – An interruption in coverage caused by non-payment of the premium.

Liability coverage – Covers losses for bodily injury or property damage to others that occur on the homeowner’s property, as well as medical and legal expenses that may arise from lawsuits. Both losses are covered up to a specific dollar limit.

Market value – The current worth of your home, including the land on which it is built.

Nonrenewal – When an insurance company declines to renew a policy at the end of its current term.

Peril – A specific risk or reason for a loss.

Personal property – Portable items, such as furniture, electronics and clothing, that are not permanently attached to the home.

Policy – A written contract between an insurer and customer specifying coverage for loss or damage to property.

Premium – The price charged by an insurance company the varies depending on the level of coverage purchased.

Property coverage – Protection for land or personal property against loss or damage.

Underwriting – The process that insurance companies use to determine eligibility and premiums for coverage.

III. Understanding Your Policy

The first rule of understanding property insurance is that not all homeowners policies are the same. This is often one of the most common misperceptions about insurance. In a 2010 survey by the Independent Insurance Agents & Brokers of America, more than a third of the respondents said they didn’t have, or didn’t know if they had, adequate homeowners insurance coverage, and 62 percent had never discussed a complete disaster preparedness plan with an insurance agent.

Not knowing what’s in your policy can have serious financial consequences. In 2005, after Hurricane Katrina flooded the city of New Orleans, and again in 2012, when Superstorm Sandy paralyzed countless communities in New York and New Jersey, thousands of desperate survivors got a rude shock when they found their basic homeowners’ policies did not cover flood damage.

more than a third of the respondents said they didn’t have, or didn’t know if they had, adequate homeowners insurance coverage

A. What’s Covered

Your coverage will not kick in unless you experience a loss that is caused by a specific peril, or reason for loss, that your policy covers. For most policies, according the NAIC’s “Consumer’s Guide to Home Insurance,” the list of covered perils includes:

  • Fire, smoke, wind, hail, lightning, explosions, or civil unrest
  • Theft or vandalism
  • Trees and other falling objects
  • Weight of ice, snow, sleet and freezing rain
  • Rupturing and sudden overflowing of a plumbing, heating, air-conditioning appliance or sprinkler system

B. What’s Not

Some common perils occur with such frequency and predictability in certain areas that they are subject to exclusion from basic coverage. The most notable excluded perils include:

  • Floods or sewers that back up into the home
  • Land movement, including earthquakes, landslides and mudflows
  • Acts of war, or overthrow of the government
  • Damage from pets, birds, rodents or insects
  • Pollution damage
  • Deliberate damage to the home
  • Normal wear and tear

Most of these are fairly clear-cut perils, but many people get confused by the types of water damage perils, as defined by insurance companies. They make a clear distinction between sudden water damage caused by a ruptured pipe (covered) and gradual water damage caused by rising floodwaters that seep into a home (not covered).

C. Types of Policies

The reimbursement you can get for damage also depends on the kind of policy you buy. The most common form of homeowners insurance will cover all perils except for those that are specifically excluded in the policy language. Here are a few other kinds of policies that differ slightly depending on the type of dwelling being covered:

  • Modified Coverage Form is for older homes, where the cost to rebuild is greater than the market value. It covers the same set of perils as the standard homeowners policy.
  • Condominium Unit Owners Form is for owner-occupants of condominium units. It insures your personal property and your walls, floors and ceiling against all of the perils, and also extends coverage for damage to additions and/or alterations that the unit owner may have made, up to specified limits. Usually, this coverage for alterations kicks in only after any insurance limits are reached by policies (if any) that are purchased by the condominium association.
  • Dwelling Fire Form only covers your dwelling, and only for a few specific perils. It does not cover your personal property, personal liability or medical payments. This coverage is a popular option for vacation homes. It’s also the kind of limited policy your mortgage lender will purchase for you if you let your homeowners policy lapse.

If you own a townhouse, you may insure it through an individual homeowners policy or an association policy – sometimes referred to as a group policy. Interestingly, people living in a mobile home with wheels that don’t rest on blocks or a permanent foundation can be covered through automobile insurance, although it offers far less coverage than homeowners policies.

D. Optional Insurance and Endorsements

Many catastrophic events are not part of the standard homeowners policy, but they are still insurable; they just require additional levels of insurance or, in some cases, entirely different policies, which are often several times more expensive than typical homeowners premiums. Some homes are located in high risk areas like flood zones or earthquake zones, which makes purchasing additional insurance a high priority for these homeowners.

  • Flood Insurance - If your home is located in a known flood zone, you may want to consider taking part in the National Flood Insurance Program, part of the Federal Emergency Management Agency (FEMA), which writes most flood insurance policies. Premiums for this coverage can vary widely, depending on the history of flooding in your area. According to claims processing firm National Flood Service, as quoted in The New York Times, the average annual flood premium is $615, but it can go as high as $1,200 to $3,000 per year in some places.
  • Earthquake Insurance - If you live in a seismically active zone, some insurance companies will sell earthquake insurance either as a separate policy or as an endorsement to your homeowners policy. Premiums vary depending on your region and the type of home you’re insuring; wood frames are cheaper (roughly 50 cents to $3 per $1,000 of coverage) than more fragile brick buildings (60 cents to $15 per $1,000 of coverage).

California is one of the highest-risk states in the country, with annual earthquake premiums averaging just over $700 per year as of 2010, says the California Earthquake Authority (CEA). (Those in the California area who are interested in specific premium costs and various discounts can use CEA’s handy calculator app.)

Many catastrophic events are not part of the standard homeowners policy, but they are still insurable

Deductibles for earthquake insurance are also a major cost hurdle. They are often expressed as percentages, rather than dollar figures, and can range anywhere from 2 percent to 20 percent of a property’s replacement value, depending on the activity of the nearby fault.

  • Weather Hazards - In states where homes are regularly exposed to specific hazards, a homeowners policy may not have sufficient coverage, forcing people to pay their insurer top dollar for the necessary endorsements. For example, some insurers that offer policies in storm-heavy coastal areas of the U.S. will exclude coverage of windstorm and hail damage, and only offer separate, more expensive policies for those two common perils.

Some other popular endorsements and extra policies include:

  • Guaranteed Replacement Cost Coverage – A policy that pays to rebuild your home completely, even if the cost is above your policy limits. You can expect to pay $400 to $1,000 more in premiums per year for this endorsement
  • Inflation Guard – An endorsement that automatically raises your dwelling coverage limit annually in line with inflation, so that your limits are at least 80 percent of its value. Incremental premium increases in relation to the limit are usually charged when the policy is renewed.
  • Personal Umbrella Liability Insurance – So called because it tends to broadly cover assets, this insurance increases your liability coverage above the limits available in any of your “primary” policies, including homeowners, auto and boat insurance. Umbrella coverage can extend to other excluded coverages, such as false arrest, slander, libel and invasion of privacy, which can kick in once your primary coverage is exhausted. Premiums for this coverage tends to begin at around $150 to $300 per year for $1 million in coverage, an additional $75 for $2 million, and $50 extra per year for each additional $1 million in coverage, according to the Insurance Information Institute.
  • Scheduled Personal Property - An endorsement that covers high-value objects such as jewelry, furs, stamps, coins, guns, computers, antiques and other items that could exceed the limits in your homeowners policy. Sometimes referred to as a “personal article floater.”

E. Limits of Coverage

Even if you suffer a loss that is included as a covered peril, there are limits to the amount of reimbursement you can receive

Even if you suffer a loss that is included as a covered peril, there are limits to the amount of reimbursement you can receive. Typically, your insurance agent will help you decide how much dwelling, personal liability and medical payments coverage to buy when you first get homeowners insurance, based on the value of your home.

The limits of your coverage for other structures on your property (including separate garages, studios, storage sheds, etc.), for personal property and for loss of use of your home are expressed as percentages of your dwelling limit. The coverage is usually a set as a percentage of the agreed-upon dwelling coverage limit.

Say your dwelling coverage limit is $200,000 and your coverage for personal property is limited to 50 percent of your dwelling coverage, while loss of use is pegged at 20 percent of the dwelling limit and other structures is pegged at 10 percent. In that case, your coverage for personal property would be $100,000, loss of use would be $40,000 and other structures would be $20,000.

F. Deductibles

Before reimbursements can be made, policyholders must also pass one more obstacle: the deductible. In order to cut down on trivial claims that would otherwise be filed against the insurer, the deductible is the amount the money you have to pay out-of-pocket on a claim before the policy pays the loss. This deductible is meant to be low enough to be reasonably affordable by most homeowners and applies to coverage for the home and personal property.

The amount of the deductible can vary depending on how much you want to save on your monthly premiums. For instance, a policy with a $1,000 deductible will come with a premium that is roughly 25 percent lower than the same policy with a $500 deductible. So, while you pay less each month for a $1,000 deductible, you must pay the first $1,000 of any claim you make before the coverage becomes active.

In most locations, there are also catastrophe deductibles for other, more expensive policies such as earthquake and flood insurance, which are expressed as a percentage of the value of the property instead of a dollar amount. (See Optional Coverage and Endorsements section above.)

IV. How to Shop for Homeowners Insurance

As discussed earlier, insurance policies come in many different shapes and sizes. The same is true for insurance companies and agents, which can charge wildly different rates for essentially the same coverage. Bigger is not always better, and small, local insurers don’t necessarily have the best customer service. So it’s always in your best interest to shop around for the best deals and to ask the right questions in an effort to know what you’re actually getting.

The NAIC came up with a list of good questions to ask an agent while you’re shopping around for quotes. Use this handy checklist the next time you chat with an agent about shopping for a homeowners policy:

  • What is the claims history of the home I am considering?
  • If I submit a claim, how will it affect my premium when I renew the policy? Could it end up costing me overall?
  • How will my credit history affect my premium?
  • What does the policy cover? What doesn’t it cover? What are the limits to the coverages?
  • How much coverage do I need for my personal property?
  • How much liability coverage should I buy?
  • Should I buy flood insurance or earthquake coverage? Can an agent help me determine how much risk my home is at?
  • What types of water damage are not covered? Is mold damage covered?

Check with your state insurance department or consumer agency to see if it publishes premium comparison guides for homeowners insurance. To make sure all prospective insurance companies are financially sound, check their health by using evaluations from independent ratings agencies such as Standard & Poor’s, A.M. Best and Moody’s.

A. Stick with the Professionals

With the dizzying amount of choice available for finding insurance agents, some people just go with recommendations from friends, neighbors and relatives. However, you should always beware of referrals from non-professionals. Your brother-in-law may have gotten a great quote from his agent, but that’s no guarantee you’ll get the same treatment.

beware of referrals from non-professionals

Insurance companies generally use one of three methods to sell their products.

  1. Independent agents who represent several companies and can give you several quotes at once;
  2. Exclusive agents who only sell the products of one insurance company; and
  3. Direct market sales that are done over the Internet, by mail or by phone.

Note: As helpful as independent agents can be, make sure you take the time to look up their credentials via your state insurance department and to make sure they are fully licensed. Some unscrupulous adjusters without licenses print up false business cards and claim to be legitimate, but may not follow through after you have paid them.

Doing business with an unlicensed agent may jeopardize your chances of having your claims paid or refunds sent in the event of a cancellation, which can leave you responsible for all replacement costs in the event of a major property loss. It really pays to do your homework and make sure independent agents are the real deal.

make sure [agents] are fully licensed. Some unscrupulous adjusters without licenses print up false business cards and claim to be legitimate, but may not follow through after you have paid them

B. How Insurers Determine Your Premium

Many factors affect the underwriting process, which determines the premiums you pay. Different insurance companies charge different premiums for similar coverage. Decisions you make about how much insurance coverage to buy also affect your premium. Some of the other things that are likely to affect your premium include:

  • The cost to rebuild your home; this is not the same as the purchase price, which includes the cost of the land. Your insurance agent might help you estimate replacement cost using information about your home and its contents.
  • Whether your home is made of brick or wood; the premium is usually lower for homes that are primarily brick or masonry than for wood frame homes
  • The proximity of your home to resources and services, such as a water source or fire department and the quality of your community’s fire protection services
  • The age and condition of your home;the premium is often higher for older homes and homes in poor condition than for newer homes and homes in good condition.
  • The claims history of your neighborhood and community, particularly the homes immediately next to your address
  • A wood furnace or wood stove in the home
  • Owning high-risk outdoor amenities, such as a swimming pool, a trampoline or playground equipment that could cause injuries
  • The types of pets you have. Some insurers won’t insure you if you own certain breeds of dogs that are known to be aggressive, such as, but not exclusive to:
    • Akitas
    • Alaskan malamutes
    • Presa Canarios
    • Chow chows
    • Doberman pinschers
    • German shepherds
    • Pit bull terriers
    • Rottweilers
    • Siberian huskies

Other companies do not exclude specific breeds, choosing instead to consider individual animals on a case-by-case basis. In some cases, the presence of exotic pets in the home, such as snakes, lizards, birds and horses, may also drive up rates.

Average Home Insurance Premiums Graph

Using data from 2002-10, this graph shows how much monthly premium rates might increase during an eight-year period, both overall and year-to-year. Click Image to Enlarge.

C. Getting Premium Quotes

Today, new apps have made quote-gathering online faster and easier than ever before. Rather than calling each insurance company individually or searching endless web pages for quote information, these online services allow you to quickly pull up a broad comparison of different companies’ prices.

Insurance companies such as Esurance (offered by Allstate), Progressive Insurance, Liberty Mutual and many others have sophisticated search algorithms that allow you to plug in some basic information about your home’s location and size, plus the type and amount of coverage you want, and receive an instant preliminary quote.

To expand the reach to several insurers at once, online insurance shopping services, such as NetQuote, InsWeb and Affordable-Home-Insurance.org, offer similar search services that calculate the lowest available premium quotes from their networks of thousands of agents across the country, working for dozens of insurance companies.

Also, most state insurance departments are now providing services that show you average premium price ranges (though not specific premium quotes) based on a property’s value, type of construction, mitigation features, various deductible levels and other criteria. For instance, check out the CHOICES page on the Florida Office of Insurance Regulation site, or the Homeowners Premium Survey page from the California Department of Insurance.

But first you should decide what coverages and policy limits you need. This is where the importance of replacement costs vs. actual costs comes into play:

  • Actual cash value (ACV) – This method would reimburse you for your lost or damaged possessions only after accounting for the age of each item and discounting for the wear and tear – or the depreciation – that has occurred over the years to lessen its value. Usually, the ACV is lower than the market value, but premiums tend to be cheaper.
  • Replacement cost value (RCV) – This would replace your possessions with similar items at their current market value, so it does not factor into depreciation. The downside is that the annual premiums for RCV policies tend to be about 10 percent higher that ACV ones.

To make sure you get enough for reimbursement, your coverage should equal the full RCV of your home

To make sure you get enough for reimbursement, your coverage should equal the full RCV of your home. The market value, which includes the price of your land, depends on the real estate market. If your dwelling coverage drops below 80 percent of the RCV of your home, your insurance company may reduce the amount it will pay on a claim.

As you shop for a quote, the agent or online app will ask for some basic information about your house, such as:

  • Where it’s located
  • The square footage
  • When it was built
  • The type of construction
  • Roof type and age
  • Number of bedrooms, bathrooms and stories
  • Garage type (if any)
  • Foundation type
  • Whether is has security systems, such as burglar alarms and smoke detectors
  • Type of heating and air-conditioning systems

Be sure to get rate quotes and key information in writing.

Be consistent during your search. When you get quotes, it’s crucial that you ask for the same coverages and limits and give the same information to each agent or company. That way, you can get a much better apples-to-apples comparison of rates.

While you shop for bargains, this is also a good time to assess the insurer’s customer service skills and ability to handle problems. Go to your state insurance department and see if they have a “complaint index” (here’s an example from Missouri). This index measures how many complaints your state insurance department receives, relative to the size of the company, and then gives you an idea of how well each insurer responds.

assess the insurer’s customer service skills and ability to handle problems

V. What You Can Do to Save Money

As we’ve seen above, the homeowner has a fair amount of choice available in determining the types of policies they need to meet their needs. Now here are some simple suggestions from the Insurance Information Institute (III) about how consumers can change their behavior and earn discounts to help drive down premium costs.

  • Choose a higher deductible – Having a higher deductible can be a good way to save money on your homeowners insurance premium and to submit fewer claims. Raising your deductible from $500 to $1,000, for instance, could save you up to 25 percent on premiums. However, be sure you can afford the deductible in case you have a loss.
  • Bundle your insurance – Many insurers will offer discounts for customers who are willing to keep their different kinds of insurance with the same carrier. For instance, a company might between 5 and 15 percent discounts for having two or more policies.
  • Stick with one insurer - The length of time you’ve been with your current insurance company could pay off in the end. According to III, some insurers will offer 5 percent discounts for those who stay with them from three to five years, and 10 percent if they remain for six or more years.
  • Keep your credit history clean -In many states, insurers use your credit history as a factor to decide whether to sell you insurance and what price to charge you. Keep tabs on your credit score by using any one of these three main consumer credit rating agencies – Equifax, Experian or TransUnion – to get a free credit score. Also check out the free AnnualCreditReport.com each year to make sure there are no red flags on your report. Sometimes when a third party makes a request to run a credit score check, it can have a slight negative effect on your overall score, but just checking your own score will not affect your rating in any way.
  • Buy safety devices for your home - Having protection devices in your home, such as smoke detectors, a burglar alarm and deadbolts, will usually earn a 5 percent reduction in premiums from many insurers. Anyone who goes the extra mile and installs better sprinkler systems and burglar alarms can see discounts of up to 15 to 20 percent. But as you’d expect, these systems tend to have steep up-front costs.
  • Set replacement costs on the value of your home, not your land - During a catastrophe, the land itself will not be damaged in any significant way, so why should its value factor into how much it would cost to rebuild? Make sure the limits of coverage are based on the value of your dwelling, not the land upon which it sits. Most reputable agents know this, but it’s worthwhile to be vigilant and ask about it in case someone is trying to sell you too much coverage.
  • Make your home more disaster resistant - Ask your agent about easy or innovative ways you can make your dwelling more resilient against everyday perils. Some of these include:
    • Adding workable storm shutters to windows
    • Reinforcing your roof agains hurricane-force winds
    • Add earthquake brackets to keep heavy furniture from toppling
    • Buying new appliances before they fail and cause water damage
    • Installing smoke detectors throughout your house
    • Clearing brush from the sides of the house
    • Removing old or dead trees that may topple onto the house
    • Cleaning storm gutters to prevent overflows
  • Take advantage of senior discounts -Are you 55 or over? If so, some insurers may offer 10 percent discounts on your premiums, due to the tendency of the older demographic to lead safer lives than their younger counterparts.
  • Look to the private market -If you’ve been forced into a government-backed insurance plan because of economic constraints, take another look at the private market. You might be surprised to find that some lower-cost plans are becoming more and more available.

VI. Keeping Up on Your Homeowners Policy

At this point, you’ve made the decision on the right insurance company, the type of coverage you want, the type of policy that best fits your needs and the actions you can take to keep your premium costs down. This, however, is no time to file the policy away and forget it. As you make incremental alterations and improvements on your house, your policy should change right along with it.

A. Your Policy’s Upkeep

  • Pay the premium on time - This is the most likely reason coverage may be dropped on an insurance policy. A few insurers may offer a small grace period, but most are sticklers for premium deadlines and will not cut you a break for lateness.
  • Keep an up-to-date paper trail - Be sure to organize and file all of your signed insurance documents or other paperwork you received in the mail from your insurance carrier, including the policy document itself, correspondence, copies of advertisements, premium payment receipts, notes of conversations about claim activity
  • Make a detailed inventory of your possessions - Go from room to room in your home and write down everything of value that you would want replaced in the event of theft or calamity, such as jewelry, antiques, furniture, appliances, electronics, firearms and collectibles. For even more thorough accounting, take pictures or videos of everything.
  • Keep inventory list offsite - To make sure you can find the list following a disaster, try to store your home inventory in a secure place at another location, such as your workplace, a safe deposit box or at a relative’s house. The advent of cloud computing is making it easier to store this information in digital form on a secure server.
  • Maintain your home - A homeowners policy isn’t a maintenance contract; it insures against damage from perils such as fire, wind and hail. It doesn’t pay to repair items that simply wear out, like rotted porch railings. You’re responsible for the upkeep of your home, such as repairing your roof when it begins to leak or cleaning your chimney flue so it doesn’t catch fire.

Each year, try to make a point of reviewing your written and/or photographic inventory and make updates as you add or subtract new valuables in your home. You could make it part of your New Year’s ritual by adding it to your list of resolutions. Keep receipts with your home inventory for all repairs you may have made in the last year that could add to the value of your property.

As you make incremental alterations and improvements on your house, your policy should change right along with it

B. Filing a Claim

In the event that you do experience a loss, here are some quick things to do before you make the call to your insurance company’s claims center:

    • Read your policy again - Before making a formal claim, try to determine whether the damage is covered on you own. If the cost to repair the damage is not much more than your deductible, you might want to pay for the repairs without filing a claim. How often you file a claim and the types of claims you file can significantly impact your premium and influence your insurer’s decision to renew you.
    • Ask about forms or documents you’ll need - If you decide to go ahead with the claim, make sure you get a clear description of the exact forms you need to fill out in order to process the claim.
    • Protect the home from further damage - If the house is unsafe, don’t try to be a hero by reentering it. But if the situation is stable, help minimize the damage by boarding up windows, spreading tarps to protect damaged areas from rain, clean up water from a backed-up drain, etc. Do what you can within reason.
Average Homeowners Loss

This graph analyzes the relationship between severity (the amount of damage in dollars) and frequency (rate of occurrence) for fires, wind/hail storms, and other scenarios in which a homeowner would likely file a claim. Click image to enlarge.

  • Cooperate with the adjuster - Once the adjuster arrives to assess the damage, do a walk-through inspection together and discuss his or her impressions. Take very careful notes and remember the dates of your conversations so you can ensure there is a record of each visit.

C. Solving Disagreements

Adjusters can be an enormous help in times of crisis, but remember that part of their job is to limit exposure to losses for their employers. Not every claim goes smoothly, and sometimes you will be denied coverage. But remember: Adjusters don’t always have the last word.

  1. Don’t give in too quickly. If there are disagreements between you and the adjuster, don’t feel pressured into accepting the first assessment. Instead of arguing directly with the adjuster, try to resolve your concerns with your insurer before getting third parties involved, which can slow down the process considerably.
  2. Gather evidence to support your side. Collect documents, save receipts, take photos, and write a detailed account of your complaint. All of your efforts will enable you to make the a well-reasoned argument that you can then submit to the insurer, asking them to reconsider. Oh, and remember to make copies of everything!
  3. Invoke the appraisal clause. If the disagreement continues, find out if there’s an appraisal clause in your policy. This clause allows either you or the insurer to bring in a third-party adjuster to make a binding decision on the dispute.
  4. Call the state insurance department. If this fails, contact your state insurance department to lodge a formal complaint. The state agency has consumer services staff who can help make your case against the insurer and aid in negotiations.
  5. Hire an independent, or public, adjuster. Contact the National Association of Independent Insurance Adjusters (NAIIA) to find an adjuster who is not bound to any particular insurance company and is trained to help broker an agreement. You can expect the fee for the public adjuster’s services to be about 10 to 15 percent of whatever settlement you get.
  6. Lawyer up. If all else fails, hire a lawyer to step in, investigate the incident and, if need be, argue the case for you. This, of course, would be the most expensive option, with legal fees taking up even more of any settlement you might win.

D. Cancelling or Losing Your Insurance

You always have the right to cancel your policy for any reason. However, after an initial trial period, usually 60 days from the opening of the policies, insurance companies must give you a reason for canceling you. Acceptable reasons include:

  • Late or nonpayment of premiums;
  • Providing the insurer with fraudulent information on your application;
  • Conviction of a crime that may increase the risk to the insurers (e.g., the illegal storage of fireworks or explosives on the property);
  • Willful disregard for the safety of the property, which may increase risk (e.g., ignoring a gas leak); or
  • Changes to the property that could void the policy (e.g., physical modifications or additions that threaten the stability of the structure or local codes; leaving the house vacant for more than 60 consecutive days, making the structure more prone to vandalism, etc.).

remember: Adjusters don’t always have the last word

It’s important to note the key differences between an insurance company cancellation and a nonrenewal.

  • Cancellation means either you or your insurance company stopped the coverage before the policy’s normal expiration date, which is usually 12 months after the policy starts.
  • Nonrenewal means the company refuses to renew your policy after it expires. Insurance companies generally have the right to not renew your policy if they so please.

If your insurance company cancels your policy, it must give you notice. The number of days varies by state, but it’s generally in the neighborhood of 30 days. If you or the insurer cancels your policy, the company could refund a portion of your premium. Your insurer must also give notice (again, typically 30 days) before it chooses not to renew your policy. You should also ask the insurer for the reason behind the nonrenewal.

Your insurer must also give notice (again, typically 30 days) before it chooses not to renew your policy

E. What if You Can’t Find Insurance?

There are some regions of the country – like the Gulf Coast – that carry so much risk of damage from covered perils, such as hurricane wind damage, that most insurance companies won’t offer coverage. This practice can get extreme, as was the case with State Farm’s complete withdrawal from Florida in 2009.

Homeowners Insurance Claims Frequency

This graph notes the frequency of property damage claims related to wind/hail, fire, theft, and other dangers. Click image to enlarge.

If this happens, go to the NAIC map page and click to find your appropriate state insurance department. Each of these departments can let you know if your state has a Fair Access to Insurance Requirement (FAIR) Plan, “wind pool,” or other so-called nonprofit “residual market mechanisms” that will take on high-risk properties no private insurer will touch.

VII. Pulling It All Together

For far too many homeowners, insurance is just another piece of paper that is signed and filed away, rarely to be thought of again. That is, until the worst happens. People who wait until they experience a loss before analyzing their own policies are not getting the full value – maybe little value – out of their countless premium payments.

Homeowners insurance is a financial covenant, but it should also be treated as a living, breathing entity to be nurtured over time. Only by reading the policy carefully, shopping around for the right agent, knowing your coverage limits and updating the property inventory can you ensure that your hard-earned dollars will keep that roof over your head – and another, stronger one after that.