For Arizona resident Dennis Yacknell, paying $30,000 from his own pocket to repair his roof that the insurer wouldn’t pay for came as a rude shock. The same goes for the Guinness family from Virginia who shelled out a whopping $500,000 to renovate their mold ridden home which their insurance plan didn’t cover. Such cases are being reported almost every other day and policyholders are forced to deal with the fact that they may have overlooked the fine print in their home insurance policies. These are classic examples of mistakes you should avoid while zeroing in on a home insurance policy.
Purchasing homeowner’s insurance is a huge investment and you would naturally expect your money’s worth when and if the time came to make a claim. The first order of duty therefore is to find a reputable insurance company with an excellent track record for handling customer claims smoothly. What else should you know? Go through the points below to make sure you’re not in for any rude shocks later on when you really need your insurance to kick in for you.
Make sure there are defined limits in your policy
A faulty insurance policy without clearly defined limits can translate into losses running in thousands of dollars when a claim is filed. Insurers simply refuse to release a payout if the damage wasn’t covered for at the time of purchase. So carefully read through the fine print and make sure you ask plenty of questions.
Understand the difference between replacement cost versus actual value cost
Replacement costs include coverage for rebuilding your entire home or the replacement of all your personal property in case of damage, not considering the depreciation of your home or personal belongings over the years.
Actual value cost covers only the current value of your home including depreciation over the years. A lot of people make the mistake of purchasing insurance that covers only the mortgage amount or the current value of the house.
It is preferable to choose a plan that includes assured replacement costs for your home. One option can be the 100% protection plan from The Hartford that provides for total replacement cost of your home extendable up to 125%, depending on the limits of your plan. You should make sure you review your dwelling coverage periodically to make sure it does not go below 80% of the total replacement cost of your home. If it does, your insurance company may reduce the amount it will make on a claim.
Give importance to liability coverage
Personal liability will cover damages incurred accidently to someone else or their property if in a court of law you are found to be personally and legally responsible for it. Coverage will also include expenses paid for legal representation in a court of law. The limit of coverage on your personal liability insurance can be set by you—coverage is usually $100,000 to $300,000 on standard policies.
A lot of people make the mistake of setting lower limits on their liability insurance thinking they may never need it. Remember, it takes just one bad incident for you to suffer the consequences of an expensive lawsuit. And be warned! Your insurance company may increase your premiums, especially if your dog bites someone! Data shows dog bites are not as uncommon as they might seem. They account for a third of the total amount paid in a homeowner’s personal liability claims.
Mold and flood damage
As the Guinness family experienced first hand, the damage caused by mold was not covered by their homeowner’s policy. Most standard homeowner’s insurance policies do not include mold coverage, nor does it include flood coverage. Mold coverage is quite high, but does not top the cost of removal which was a painfully expensive $500,000 in the Guinness’ case.
If you live in an area which is officially recognized as a high-risk flood area, flood insurance may be mandatory. The government may offer flood insurance plans for your area. Check out floodsmart.gov which is the official website of The Federal Natural Flood Insurance Program (NFIP).
Make sure you know which “acts of God” are covered and not covered
Tornados are often covered by a standard homeowner’s policy, but hurricanes may not be. The same goes for earthquakes and floods—these may require additional coverage. You should ask your insurer whether flooding as a result of tornado damage is covered in your insurance plan. Make sure you know exactly what you’re being covered for.
Maximize your deductible
How much money are you willing to spend out of your pocket? When it comes to choosing a deductible amount, the higher the better! According to Jack M. Guttentag, a professor emeritus at the Wharton School of the University of Pennsylvania who runs MortgageProfessor.com, “What you want is coverage for the risks that you can’t pay for yourself.” Think about this way. Choosing a higher deductible could save you hundreds of dollars a year which you could use to buy other types of insurance.
As mentioned earlier, purchase coverage with the right insurer and pay special attention to the fine print in every document and you’ll avoid making pricey mistakes.