How well does your homeowners' insurance really protect you?
You’d think most people would know the answer, but a recent national survey
found that more than 60% of respondents were either not familiar or only
somewhat familiar with the details of their insurance policies. Almost 40%
weren’t fully confident that their coverage was adequate and appropriate for
their needs. That’s a lot of ignorance – and anxiety – about what, for most
people, is their largest asset.
“Many people buy homeowners' insurance because they’re
required to by the bank when they get a mortgage,” explains Steven Spiro, a
principal with The Excelsior Group, an insurance agency in Valley Stream, N.Y.
“They just follow orders and do what the bank tells them to.” Then they tend to
forget about it – until they file a claim and discover that something they
thought would be covered is, in fact, not.
Test Your
Knowledge
Here’s a quick way to see how much you know about common
holes in your homeowners coverage:
The bank didn’t tell
me I had to have flood insurance, so I don’t need it. Right?
Wrong. As thousands
of people discovered in the wake of Hurricane Sandy, Tropical Storm Irene or
even a particularly torrential downpour targeting their area, flooding can
happen anytime and anywhere. “Ninety percent of all natural disasters have some
form of flooding,” says Jeanne Salvatore, spokesperson for the Insurance
Information Institute (III), an industry-supported nonprofit organization. Yet
only 13% of Americans surveyed by the III had flood protection. Even if you do
not live in a high-risk area, according to the III, more than 20% of all
flood-insurance claims are filed in low-to-moderate flood-risk areas. “Flood
insurance is the one coverage everyone should have,” stipulates Salvatore.
Standard homeowners' and renters' insurance policies do not
cover damage from flooding, which, for insurance purposes, is strictly defined
as the rising and overflowing of a body of water onto normally dry land.
However, flood coverage is available as a separate policy from the National
Flood Insurance Program. Note that there is a 30-day waiting period before the
coverage takes effect, so don’t wait for an ominous weather forecast to buy
protection.
If the storm sewer
backs up into my basement, am I covered?
You may think that water overflowing from your toilet, sink
or shower drains is a flood – after all, it looks like a flood – and that flood
insurance would cover it. It won't. Neither, in most cases, will your regular
home insurance, although more than two-thirds of people surveyed by the III
believe that damage from a sewer backup/sump pump failure is covered by their
homeowners' policy. You may want to request – and pay extra for – this
additional protection (called an endorsement). Otherwise the cost of the
repairs will come from your own pocket.
If new building codes
require upgrading undamaged parts of my house, will my insurance cover the
costs?
Although nearly two-thirds of Americans surveyed by MetLife
said “yes,” the answer is “no.” In most cases, policies don’t pay for upgrades
in undamaged parts of homes, even when those improvements are mandated by
stricter building codes. However, most insurance companies offer additional
“ordinance or law” coverage – for an additional price.
If my home is
destroyed in a fire, will my policy cover the cost of rebuilding?
Maybe – although probably not the full cost, much to the
surprise of nearly three-quarters of MetLife’s survey respondents. Nearly all insurance
companies cap how much they will pay if you have a total loss, unless you buy
optional coverage. And because depreciation is taken into account when
calculating the value of personal possessions, homeowners could find that their
insurance check is far smaller than they’d like. Furthermore, most policies
subject property losses to a deductible as well.
On a positive note: Many homeowners' policies cover
“additional living expenses,” or “loss of use” costs, when you can’t inhabit
your home due to a disaster covered by insurance. If ALE coverage is included
in your policy, then your insurer will pay for the “actual, reasonable and
necessary increase” in your living expenses while your home is being repaired
or rebuilt.
Another bit – or “byte” – of good news: Most policies cover
the cost of replacing electronically downloaded and stored data and
entertainment, such as music and ring tones, which could be expensive to
replace without easy access to free re-downloads. At least, you can listen to
music to cheer you up.
Are there any other
areas in which my homeowners' coverage might come up short?
“The single thing that jumps off the page is additional
liability protection,” says Spiro. For that reason, he suggests purchasing an
umbrella policy, which, as the name suggests, extends further protection from
lawsuits resulting from an injury in your home or on your property (that
includes your vacation home, car and boat). “It’s cheap enough that it
shouldn’t be ignored,” he notes, pointing out that an additional $1 million of
coverage costs between $150 and $200 per year, whereas “if someone sues you and
you lose, you have to empty your bank account to pay the damage.”
If I’m not happy with
my existing coverage, can I buy added protection?
Usually, yes. Most
insurance companies offer “buy-back” endorsements, which let you pay more money
for specific coverage.
How often do I need
to update my policy?
At the very least, you should re-examine your homeowners'
policy every year, urge both Spiro and Salvatore. Any structural change to your
home – installing new windows, adding a bathroom, fixing up the basement –
should trigger a call to your insurance agent. Ditto for any major life changes
that increase the number of possessions in the house, such as getting married
or having an elderly parent move in. Even buying new furniture or re-carpeting
is worth mentioning when you renew your policy. If it’s valuable to you, it’s
worth protecting.