In the aftermath of this season’s storms, lightning strikes, wildfires and other disasters, it’s sad to note that many of those whose homes have been destroyed simply didn’t have enough insurance coverage in place. The same could be said of property owners whose homes were destroyed by Hurricane Katrina or even a singular home fire started by bad wiring.
The truth is, most homeowners pay little attention to their property insurance until disaster strikes. And then, it’s too late.
Purchasing the right type and amount of insurance coverage for your home or rental is not difficult. Do some research, call a reputable agent and get it done. These basics will arm you with the knowledge you need to start:
Take a close look at your Insurance Coverage Binder Agreement. This thick packet of documents is a binder of terms and coverage limits. Flip through the pages until you get to one labeled “maximum coverage limits” (see example below). While all the categories are important, pay special attention to your dwelling and liability coverages.
Determine dwelling coverage needs
Dwelling/building covers the building structure if it is damaged by a covered peril (fire, windstorm, flood due to broken pipe, etc.) Find the dwelling/building coverage amount listed on your policy and divide it by your home’s square footage. Talk to your insurance agent and, perhaps, a contractor to determine whether the coverage your policy allows per square foot is enough. In California, for example, $200 to $400 per square foot is a good range, depending on the quality of construction materials and characteristics of your lot (condominiums are a little different, and we will cover that below).
If someone slips and falls on your property or your dog bites someone, you may be sued. Liability coverage protects you in the event of these and other liability issues. In the event of a liability claim, the insurance company will step in, defend you with its attorney, negotiate a settlement or pay any judgment — up to the policy limit. Most policies provide $100,000 to $300,000 of liability coverage, but this often isn’t enough; lawsuits are expensive. You can and should consider bumping up your coverage with an umbrella policy; you can add another $1 million of coverage for about $250 to $350 per year. Talk with your insurer about the cost of an umbrella policy and whether you need one.
Add on coverage for valuables
Be aware that expensive artwork, jewelry, antiques, a wine collection, gold, silver and other valuables may require special coverage through a floater or blanket policy. Talk to your agent to make sure you are properly insured.
Condos and townhomes
Insurance for condominiums, or common interest development (CID) units, works a little differently. Generally, your coverage applies only to the interior of the unit — kitchen cabinets, flooring, clothing, liability, etc. Banks these days require a CID unit owner to have an HO-6 policy to cover the inside of a unit. If, however, you cause smoke or water damage (think overflowing bath tub) to another unit and your HO-6 doesn’t provide enough coverage, you might be on the hook for some pretty serious money. Understand that some townhome communities require regular dwelling policies. Take your homeowners association policy information to your insurance agent for assistance.
In some states, you may be able to purchase earthquake or flood coverage (these perils aren’t covered by standard homeowner’s insurance). And be warned: It’s virtually impossible to insure your property against some catastrophes, such as landslides and mudslides. Watch those homes on hills and near the rivers!
A little prevention will go a long way toward helping you recover from disaster. Meet with your agent and review your coverages. Be truthful with your agent; let her know if this is an owner-occupied home, a vacation home or a rental property. If an issue arises and you’ve lied to your insurance company, it will likely reject your claim, and you’ll be on your own to defend yourself in court.
- The Ins and Outs of Homeowner’s Insurance
- Should You Review Title Report Before Purchasing?
- Buying? Use This Checklist to Avoid Surprises
Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a guest blogger on Zillow.com and the author of several books including “Real Estate Ownership, Investment and Due Diligence 101”, and he loves kicking the tires of a good piece of dirt! See more at ProfessorBaron.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.