I think that once a week I will be asked a question about insurance. There is no topic more important to us during this period of buying a home, which is harder to comprehend. The reason for this is that it is easy to compare apples to oranges with insurance. Before going into what forms you may encounter, I want to explain a little about how insurance works. Basics principles of insurance are not always fully understood.
In a way, insurance is an organized wager. You place a bet with a company that if something bad happens to your house that they will pay for it. The company tries to mitigate their possible loss with some rules. The firm will say what they will wager on, and how the wager will be handled. If nothing happens, the company gets to keep the money, but if something goes wrong they pay for the repair. Into this bet steps the government with rules of their own, so that a company will not take unfair advantage of you. Each state will dictate the rules of the game to insurance companies, and these rules deal with things that can typically happen in their area. In Texas, floods and hurricanes effect much of the state, so the rules focus on those disasters. Colorado would not have exactly the same concern. There will be some state agency, usually called a department of insurance, that will tell insurers how to behave, and this agency will also be a source of information for you. (Check their website).
One question that I had this week was about deductibles. Each firm will have their own specifics, but I have found that there are two basic types. One type deals with each claim. Let us say that you have a $500 deductible, and you have a claim for roof repair which is covered by your insurance. The repairs cost $6000. You will pay $500, and the insurer will pay $5500. Another type of deductible can deal with the entire years claims, instead of individually. Or example, you have a $2000 deductible for the year. Your first claim is for $500 for a water heater repair. Your next claim is for some minor roof repair for $1500, and your last claim is for foundation repair for $3000. You would pay for the water heater and the roof ($500+$1500=$2000, the amount of your deductible), and the insurer pays the $3000 for the foundation. The deductible is the amount you pay. If you are willing to pay more, your insurance will be less. From my knowledge, homeowner insurance policies deal with a deductible in the first manner.
Alright, what does your policy cover. Simple answer: beats me. Each insurer may be told how to behave by the state you are in, but they can cover more or just to the bare minimum of the states requirements. One of the most common problems faced by homeowners that cause concern over if it is covered or not is water leaks. Since water leaks can cause so much damage outside of the busted pipe itself, many insurers do not cover this on a standard policy. You need to ask if a water leak is covered, if this is a worry to you. Let us move onto the forms, so you can see what your policy covers.
Like the other paperwork involved with your home, you will find many disclosure forms. Some will be state required, while others are from the insurer. Although insurers are not loaning you money, they are working like any other financial institution. This means that part of their process in deciding what to offer you and wether to deal with you has some relation to your credit and financial history. Insurers use their own version of a FICO score to make this assessment. All of this leads me to the point that part of the disclosure forms will look very much like forms that you get for credit cards or loans. Privacy statements, credit information disclosure, consumer bill of rights, consumer remediation form are all disclosures in this category. I take a dim view of these documents, since they seem to simply be informing you of how they company will protect itself if you have a grievance. A cynical view I know, but all financial institutions behave in a similar fashion in this regard. The main disclosure that you should review will be about homeowner’s insurance in your state. This form will provide with the guidelines that the state requires the insurer to abide by. Outside of the disclosures, the first document that you will see will be a Premium Statement. This is the invoice for the policy. Like any credit card statement, it will give you what you owe, what the total amount due is, when it is due, and some type of identification number for the policy.
Now we get into the meat of your policy, the Homeowner Policy Form. This page or two will actually be sparse. You need to look at it in conjunction with the disclosure about the insurance policy guidelines for your state. The form frequently has three columns: what is being covered; what amount will be paid out for that item (this column is called the limits of liability); and how much it will cost you for that item (the premium). Each line item is negotiable, but your lender may have certain requirements about what coverage they want, and your state may be in on requirements here too. Basically you will have coverage for your home, other structures on the property (a shed or detached garage), your personal possessions either on or off the property, your personal liability to others injured on your property and their medical payments for said injuries, a payment to you if you are injured, and a list of other items which are not normally covered in the insurance, but that you want. The Policy Form tells you how much, and the guide will explain the details of the coverage. By fudging the numbers on the Policy Form, you can effect how much you have to pay. As with the deductible, you have to find an amount you are able to pay. I am a bargain hunter, and some of my furnishings where gifts or salvaged items from companies. I did not pay for them, so I do not know what it would cost to replace them. I might have to pay $80,000 to replace these items if they are lost due to a fire, but I could decide that I will just keep to my ways, and try to find free items again. For personal property, I could say that I only need $50,000 in coverage to replace my goods. I am willing to take a $30,000 hit, because I know that I will find a way to cover it. This would lower my premium. Never zero out these coverages. If you did have a fire, can you replace your clothes quickly and cheaply? You need to determine what risk you will take when playing with these numbers.
You have gone through the Policy Form with your guide in hand, and you have made your adjustments balancing your acceptable risk with the requirements of the lender. The next form to look over will be the Exclusion Statements. Each insurer will determine items that they will not deal with in their policy. This could be a swimming pool, a trampoline, or if you own a certain breed of dog. Whatever it s that they are not including in the policy will be clearly mentioned, so check if you have a concern. The agent will inform you of a way to deal with an item that you do not want excluded.
You may have heard about Home Warranty Insurance. This is not a homeowner’s policy, but it can be a good policy for new homeowners. This type of warranty insurance is becoming popular in home sales. The scope of coverage changes from firm to firm, and I have found that they are increasing what they will cover rapidly, in order to get you to purchase a policy. Deductibles are usually $50 per incident. The policies cover appliances and mechanical systems not dealt with in the homeowner’s insurance. Say that your air conditioning gives up, a technician will come out to repair it, and all you have to pay is the $50. The policies run around $400 per year. If you are worried about the equipment in your home, this may give you peace of mind.
Well that completes the whirlwind tour of the paperwork. My last post on this topic will be on Monday, where I wanted to briefly go over what to do with these documents after closing.