When I was a trainee underwriter back in 1985, a mid-level manager, “Mr. H.” once told me, “Insurance coverage is kind of like luncheon meat. Almost everyone has purchased it at one time or another. But they really don’t want to know how it’s made!”
Today, as an insurance analyst working on ensuring that our company follows legal requirements when it comes to notifying customers of policy changes and their various rights, I suspect there is more than a grain of truth in the words of old “Mr. H”. Despite all of our best efforts to achieve policy language that is clear and readable, I suspect that most customers still do not read their policies. It’s almost as if they can smell the potential for confusing “legalese” through the envelope that their policy booklet arrives in and immediately shy away.
I believe that advertising is partially to blame. Insurance companies assure us that “we’re in good hands” and that they are “on our side” and “just like good neighbors.” With all these friendly, compassionate people looking out for us why would be bother to actually sit down and read our policies?
Unfortunately, however most customer dissatisfaction expressed through formal Department of Insurance complaints and lawsuits likely stem from the fact that the policyholder may not have understood what he or she was buying when the original purchase of homeowners insurance was made.
While reading a homeowners policy booklet cover to cover is probably as riveting as watching paint dry, having at least a basic grasp of coverage limits can protect you from paying too much because you are carrying coverages that you don’t need (bad) or discovering, after a catastrophic loss that you are woefully underinsured (way worse).
In actuality, reading a homeowners policy isn’t so tough provided that you have just a bit of background information. Think of it like reading a roadmap. It’s much easier if you also have the map “legend”, that little diagram that explains which roads are interstates and which might be unpaved service roads.
First, you will need a copy of your “Declarations Page”. So, you may be thinking, “Umm, right; what’s a Declarations Page?” That’s a fair question. It is usually a piece of paper that your insurance company sent with your policy booklet and a lot of other paper inserts when you first bought the insurance. “Oh, that! Well; um; I kinda think that I might have just maybe thrown that away.” If that’s the case, no need to panic, just call your local insurance agent or broker or the company’s customer service number and tell them that you would “like to review your coverages and need a current copy of your declarations page.” Usually the company will be happy to oblige, because after you’re finished “reviewing” you just might just buy something.
The declarations page of a homeowner’s policy is divided into sections. You’ll have a section for personal information like your name, address of the property that the policy covers, the date the policy takes effect, when the policy will expire, and the type of policy. It is a good idea to take a quick look at this information to make sure it is correct. If the declarations page says, “Mobilehome Policy” and you live in a high-rise condominium, you could have a big problem when it is time to file a claim.
Next, you’ll have a Coverage section. This provides more details about the types and amounts of coverage provided by the policy. Now, here is where it might get a bit tricky. The Coverage section is broken down into sections and then those sections may be broken down into more sections and so on, and so on andwell, you get the idea.
So, let’s start with the “big” sections and work our way down. The main sections are called, quite conveniently, “Section 1” and “Section 2.” This is pretty straightforward except for the fact that a lot of companies insist upon using Roman numerals so you might see this written as “Section I” and “Section II.”
The Section 1 coverages contain the “Physical Damage Coverages” or the protection for all the scary things that can happen to your home and personal belongings.
The Section 1 coverages may be further divided into “Coverage A Dwelling”, “Coverage B Personal Property”, “Coverage C Loss of Use” and “Other Coverages”
Coverage A Dwelling
This is, simply the highest amount that the company will pay for damage to the building that is your home. If your Coverage A Dwelling amount is $200,000 and your home burns to the ground, the company will pay you up to $200,000 to rebuild the house. Some companies may also have something known as “Dwelling Extension” coverage which applies to other structures on your property like a garage or storage shed that isn’t attached to your house or your wooden privacy fence. Usually this amount is some percentage of the Coverage A Dwelling amount. If your Declarations page says you have Coverage A Dwelling with 10% Dwelling Extension, you would have $20,000 available to cover garages, fences, playhouses or other buildings that aren’t attached to the house itself if your Coverage A Dwelling Amount is $200,000. The 10% amount will usually be a “freebie” included in the cost of the policy, but some companies will allow you to increase that amount for a fee if you need to. Also, if you have Renter’s insurance because you live in an apartment or rented home, your policy will not include a Coverage A Dwelling Amount.
Coverage B Personal Property
This is the highest amount that the company will pay for loss or damage to your “stuff” or all the belongings that are not permanently attached to the home itself. From clothing, furniture, electronics, the food in your pantry, to the tools and the lawnmower in your garage, personal property is probably best defined as whatever you would take with you if you moved to a new home. Like Dwelling Extension coverage, Coverage B Personal Property is usually based on a percentage of the Coverage A Dwelling amount as part of the basic cost of the policy, but can be increased for a fee if additional coverage is needed.
Another thing to be aware of is that certain types of personal property may have additional limitations or may not be covered at all if used in the operation of a business. Computers, for example are one category where you might want to check with your agent if you have very high valued equipment or you use your computer to operate a business from your home. Jewelry, furs, stamp, coin, or baseball card collections, guns, and “Grandma’s good silverware” are all items that might have limited amounts of coverage under basic policy. Be sure to check with your company about purchasing additional coverage if you think you have a need.
Coverage C Loss of Use
This is a coverage that comes into play when your home is so severely damaged that you must live somewhere else until the home can be repaired. If your house is gutted by a fire, you will still need to make the regular mortgage payments in addition to finding another place to live. Loss of use coverage will help pay for the cost of renting another house or apartment while your damaged home is undergoing repairs. The limit on Loss of Use Coverage is usually expressed as some flat dollar amount.
These include a number of “miscellaneous” type coverages and may vary from company to company both in the types of coverage and the amount of coverage provided as part of the policy. Some common ones include things like:
Building Ordinance Coverage
While your home is being repaired you discover that your city is going to require you to make additional changes to the home in order to bring it up to local building codes. This coverage can help cover those added costs.
Credit Card and Forgery
If your credit card is stolen, checks forged or money stolen through unauthorized use of a debit card, this coverage will apply up to a certain limit.
Fire Department Service Charge
If you live in an area where there is a fee associated with having the Fire Department respond, your policy may provide some coverage for this
If you have been the victim of a burglary and think that the thieves may have taken or copied your house keys, this coverage will pay the cost of having a locksmith change out all of your locks in order to prevent another theft.
If your home has suffered some type of damage this coverage will pay for you to make temporary repairs designed to prevent additional damage until permanent repairs can be made. For example, if several windows are blown out during a windstorm this coverage would pay for boarding up the windows temporarily until they can be permanently replaced.
Section 2 Coverages
Section 2 coverages include all of the Personal Liability coverages. Simply put, Section 2 coverages provide you with protection from lawsuits if you should accidentally injure another person or cause damage to their property. When your dog bites the mailman or your friend slips and falls on your snow covered sidewalk or your kid breaks the neighbor’s window with a baseball, Section 2 coverage can help to pay for damages, defense costs and medical expenses.
The limits for Section 2 coverages may be expressed as two limit amounts such as $300,000/$600,000. The first amount is the “Per Occurrence” amount. So, if your dog bites the milkman on Monday and the mailman on Tuesday those are 2 separate occurrences and the policy would pay up to $300,000 for each occurrence. The $600,000 amount is the “Aggregate” amount or the overall total. So, if your company paid out $300,000 for your dog biting the milkman on Monday and another $300,000 for the dog biting the mailman on Tuesday, and on Wednesday your 10 year old son’s science project accidentally explodes and causes the neighbor’s $300,000 home to burn to the ground the company would not pay anything since the aggregate limit of $600,000 has already been met.
Most policies generally come with a standard amount of Section 2 coverage which can be increased for an additional fee.
While your Homeowners policy declarations pages and policy booklet will never make the best seller list or be the kind of light, summer reading that you enjoy while lounging on the beach, having a basic familiarity with the policy sections, coverage limits and what they mean can go a long way in making sure that your home and belongings are properly protected.