Understanding Homeowners Insurance Coverage Limits

Homeowner’s insurance limits are not difficult to understand, but they do not represent what you might think at first glance. A homeowner’s policy is divided into two basic sections: property coverage and liability coverage.

Property coverage is what most people think of first when they think of homeowner’s insurance, and is referred to as Part One. Property coverage is divided into four basic parts labeled A, B, C, and D. Coverage A is coverage for the actual structure of your home. If you were to pick up your home and shake it so that all the contents fell out, Coverage A would cover what was left: the frame, the roof, the walls, the floor, the cabinets and window hardware, anything attached to the home permanently. The only part of your home not covered here is the foundation, although most companies do allow you to purchase some limited coverage for basement water damage. The limit Coverage A is typically much higher than what you could get for your home on the real estate market, a fact which often upsets people and makes them feel they are being ripped off. It shouldn’t. Coverage A does not represent your home’s fair market value, but rather the estimated cost of removing debris and rebuilding your home in the event of a total loss. Skimping on this coverage is a bad idea, and most reputable insurance companies will not all you to do it. More rarely, for people who live in very popular areas around resorts or on the oceanfront, the Coverage A limit will actually be less than the home’s real estate value. This is because Coverage A is only meant to restore your home to what it was before the damage, not garner you a profit. A very few states require companies to actually pay out the exact amount of Coverage A to the homeowner, that is, if you are insured for $100,000 and your home is destroyed they have to cut you a check for $100,000, no more, no less. But in most states this number is flexible, and companies will only pay out what it costs to rebuild, even if it is bit less or a bit more.

Coverage B limits are usually 10% of whatever the Coverage A limit is. This part of your policy is for any structure that is separate from the home itself, such as a garage, a gazebo, or a shed. Most states require that companies provide at least 10% of the home coverage on the policy whether you have a garage or separate structure or not. If you have a structure on your property that is worth more than 10% of your home coverage, by all means ask to increase the limit on this section. Usually the cost to do this is minimal.

Coverage C is for your personal property and belongings, and the contents of your home. Coverage C is usually between 50% and 75% of the coverage limit on the structure itself. For instance, if your home is insured for $100,000, your property will be insured for between $50,000 and $75,000. Coverage limits for your property can also be increased at your request. Be aware that certain categories of valuables such as jewelry, guns, antiques, stamp and coin collections, and artwork, are insured for very limited amounts under this coverage and usually for theft only. If you own such things, be sure to mention them so a rider can be attached that covers their full value and expands coverage to include all perils such as fire and destruction by wind or hail. Another issue to keep in mind when discussing your property limits with your insurance agent is whether the policy covers your property for replacement value or actual cash value. Make sure you get replacement value coverage on your property, otherwise you may be handed a check for $50 to replace your old appliances that were destroyed in your house fire. Many people do not realize that 10% of their property coverage follows then anywhere in the world, so if you are covered for $75,000 and take a trip to India, your luggage, clothes, and other essentials you take along are covered for $7,500.

Coverage D, the last of the property coverages, takes care of the expense of living and eating somewhere else while your home is being rebuilt. Limits here vary wildly, from a few hundred dollars to unlimited coverage for this difficult time. Be realistic about how you will handle this kind of emergency situation and make sure you clearly understand how much you can get under this limit and whether it will adequately cover your needs.

The other half of your policy, parts E & F, are your liability coverages. Liability is third party coverage, that is, it isn’t for you or your family, it’s for people who are hurt while on your property. Standard coverage is $100,000. It includes not just medical care for the third party, but also your legal fees. Ask about increasing this limit to at least $500,000. In the current climate, $500,000 for medical and legal expenses is not really all that much should you be sued. Liability coverage is usually fairly cheap and you will barely feel the increase in cost, but should you need to ever use the coverage, you will be thankful you bumped it up. Here again, consider your needs realistically. If you own a high-end home, you will need a separate liability policy to extend this coverage to one or two or even three million. Although that sounds daunting, the cost is usually fairly low, in the neighborhood of two to five hundred dollars or less depending on the state you live in and your circumstances.

Finally, be sure you ask about other coverages that might be included in your policy though not spelled out under the limits described above. Many policies offer free coverage for refrigerator and freezer contents, landscape material such as trees and shrubs, and costs associated with assessments by your city or township for improvements. You can usually add extended coverage for home computers and peripheral components as well as home office coverage for a minimal expense.

Understanding the limits on your homeowner’s policy will not only give you peace of mind, it will give you confidence and protect you from being brushed off should you file a claim and receive incorrect information. Though few people take the time to actually read their policies, doing so and asking plenty of questions can literally save you thousands of dollars.