Some years ago when I was fresh out of college and in the midst of training to become a property and casualty insurance underwriter, I remember seeing a television commercial for one of my company’s major competitors. In the ad, a young man was driving a compact car with a very large sheep dog sitting beside him. He parked on a steep hill and got out of the car before realizing he had forgotten to set the parking brake. He then realized that his dog had accidentally locked the door with his keys inside. The car began to roll with the young man running behind. The car did all kinds of damage to property in its path before finally coming to rest right in the middle of a pond. The tag line was, “Are you covered?” The commercial was a humorous illustration of all of the crazy things that can and do happen, but unfortunately, may or may not be covered depending upon a number of factors.
Having dealt with customer concerns over the years I have discovered that many people have no idea what their homeowner’s policy covers until they submit a claim. Policies are purchased with the assumption that the insurance company is there to “take care of” anything and everything that could possibly go wrong. In actuality, insurance policies are legal contracts between the customer and the company which often contain a number of coverage limitations. Sadly, most customers do not know what kinds of questions to ask regarding their coverage to ensure that they are adequately protected.
The first important thing to remember is that insurance is really designed to cover loss or damage that is “sudden and accidental.” Problems that are caused by long standing maintenance issues are generally not covered. For example, a slow leak in the bathroom which eventually results in tile damage or rotting of the sub-floor is probably not going to be covered since the damage occurred over a long period of time.
On the other hand, if your grandmother with Alzheimer’s forgets that the bathtub is running and the overflow of water causes ceiling damage to the room below, that probably would be covered since it meets the test of “sudden and accidental.” Insurance agents and brokers may sometimes use the phrase “fully covered.” As a consumer you should press the agent for what he or she really means by “fully covered” since it would be highly unusual for any policy to cover absolutely everything.
Since 1971, the Insurance Services Office (ISO) has been an organization that provides a variety of support services to insurance companies, including the development of standardized policy language. As a result there are a number of similarities with regard to basic homeowner policy coverages. However, customers should not assume that all homeowner insurance policies are identical. Differences can occur if one company includes a coverage as part of the basic policy while another company may require that coverage to be specifically purchased for additional premium.
Some of the most common homeowner coverages as outlined by ISO are:
Fire or lightning
Windstorm or hail
Riot or civil commotion
Damage caused by aircraft
Damage caused by vehicles
Vandalism or malicious mischief
Weight of ice or snow
Accidental discharge or overflow of water or steam
Sudden cracking, tearing, bursting or bulging of a water heating system or appliance
Damage from artificially generated electricity
Even though these are the standard ISO coverages that are probably included in most basic homeowner’s insurance policies, it is important to ask about limitations or special provisions to these coverages. For example, theft damage is sometimes limited for condominium units that are rented out part of the time. Or damage from frozen pipes may be excluded if the home is vacant and unoccupied at the time of the loss.
Personal Liability Coverage
In addition to physical damage to the home and personal property inside, a homeowner’s policy will also include personal liability coverage. This will generally protect you from the costs associated with lawsuits resulting from injuries to another person that are the result of your negligence or from your having accidentally caused damage to someone else’s property. Some of the more common scenarios for bodily injury might involve your dog biting the mailman or the medical bills incurred by the Girl Scout who slips on your cracked sidewalk as she approaches your home to deliver cookies. Property damage claims might include the case where your child’s backyard batting practice results in a neighbor’s broken window or where the rock accidentally thrown from your lawnmower which dents the neighbor’s aluminum siding.
Most policies don’t exclude liability coverages unless the act is intentional and if you are operating any sort of business from your home coverage may not extend to business related injury or property damage. And if you are a regular Internet blogger or enjoy voicing your opinions on various topics through “Letters to the Editor” in either the paper or online version of your local newspaper you might want to be aware of where your policy stands on defending you for libel.
Because awards and legal fees from injury or property damage lawsuits can be quite costly it pays to be familiar with any exclusions or limitations to liability coverage contained within the policy.
Another important reason to ask questions regarding what is and is not covered under the policy is that often companies will offer optional coverages which can be purchased for an additional premium. These optional coverages can help to fill gaps for situations that are not covered by the basic policy. For example, most personal homeowner’s policies will exclude property and liability coverage related to businesses in the home. However, homeowners who provide in home day care or who store inventory and samples for a business in their homes may be able to purchase additional coverage for their business exposure.
Earthquake damage and damage from the back-up of a sewer or drain or sump pump failure are two other common causes of loss which are not usually included in the basic policy but which can be purchased by those who have a need for protection against these types of damages.
National Flood Insurance
Perhaps the most common misconception is the belief among many homeowners that a regular homeowner’s policy offers protection from flood damage. Unfortunately, after Hurricanes Katrina and Rita many homeowners were unpleasantly surprised to learn that their homeowner’s insurance policies did not provide any flood protection coverage. The National Flood Insurance Program (NFIP) was established by Congress in 1968 because private insurers felt that the hazard of flood was too expensive to insure. In return for the availability of flood insurance, communities agree to adopt codes and ordinances to regulate construction and development in flood plain areas.
When purchasing a new home in a potentially flood prone area it is important to obtain information from your Realtor regarding the flood risk of the property since this will determine the type of flood policy required.
The NFIP indicates that the average home has a 26% chance of being damaged by flood compared with only a 9% chance of being damaged by fire. Since even a small about of water can result in significant damage to floor coverings, baseboards and furniture flood insurance may be a worthwhile investment.
Even in these trying economic times, the personal home is still one of the most significant sources for building long term wealth for the average person. With over $7.4 billion lost in home fires and $4.9 billion lost in wind damage to personal homes in 2007 alone having a thorough understanding of homeowner policy coverages is critical. There may even be some situations where a homeowner may opt not to purchase additional coverage, but “self-insure” instead. However, even in these situations it is far better to be aware of potential coverage gaps up front rather than facing an unpleasant surprise after a loss has occurred.