Purchasing your first home is a daunting process. Not only do you have to find the right home (a feat in itself), go through the process of applying for a mortgage, but you also have to purchase insurance for the first time. If you haven’t owned a home before, you’ve probably never given a second thought to how a homeowner’s insurance policy works. As an insurance advisor, one of my favorite parts of my job is educating first time buyers on homeowner’s insurance and how their policy will respond in the event of a claim. Obviously, I could write an entire book about the “basics” of an insurance policy, but instead of touching on everything, I’m going to focus on the most commonly asked questions.
What is an insurance policy? An insurance policy provides coverage for your home, other structures on your property, personal property, and personal liability in the event of a claim. The insurance policy is broken into six parts:
1. Coverage A – Dwelling – This provides coverage for your home. You want to use the Replacement Cost Value for this coverage.
2. Coverage B – Other Structures – This provides coverage for other structures on your property. This can be a detached garage, pool, fence, shed, etc. Basically, anything that is a structure that is not attached to your dwelling. This is calculated as a percentage of your Dwelling Coverage.
3. Coverage C – Personal Property – This provides coverage for your personal property, such as clothing, furniture, decorations, etc. Again, this is a percentage (typically 50%) of your Dwelling Coverage.
4. Coverage D – Loss Of Use – This is coverage that provides you with money to live elsewhere if your home is rendered “unlivable” while a claim is being fixed.
5. Coverage E – Personal Liability – This provides coverage for you if you are found liable for bodily injury or property damage of a guest on your property.
6. Coverage F – Medical Payments – This is no-fault coverage that provides money to non-residents of a home in the event of bodily injury on the property.
What is replacement cost value? Replacement Cost Value is often confused with market value, when in fact they are completely different. We won’t get into the nuances of market value since that is not what we are concerned with. Replacement Cost Value is what it would cost to build the same home with today’s construction prices, without the land included. When deriving this value, we’re looking at the finishes of the home, square footage, materials used, age, etc. to compare with homes with the same characteristics as what is being built today. So, a home built in the 1950s might be on the market for $250,000 but we really need to insure it for $300,000. Whereas, a home built in 2016 may be on the market for $300,000 and we only need to insure it for $250,000. This can get extremely confusing, but we are here to help you with every step!
What is covered on my insurance policy? Most homeowner’s policies are written on an HO3 Policy Form. On an HO3 policy, unless a peril is specifically excluded, it is covered for your dwelling. It is important to note that flood is never covered under a homeowner’s insurance policy and is always a separate policy.
What is a deductible? A deductible is an amount of money that you are responsible for in the event of a claim. With coastal insurance, you typically will find a Hurricane or Wind & Hail Deductible and an All Other Perils (AOP) Deductible. So, let’s say you have a homeowner’s policy with $250,000 Dwelling Coverage with a $2500 AOP Deductible and 2% Hurricane Deductible. In the event of a claim due to a hurricane, you (the insured) are responsible for the first $5,000 (2% of $250,000) of repair/replacement. If the loss due to a covered peril that is not a hurricane, then you would be responsible for the first $2,500 of repair/replacement.
What is the difference in a Wind & Hail Deductible, Named Storm Deductible, and Hurricane Deductible? A wind and hail deductible applies in the event of ANY wind and/or hail damage. This could be anything from a strong gust that blows over a tree onto your roof to gale force winds from a hurricane. A named storm deductible only applies in the event of a named storm (tropical storm, tropical depression, hurricane, etc.). If a wind and hail claim occurs that is not part of a named storm event, then it would be covered under your AOP Deductible. A hurricane deductible only applies in the event of a hurricane. All other wind and hail related claims would be covered under the AOP Deductible.
What is the most important part of purchasing homeowner’s insurance? I can’t say what every individual’s decision making factor is going to be because everyone has different risk management techniques. My biggest advice to clients is don’t make a decision based on premium alone. Typically, when premiums are drastically lower, it is because there is less coverage and/or higher deductibles. As a consumer, you must decide how much risk you are willing to take on. Do you want to pay a little more each year and have a lower deductible? Or, do you want to pay less each year and have more personal exposure in the event of a claim?
We hope you have found this post helpful in your search for homeowner’s insurance whether it is your first home or fifth. If you would like to talk with one of our advisors call us today at 843.763.4200 or send in an online inquiry here.