Homeowners Insurance:
What should you look for in a policy?

By: Christopher M. Blankenship

A homeowners insurance policy is a "package" of coverage designed to cover financial losses which may arise during the time you own a home. The most important task when purchasing a new homeowners insurance policy (the Policy) is determining the amount of coverage for the replacement (re-construction) of your home's structure. The part of the Policy which covers the structure itself is called "Dwelling: Coverage A." Your insurance agent, real estate appraiser, and home builders can help you determine whether the amount of "dwelling coverage" is adequate. It may take more money than you think to rebuild your home especially in the case of severe or total destruction of the structure (total loss).

Be conservative — choose an amount on the high side in selecting the dwelling coverage limit. Lenders generally require that the dwelling coverage, at a minimum, pays enough to cover the balance of the current mortgage. However, the sales price, which includes your land value and the amount that you borrowed, has little to do with the amount it will cost to rebuild the building itself.

The Policy should have at least a 25% "extended replacement cost" endorsement which will extend the policy payout 25% beyond your dwelling (structure) coverage. It is best to avoid policies which do not include "special form" dwelling coverage.

"Special Form" (or "All Risk") coverage will pay for damages to your home caused by any "peril," with the exception of those "perils" identified in the Policy as exclusions. Some standard "peril" exclusions would be: wear and tear, rot, water damage that occurs over time, earthquake, flood, damages caused by insects or vermin, settling of the structure, earth movement, and landslide. Some of the excluded perils such as earthquake and flood can be purchased for additional premium. You may want to strongly consider earthquake coverage in the state of Washington. Flood insurance may be required by your lender if your home is near a river, stream, or on the coast. Look and be aware of these flood sources near your home. If any of these sources are nearby, you should consider flood insurance coverage, whether required or not.

If your home is older or built prior to the current building code standards, you may want to increase the "building code and ordinance" insurance coverage. A re-constructed home may need to meet new building code standards. Examples of current building code standards are: building exterior two-by-six walls, double pane windows, and higher standards for wiring and insulation.

Generally, personal property contents insurance coverage is included in the overall policy, in the amount of 50% to 75% of the existing "dwelling (structure) coverage" This amount is normally sufficient to cover the contents of your home (items not attached to the building). However, completing an inventory of your personal property will help to ensure your coverage is adequate.

As part of your inventory process, video record the items, gather and store sales receipts and/or appraisals for "one of a kind" expensive items. Use the replacement value not the actual cash value when calculating your totals. Pay special attention to insurance coverage limitations for certain items, such as jewelry (which may be limited to a claim amount as low as $500 in total), or be aware of language used in the Policy such as "actual cash value" or "full value" contents coverage which should be avoided. The Policy should have "replacement cost" coverage on personal property contents. Note: Additional "riders" for contents, such as jewelry, can be purchased to increase and/or broaden the insurance coverage on specific items.

Personal liability coverage is included in the homeowner's insurance policy; you will want to obtain at least $500,000. You may want to consider a separate "liability umbrella" policy if you would like more coverage. A liability umbrella is very important if you have a swimming pool, own waterfront property, or serve alcohol to guests. In certain circumstances, such as owning a pet whose breed is defined as a "dangerous dog breed," providing the use of recreational trampolines, having unusual stairways or trams accessible in/on your property, will make insurance coverage expensive and, more often, difficult to obtain.

It is important for a homeowner to routinely review their insurance coverage. Prior to your next insurance renewal, contact your current insurance agent and a competitive agent to investigate what policy coverage their companies offer and their annual premium charges. This is also a good time to check and see if your current insurance coverage is still adequate or should be increased.

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