Everyone knows a property owner needs an insurance policy, but many renters overlook the fact that they, too, need coverage.
Some think that because the landlord has an umbrella policy, they don’t need additional coverage. Then there are college students who believe their parents’ homeowners insurance covers their apartment.
People somehow don’t think about renters insurance because their home is not a house that they own. They forget that while they may not own the building, they own the contents, and replacing them could be a major expense. Misconceptions about renters insurance can prove expensive when the unexpected happens. A lot of the people in the recent tornadoes didn’t have renters insurance and lost everything.
The number of renters is growing nationwide — it’s up more than 10% between 2004 and 2009, according to Traveler’s Insurance — and in today’s economy, many of them might not be on the lookout for one more bill to add to their budgets. But this is one they can’t afford to ignore, so forget the myths and go for the facts.
Not Buying Insurance for All the Wrong Reasons
In a recent survey by MetLife of people who didn’t have renters insurance, 33% of respondents said they thought renters insurance was too expensive. Not sure where they were looking, or if they were just guessing. But, at $125 to $200 a year for a policy covering up to $25,000 of contents and $300,000 in liability protection, there’s no need to crack your piggy bank, you could spend that much on a couple of nights out on the town.
Nearly one-fourth of folks surveyed said they thought they were covered by the landlord’s policy. Wrong again.
The building is protected, but not your stuff. Furthermore, don’t assume that if your roommate has a policy, that you’re covered too.
Some 20% thought their personal property wasn’t valuable enough to warrant insurance. Do the math. If you had to replace your entire wardrobe, furniture and more — not to mention the cost temporarily moving somewhere else — could you afford to? The costs add up. In fact, insurers say the average person has $20,000 in possessions.
What’s Covered, What’s Not
What’s important is to know what’s covered by your policy and what isn’t. Generally, a basic policy will cover clothing, furniture, computers, electronics and such. You can also get liability protection to protect you if someone is injured in your home.
For items like antiques, expensive jewelry, firearms or special equipment, a separate rider might be necessary. Furthermore, some insurers offer renters policies that cover you for a range of other issues: losses from credit card and check forgery; additional living expenses if you need to stay in a hotel after an incident, and the meals you have to eat out since you can’t cook, among others.
While the circumstances under which you’re covered varies, some examples include fire, lightning, windstorm or hail, freezing of plumbing system, ice, snow or sleet damage, and theft.
Be clear about what’s not covered. For example, jewelry damaged in a fire would likely be covered, but if you simply lost your jewelry, it wouldn’t.
Again, policies vary, but generally, causes of loss that are not covered are intentional loss, pollution, lead exposure, flood, earthquake, and neglect.
Many homeowners believe their homeowner’s insurance policies will cover them for practically any damage sustained to the house or contents. The reality is that homeowner’s policies contain many exclusions and restrictions on coverage that can leave you with a coverage gap. Here are five common myths about homeowner’s insurance.
1. Loss-of-Use Coverage
If you have damage to your home severe enough that you cannot live in it while it is repaired, you likely expect the insurance company to put you up in a hotel while the work is being done. However, that is not necessarily the case. Not all policies include a loss-of-use provision. If you have to pay for a hotel, meals and other services out of pocket, it can add up quickly and put you at financial risk. If loss-of-use is covered, it will be stated explicitly in your policy, along with any limits of coverage.
2. Replacement Cost
Replacement cost in a homeowner’s policy refers to valuing the loss at the amount it will cost to replace the item. For example, if your four-year-old computer is lost in a fire, replacement cost coverage would allow you to purchase a new one with similar features. Most homeowners believe that is what will happen if they have a claim, however, the bulk of policies do not carry this clause. If not included, losses will be valued at what they were worth in their condition before the loss occured. The four-year-old computer might be valued at $250 – not enough to purchase a new one. Replacement cost clauses are a valuable inclusion in a homeowner’s policy.
3. Flood Coverage
Almost all homeowner’s policies exclude flood coverage, along with earthquakes and other natural disasters. Floods can occur from a number of causes, such as hurricanes, burst pipes or sewer backup. A flood is one of the most common causes of home damage and the destruction of contents. There are companies that specialize in flood coverage, and, if you live in a susceptible area, look into having a separate flood policy. Your mortgage company may require this additional coverage as well.
4. Termites
Termites live all over North America but are most destructive in Southern climates where their lifecycles are not impacted by cold weather. Termites eat wood – lots of it – and can eat the supports in your house as easily as fallen leaves in the forest. They live in large colonies and, collectively, can destroy the structure of your home. Repairing termite damage and eradicating them can cost thousands of dollars. Most policies exclude termites and other pest damage. If you live in a susceptible area, the best insurance is to have the house regularly checked and sprayed by a professional. You may want to consider an annual termite contract from a reputable pest control company.
5. Valuation of Loss
When you have a home insurance claim, the insurance company will send out an appraiser to determine the extent of the damage and the best way to fix it. The appraiser will assess a value to the loss which will be the minimum the insurance company can pay in order to meet their contractual obligations. However, you do not have to take that value as final. If you can prove your loss should be valued higher, you can negotiate the settlement with the company. Keeping receipts and pictures of valuable items will help you back up your claim.
The Bottom Line
To really know what is in your homeowner’s policy, you should read it thoroughly. Look for exclusions to coverage and decide how you will cover those risks. In some cases, your insurance company will have separate add-ons that they can attach to your policy or you can get specialized insurance from another company. For those risks that cannot be insured, analyze how you will financially cover those risks if they should happen.
With the recent Japanese quake and subsequent stories about the vulnerability and possibilities of similar disasters striking here in the U.S., many homeowners are wondering about protecting their primary asset, their home, should a large earthquake hit their region.
Whether you should or should not have earthquake insurance is a conversation you should have with your insurance agent who provides your homeowners’ coverage.
When considering earthquake coverage three questions to consider are:
- What exactly are you protecting
- What is your deductible
- What will be your cost
1) What exactly are you protecting? How much equity do you have in your home? Are you upside down? Do you have ten or fifteen percent equity in your home?
2) What is your deductible? Most insurance companies offering earthquake coverage have very high deductibles, usually 10% or 20% of your coverage. If your dwelling is insured to rebuild for $200,000 then your deductible is either $20,000 or $30,000 in these cases. Does this exceed your equity in your home? If so, do you feel it worth the cost to pay not only premiums but also a deductible to rebuild your home given the current value? If your home is valued at $450,000, you owe $415,000 and your deductible is $20,000, do you feel it makes sense for you to get earthquake insurance? A difficult question to answer.
Finally, if there is partial destruction of your property, but not complete, the cost to repair may be just beyond your deductible, say $30,000 to repair some damage as the house was not a complete loss to the earthquake.
3) What will be your cost? Premiums depend on a myriad of factors, as most insurance premiums do. Type of home, zip code, deductible, etc., all factor into your premium. The analysis of premium comes down to how much it is worth to you per year to insure how much equity against how much of a deductible? It is a risk-benefit analysis that only you can answer, with the assistance of your insurance professional providing the costs and deductibles.
If your premium is around $500 per year and you have significant equity you may decide there is a good value in obtaining a policy. If your premium is over $1,000 per year, you have little equity and a large deductible you may feel the value of the policy is not worth the premium. And should your home undergo significant destruction in an earthquake, are you comfortable walking away from the home and the mortgage(s)?
There is no set ‘yes; or ‘no’ answer to ‘should I get earthquake insurance?’ Every situation is different and every family’s comfort level of risk and benefit is different. Answering the question however is a valuable exercise and one every homeowner should engage in annually when reviewing their insurance coverages.
The seventh largest quake ever occurred March 11th. The eighth largest quake occurred last year. The third largest quake occurred in 2004. Add to this hurricanes and floods, and it seems like natural disasters are on the rise.
Everyone should be well aware by now, earthquakes and tsunami’s like Japan recently suffered are not normally things insurance covers. No one wants to find out AFTER THE FACT that their homeowner’s insurance doesn’t cover them for a disaster. Let’s look at what your homeowner’s insurance doesn’t (or may not) cover.
Flood
Flooding is not covered by homeowner’s insurance, PERIOD. No gray area, no loopholes.
Let’s be specific about what a flood is so you can decide if you need a separate flood policy through the National Flood Insurance Program (NFIP). That flood insurance policy can still be purchased through your local agent.
FEMA defines a flood as “excess of water on land that is normally dry.” The NFIP considers a flood “a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from:
- Overflow of inland or tidal waters;
- Unusual and rapid accumulation or runoff of surface waters from any source;
- Mudflow; or
- Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.”
On the bright side, a burst pipe is considered a covered claim by most policies, however, there may be fine print that allows your insurance company an out even in this case, so be sure to read your policy carefully!
Earthquake
Depending on where you live, this could be a critical exclusion. The western United States receives the most earthquakes, but according to the United States Geological Survey, they can still occur throughout the rest of the country.
Earthquake insurance (not part of your regular homeowner’s insurance) should cover the cost of replacing your property or repairing damage to it. When reviewing this insurance, consider the following:
- Will only your dwelling be covered?
- Will detached structures be covered?
- Will your contents be covered as well as loss of use for expenses incurred if you have to live elsewhere during repairs?
- What isn’t covered?
- What is your deductible?
That last one is usually pretty high with earthquake coverage, so be sure you know what your deductible is.
Loss Assessment
If your condominium, co-op apartment, or townhome is part of a homeowner’s association, your homeowner’s policy should include loss assessment insurance. Loss assessment provides coverage for damage to the common areas owned by all residents. If the association charges all residents to pay for damages, this coverage will provide for that.
Homeowner’s Insurance exists to protect you, your family, and your assets in case of an emergency. Make sure you’re adequately covered BEFORE a disaster strikes.
Homeowners insurance rates may be going up with new hurricane modeling software. The new software package from Risk Management Solutions, Inc. goes way beyond the criteria that other models project.
The factors include the size of the hurricane and how much of it is still over the water, how fast it is moving, and whether a storm is strengthening or weakening just before landfall. Terrain also plays a role; a storm will be torn apart by mountains, but will be able to gather fuel from swampy areas like the Everglades in hurricane-prone Florida.
The model also accounts for the spike in the cost of construction materials after a storm and updates assumptions about the damage that even a moderate hurricane can do to commercial buildings in some regions to reflect the strictness of local building codes—and how well those codes are enforced.
Gone are the days where only those living in the coastal regions of hurricane country have to bear the brunt of the extra fees in their homeowners insurance. Now the risk will be spread out further and wider.
Of course, if you live on the coast don’t expect your premiums to go down any.