Monday, 20 June 2016

Making sure your homeowners insurance policy is adequate

Homeowners Insurance policy

Spring has officially arrived in Michigan. Homeowners who have spring fever and are starting to spruce up their residences shouldn't forget to make sure they have adequate insurance coverage.

Making sure your homeowners insurance policy is adequate
"A home and the possessions it contains are very special. Homeowners need to make sure they are adequately insured -- before they have a loss," according to Leanne Snay, Executive Director of Insurance Information Association of Michigan (IIAM). "People need to remember to think of homeowners coverage when they do spring projects like adding a room, building a deck or installing a hot tub or pool.

Many Michigan homes may be dangerously underinsured, the insurance industry official said. Inflation and improvements have increased their value in past years, but property owners have neglected to increase insurance coverage levels accordingly.


In most cases, the amount of recovery for property loss is limited to amounts specified in the homeowners policy. For example, in the case of a total loss where it costs $100,000 to replace a home insured for $85,000, the owner would receive only the latter amount.

Making sure your homeowners insurance policy is adequateMost property losses, of course, aren't "total," Snay said. Even with partial losses, however, many homeowners could have financial difficulties if underinsured. Replacement cost policies generally require the insured to maintain coverage levels equal to at least 80 percent of the cost of the home's replacement. If the insured does not, the company won't pay the full cost of repairing, replacing or rebuilding for such partial losses.

Many companies offer a special policy endorsement or provision that increases the dwelling coverage levels automatically to keep pace with inflation, according to Snay.

The insurance representative suggests that homeowners contact their insurance agent before pounding that first nail. If a loss occurs after the remodeling is complete but before the insurance policy has been adjusted to reflect the increased value, the homeowner may be responsible for a part of the cost of the repairs or rebuilding.

As well as making sure homeowners have an adequate amount of coverage, they should be familiar with what is covered under their policy.

Types of homeowners insurance policies

Making sure your homeowners insurance policy is adequateOne type of home insurance policy is the "broad form," otherwise known as HO-2. This covers damage to the dwelling and possessions from perils such as explosion, fire or lightning, windstorm or hail, riot or civil commotion, theft, vandalism, falling objects, building collapse and damage from a vehicle or aircraft. A more common type of policy is the HO-3, often referred to as the "special form." 

This policy covers the dwelling against additional perils and, accordingly, is priced somewhat higher. There are also policies to fit the specialized needs of renters and condominium owners.
Most homeowners policies also cover a policyholder's legal liabilities if someone is injured on their premises, or if the insured damages someone else's property.

Making sure your homeowners insurance policy is adequate

A homeowners policy will cover a family's personal belongings, such as furniture, appliances, rugs, clothing, jewelry, etc., as well as the home itself. The amount of insurance protection for personal property is usually 50 percent of the amount of coverage on the dwelling. For example, if a policy provides $100,000 insurance on a home, the contents would be insured for $50,000.

Most homeowners insurance policies cover contents on an actual cash value basis. That means the insurance company will pay replacement cost, less depreciation. However, consumers can purchase a policy endorsement to cover contents on a replacement cost basis. 

Personal property

If personal property is destroyed, the insurance company settlement is based on the item's cost of repair or replacement--without deduction for depreciation. If the contents are not replaced, however, coverage will be provided on an actual cash value basis. Replacement cost contents coverage, as may be expected, is a little more expensive.

Policies generally provide only limited amounts of coverage for certain types of personal property which are especially susceptible to loss, such as cash, securities, jewelry, fur, firearms, and stamp and coin collections. Coverage for cash has a $200 limit, while coverage for other valuables varies between $1,000 and $2,500. 

For an additional premium, the consumer can purchase a policy endorsement in which the terms are described specifically and each item is given a dollar value.
IIAM is a non-profit public information organization, which sponsors a number of consumer information and education programs.