Imagine my surprise when the earth started to shake recently. That surprise was only equaled when I pulled out my 25-page, single-spaced homeowner’s insurance policy and began reading. It quickly became evident that deciphering what was covered and what was not covered was no easy task.
Just what is homeowner’s insurance? How much insurance do I need? What does it exclude? How can I make sure that all my reasonably foreseeable risks are covered by insurance?
Homeowner’s insurance, also sometimes referred to as hazard or fire insurance, contains two distinct components: property coverage and liability coverage. Property coverage pays you if your home’s physical improvements or your personal property are damaged or destroyed by a covered event.
Liability coverage provides you with legal defense costs if someone sues you for personal injury, bodily injury or property damage. If they win their lawsuit and you are ordered to pay them damages, your liability coverage will pay that judgment up to your coverage amount.
Given our society’s litigious nature, it is not unusual to carry $3 million or more of liability coverage. Premiums for excess liability coverage, referred to as “personal umbrella coverage,” are relatively modest: $1 million of excess liability coverage can cost well under $100 per year.
Property insurance coverage is always required by your lender when you borrow money to purchase your home. The lender will insist that the property coverage amount equals or exceeds your loan amount. That way in the event your home is a total loss — for example, if it completely burned to the ground-- the insurance company will pay the lender its outstanding loan amount. That may initially seem fine, but if you do not have the money to rebuild, you are left with an empty, burned-out lot and no funds to rebuild. Consequently, you will want to purchase homeowner’s insurance the pays for the cost to rebuild your home. This coverage is referred to as “replacement value.”
Homeowners often think that they need to purchase homeowner’s insurance equal to their purchase price. This is a common misconception. Because the land upon which your home was built cannot burn or be otherwise destroyed, you only need replacement value coverage for the amount it would cost to rebuild the improvements to your home.
Although homeowner’s insurance policies will vary as to coverage amounts, covered losses and exclusions, there are some basics common to all policies. For example, damage from earthquakes is not covered under your standard homeowner’s policy.
“At least on the East Coast, due to lack of demand, there may only be one insurance carrier that even offers such coverage,” said Steven Atwell, chief executive of Montgomery Premier Insurance in Rockville. “If it were available, earthquake coverage would run approximately $600 per year,” he estimated.
On the other hand, damage from hurricanes may in fact be covered by many standard homeowner’s insurance policies. For example, most policies cover the damage caused when a hurricane blows a hole in your roof and rain falls into your home through that hole. Both the roof damage and the resulting water damage are typically covered.
But water damage is an extremely tricky area, and before making a claim you should examine your policy carefully and discuss with your attorney or an independent public adjuster the best way to present and document your claim.
An independent public adjuster is the homeowner’s advocate in the claims process. They generally are compensated as a percentage of the claims paid by your insurance carrier. Public adjusters are licensed in the District and Maryland but not Virginia.
One other immutable fact is that water damage from floods is not covered by the standard homeowner’s insurance policy. Floods can be caused by many events, such as heavy rains, storms, melting snow, dam failures, or overflowing lakes or rivers.
The homeowner can only obtain flood insurance through insurance agents affiliated with the National Flood Insurance Program (NFIP) administered by the Federal Emergency Management Agency (FEMA). That program requires the homeowner to provide a certificate of elevation and other data to the insurance underwriters. Additional information about flood insurance and a link to the participating insurance companies in each state can be obtained by calling 800-427-4661 or visiting www.floodsmart.gov.
Renters are also able to insure their possessions either by obtaining renter’s insurance from commercial insurance carriers or, if eligible, through the NFIB. In either case, premiums are quite reasonable. Commercially available renter’s insurance that protects possessions runs about $125 to $150 a year for a typical two-bedroom apartment. Premiums for renter’s flood insurance that covers contents in a low- to moderate-risk zone starts at $49 a year, according to FEMA.
The important thing to remember about homeowner’s insurance policies is that the devil is in the details. If you cannot understand what your policy means, call your insurance agent and ask what is and is not covered, and ask the agent to show you where in your policy those coverages and exclusions exist. While you are at it, you should ask about what other types of insurance may be available and how you might go about obtaining that coverage, such as flood insurance, earthquake insurance or a personal liability umbrella. Knowing that you are covered for these events can help you weather even the most violent of storms.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.