Coverage for the House and Contents

This part of the policy pays you mainly for losses to the house and related property. And it also may entitle you to things such as reimbursement for additional living expenses or loss of rental income when you or someone renting part of your house has to move temporarily because of damage to the living quarters.

The coverage on losses other than the house itself are generally figured as a percentage of the coverage on the house. For instance, with most basic policies, your personal property is automatically insured for 50% of the house amount. (More coverage is available on many policies -- see the discussion of replacement cost for household contents.) That 50% is in addition to the insurance on the structure, not part of it.

How policies differ

There are homeowners policies for houses, for condo and co-op apartments, even for renters. The major forms of house policies, called HO-2 and HO-3, offer similar protection on most points. The crucial differences lie in the number of perils your home and property are insured against.

Covered perils. A homeowners policy will normally compensate you for losses to the building and personal property only if the damage is caused by a peril named in the policy. This isn't a major worry because the named perils are pretty comprehensive. No homeowners policy covers damage from floods, for instance. You have to buy that separately (see Flood Insurance below).

Not all the policies that insure against a particular peril necessarily provide the same degree of protection, so you have to ask the agent to walk you through the coverage. When you're looking for a policy to cover items such as pictures, antiques, furs and musical instruments, you might do better by buying additional insurance in the form of riders than by purchasing a homeowners policy with more blanket coverage.

Insurance payback and the 80% rule. Insurance companies compute payments for homeowners policy losses in two ways. Replacement cost covers what it would cost to rebuild your home if it were destroyed or to replace items in it. Actual cash value takes depreciation into account and pays only the market value of the loss. Thus, your three-year-old television that cost $500 new might be worth only $200 in a cash-value policy. A replacement-cost policy would reimburse you for the cost of a comparable new set.

Because homes are rarely destroyed, it's possible to save a little on your premiums by insuring the place for less than it would cost to rebuild the whole thing. As long as the face amount of your policy equals at least 80% of the insurance company's estimated cost to rebuild (excluding land, which isn't covered), you are fully covered for complete or partial losses -- up to the policy's limits. If you have an $80,000 policy on a home the company estimates will cost $100,000 to rebuild and you suffer $10,000 in damage from a kitchen fire, you will be reimbursed for the full $10,000, minus your deductible. If the house burns to the ground and it costs $100,000 to rebuild, your coverage will stop at $80,000.

But insuring for less than full replacement value can be a false economy because of the way insurance companies compensate for partial losses. Say you buy coverage for 80% of the home's value but as prices for labor and building materials rise, that same amount would cover only 70% of the cost of rebuilding.

Even if you insured your home for 100% replacement value a few years ago, you may need to brush the cobwebs off your policy. A policy feature called inflation guard protects you by automatically raising your policy limits in step with rising prices. Insurance agents have access to cost-index figures you can use to help update the replacement value. When you compute the required amount of insurance, remember to eliminate the estimated value of the land, excavations, foundation, underground pipes and similar building components not likely to be damaged.

Replacement-cost guarantee. Most major insurers offer a replacement-cost endorsement that will cover costs of rebuilding or replacing your home in case of a total loss, even if the expense exceeds the amount of coverage you carry. This is a feature worth considering if residential construction costs in your area have outpaced inflation in recent years. A typical replacement guarantee comes as part of a 100% coverage policy and requires you to accept a yearly inflation adjustment and notify the insurer of any additions that alter the value by more than $5,000.

Replacement-cost coverage for contents. Many companies sell an endorsement that extends replacement-cost coverage to the contents of the place. For an additional premium, some companies will increase the total for personal property from 50% of the insurance on the house to 75%. Endorsements typically exclude fine arts, antiques and other items that are expected to appreciate. They also limit payments for other items to a maximum of four times the cash value.

Insurance for older homes. The replacement-cost system presents problems for old houses that might cost more to restore to their original condition than to replace using modern materials. Take an old house with a market value of $100,000. It's made with plaster walls and ten-foot ceilings, hand-carved crown molding, and so many other nice features that it would cost $160,000 to rebuild. But if you insure this $100,000 home for 80% of its $160,000 replacement cost, or $128,000, the house is overinsured.

That's why some insurers have developed special policies for older homes that may be entitled to lower insurance limits based on their market value. The plans take three forms:

A homeowners policy that pays for repairs with less costly and more pedestrian modern materials instead of those originally employed (a hardwood floor, for instance, replaced by carpeting over a plywood base). These repair-cost policies generally cost less.A policy that pays the actual cash value of the loss. This amount might be interpreted by the company as the current market value of the structure, or its replacement cost minus depreciation.An endorsement -- or policy addition -- that allows you to insure for less than 80% of the replacement cost of your structure without giving up your right to replacement cost for partial losses. But for furniture, appliances, awnings, outdoor equipment, clothing and other personal property, the company usually need not pay more than the cash value. If your couch goes up in flames, its value is adjusted for wear and tear.

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