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Figuring out how much homeowner’s insurance you need

Take an inventory of your belongings regularly and make sure that if you were to have to purchase each item new, your coverage would be sufficient. Don’t forget clothing and furniture. (David J. Phillip/AP)

Homeowner’s insurance is an essential protection for a major financial investment: your home.

Lenders require homeowner’s insurance to protect their interest in your home. But insurance policies vary, and sometimes homeowners and buyers find it difficult to understand what’s covered, when to file a claim and how homeowner’s insurance differs from a home warranty.

We asked Justin Fox, broker and owner of Re/Max Professionals in Cottage Grove, Minn., to share the information he provides home buyers about property insurance.

Q: What is homeowner’s insurance?

A: Homeowner’s insurance is made up of coverages that may help pay to repair or replace your home and belongings if they are damaged by certain perils, such as fire or theft. It may also help cover costs if you accidentally damage another person’s property or if a visitor is injured at your home.

Q: What does homeowner’s insurance cover?

Why you need to shop around for homeowners insurance every year

A: Every carrier and policy has specific inclusions and exclusions. Therefore, you should consult your carrier or agent to learn more about your specific policy. Most policies specifically exclude coverage for damage or losses due to bad repair workmanship, faulty construction materials and defective maintenance. In most cases, damage to your home or to one of your neighbor’s homes caused by a contractor is not covered by a homeowner’s insurance policy.

There are specific policies or endorsements that can be added to your policy to cover a home that is under construction, which can address more specific risks related to a work zone. Hiring a reputable contractor that is licensed and insured can help protect you from risks during and following construction projects.

Q: What wouldn’t homeowner’s insurance cover?

A: Most homeowner’s insurance covers personal liabilities beyond just those occurring at the property; however, those liabilities are limited and specific to each policy. Homeowner’s policies will be either a “named peril” policy, which only cover losses due to events specifically listed, or a “special peril” policy, which covers any loss unless the cause is specifically excluded. Generally, damage or loss caused by war, neglect, water damage, earthquake, power failure, nuclear hazard, intentional damage by the policyholder and governmental action are always excluded.

You can get coverage for just about any risk; however, you'll need to weigh the premium cost versus the likelihood of a loss. For example, if your home is located in an area that's not prone to earthquakes, is it worth paying the extra premium to cover an earthquake?

Q: How does homeowner’s insurance differ from a home warranty?

A: Generally, home warranties cover losses and expenses on mechanical components of your home due to age, such as furnace failures, while homeowner’s insurance covers loss and expenses due to events, such as hail, fire, wind and the like. Some homeowner’s insurance carriers do have an optional endorsement for equipment breakdown, but that’s the exception, not the rule.

Q: How do you evaluate how much coverage you need for personal belongings?

A: That’s a tough one. To remain competitive with premium rates, many carriers have reduced this coverage to Actual Cash Value (ACV). ACV is the depreciated value of your personal belongings. For example, if a TV has a useful life of 10 years and costs $1,000 new, a complete loss at year nine would only get you approximately $100 toward the purchase of a replacement. If this is unacceptable, you’ll want to be sure to get “replacement cost” coverage.

Generally speaking, coverage for personal belongings will automatically be 50 percent of your dwelling coverage amount, with some exceptions. An example of an exclusion in this coverage limit is cash; most policies will only cover replacement of destroyed cash up to $200. Take an inventory of your personal belongings regularly and make sure that if you were to have to purchase each item brand new that your coverage would be sufficient. Don’t forget your clothing and furniture.