September 21, 2017

Home Insurance and Water Damage

Image of the outside of a beautiful home.

Water is essential for many things in life, yet it is one of the most frequent causes of damage in homes. Consider how many rooms in your home are connected to an inside water source or are susceptible to water coming in from outdoors, and you will quickly realize how vital water damage prevention should be.  When water goes where it shouldn’t, even a small leak can become a major problem. Some damage from water is covered by your homeowners policy, some is not. Either way, most damage from water is preventable.

Quick action helps in water emergencies.

It has happened. There is water everywhere — in your walls, under your carpets and soaking into your belongings. Whether caused by a burst pipe, a broken water heater or a flood, there are things you can do immediately to salvage belongings and limit damage or loss.

  1. Stop the water. If the water is coming from inside your home, such as a burst pipe or water heater malfunction, shut off the main water valve immediately. (Make sure everyone in your home knows where the shutoff valve is located.)
  2. Turn off the utilities* – if the situation calls for it. In a serious water event, turning off the power or natural gas might be necessary to ensure your and others personal safety.
    *In the case of a minor water situation there may not be a need to shut off the utilities, and doing so may leave your home without power until the utilities can be turned back on again.
  3. Prevent electrocution. Do not use any electrical appliances if the carpet or flooring surfaces are wet. Use a wet vacuum to remove water, but check the manufacturer’s instructions before starting.
  4. Use fans to circulate air and encourage drying. This is especially important in the first 24-48 hours after an indoor flood.
  5. Get water out quickly (and safely). Fast action on your part can prevent further damage, help you save more of your belongings and minimize the time and expense of repairs. Clean up as much water as possible by mopping or blotting with towels.
  6. Get property to a dry location. As much as possible, move belongings to a dry area. Put furniture on blocks or slide a square of aluminum foil under furniture legs to prevent the wood stain from bleeding into carpeting.
  7. Remove area rugs from the floor. The dyes in carpets can stain flooring, carpeting or wood floors.
  8. Do not lift tacked down carpet without professional help. It could cause carpet to shrink.
  9. Launder any clothes or other washables that have been soaked as soon as possible.
  10. Wipe excess water from furniture. Open drawers and cabinet doors for faster drying. Spread out books to speed drying and prevent further damage.
  11. Watch for debris and pests. If water is flowing in your house there may be dislodged materials such as nails, or pests such as snakes or vermin.
  12. Report claims as soon as possible. The sooner you report damage, the sooner we can help you get your home and life back to normal.
  13. Keep track of the time spent cleaning and save receipts for the costs of any rental equipment or payments to professional services. Take photos of any damaged items you may have to discard before an insurance adjuster sees them, and make an inventory list of any damaged goods.

Why Is My Home Insured For More Than It’s Worth?

Image of the outside of a beautiful home.

My home is worth $275,000. Why does my insurance company want me to insure it for $375,000?

This is probably the most frequently asked question among our Homeowners Policy clients today. We will usually respond with…“and be glad that it is, let me show you why.”

Comparing market or real estate value of a home and replacement cost of a home is like comparing apples and oranges. Market value is the price for which you could sell your home. Market value takes into consideration land value, neighborhood, comparable sales, and more. Replacement or reconstruction cost is the amount of money it would take to rebuild your home, with like kind and quality, at today’s costs. Replacement cost reflects the cost for building materials, code compliance, demolition, construction labor, and more.

In the current economy, many people are under the assumption that construction costs have reduced as much as property values. This is simply not the case. The fact of the matter is, today, you can buy an existing home for much less money than it would cost to build that very same home. Although you may hear from a friend that they got someone to do some work for “super cheap,” this is the exception to the rule. Contractors’ overhead hasn’t reduced much, and cost for building materials hasn’t decreased dramatically either. Contractors are just like everyone else, they need to put food on the table, and I don’t know many non-profit construction companies out there.

The amount of coverage you need should be based on the true reconstruction costs of your home, regardless of current market value.

 

Homeowners Insurance Basics

Image of the outside of a beautiful home.

Homeowners insurance is a package policy. This means that it covers both damage to property and liability or legal responsibility for any injuries and property damage policyholders or their families cause to other people. This includes damage caused by household pets.

Damage caused by most disasters is covered but there are exceptions. Standard homeowners policies do not cover flooding, earthquakes or poor maintenance. Flood coverage is provided by the federal government’s National Flood Insurance Program, although it is purchased from an insurance agent. Earthquake coverage is available either in the form of an endorsement or as a separate policy. Most maintenance related problems are the homeowners’ responsibility.

A standard homeowners insurance policy includes four essential types of coverage. They include:

1. Coverage for the structure of the home

This part of a policy pays to repair or rebuild a home if it is damaged or destroyed by fire, hurricane, hail, lightning or other disaster listed in the policy. It will not pay for damage caused by a flood, earthquake or routine wear and tear. Most standard policies also cover structures that are not attached to a house such as a garage, tool shed or gazebo.

2. Coverage for personal belongings

Furniture, clothes, sports equipment and other personal items are covered if they are stolen or destroyed by fire, hurricane or other insured disaster. Most companies provide coverage for 50 to 70 percent of the amount of insurance on the structure of a home. This part of the policy includes off-premises coverage. This means that belongings are covered anywhere in the world, unless the policyholder has decided against off-premises coverage. Expensive items like jewelry, furs and silverware are covered, but there are usually dollar limits if they are stolen. To insure these items to their full value, individuals can purchase a special personal property endorsement or floater and insure the item for its appraised value.

Trees, plants and scrubs are also covered under standard homeowners insurance—generally up to about $500 per item. Perils covered are theft, fire, lightning, explosion, vandalism, riot and even falling aircraft. They are not covered for damage by wind or disease.

3. Liability protection

Liability covers against lawsuits for bodily injury or property damage that policyholders or family members cause to other people. It also pays for damage caused by pets. The liability portion of the policy pays for both the cost of defending the policyholder in court and any court awards—up to the limit of the policy. Coverage is not just in the home but extends to anywhere in the world. Liability limits generally start at about $100,000. An umbrella or excess liability policy, which provides broader coverage, including claims for libel and slander, as well as higher liability limits, can be added to the policy.

4. Additional living expenses

This pays the additional costs of living away from home if a house is inhabitable due to damage from a fire, storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while the home is being rebuilt. Coverage for additional living expenses differs from company to company.

Types of Homeowners Insurance Policies

The different types of homeowners policies are fairly standard throughout the country. However, individual states and companies may offer policies that are slightly different or go by other names such as “standard” or “deluxe.” The one exception is the state of Texas, where policies vary somewhat from policies in other states. The Texas Insurance Department (http://www.tdi.state.tx.us) has detailed information on its various homeowners policies.

People who own the home they live in have several policies to choose from. The most popular policy is the HO-3. It provides coverage for the structure of the home and personal belongings as well as personal liability coverage. It also provides the broadest coverage, protecting against 16 disasters or perils listed below.

  • Fire or lightning
  • Windstorm or hail
  • Explosion
  • Riot or civil commotion
  • Damage caused by aircraft
  • Damage caused by vehicles
  • Smoke
  • Vandalism or malicious mischief
  • Theft
  • Volcanic eruption
  • Falling object
  • Weight of ice, snow or sleet
  • Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or automatic fire-protective sprinkler system, or from a household appliance
  • Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, an air conditioning or automatic fire-protective system
  • Freezing of a plumbing, heating, air conditioning or automatic, fire-protective sprinkler system, or of a household appliance
  • Sudden and accidental damage from artificially generated electrical current (does not include loss to a tube, transistor or similar electronic
    component)

Owners of multifamily homes generally purchase an HO-3 with an endorsement to cover the risks associated with having renters live in their houses. Other types of policies for home owners are the HO-2, which provides more limited coverage, the HO-1, a bare bones policy that is not widely available, and the HO-8, designed for older homes. There is also a version of the HO-2 designed for mobile homes.

The HO-4 policy was created specifically for those who rent the home they live in. It covers a policyholder’s belongings against all 16 perils. It also provides personal liability coverage for damage the policyholder or dependents may cause to third parties. The HO-6 policy was designed for owners of condominium and cooperative units. It provides coverage for belongings and the structural parts of the condominium or co-op that the policyholder owns. It protects against all 16 perils and provides personal liability coverage. Both cover additional living expenses.

Levels of Coverage

There are three coverage options:

1. Actual Cash Value

This policy pays to replace the home or possessions minus a deduction for depreciation.

2. Replacement Cost

This policy pays the cost of rebuilding or repairing the home or replacing possessions without a deduction for depreciation.

3. Guaranteed/Extended Replacement Cost

This policy offers the highest level of protection. A guaranteed replacement cost policy pays whatever it costs to rebuild the home as it was before the fire or other disaster—even if it exceeds the policy limit. This gives protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally won’t cover the cost of upgrading the house to comply with current building codes. However, an endorsement (or an addition to) the policy called Ordinance or Law can help pay for these additional costs.

Some insurance companies offer an extended, rather than a guaranteed, replacement cost policy. An extended policy pays a certain percentage over the limit to rebuild the home. Generally, it is 20 to 25 percent more than the limit of the policy. For example, if homeowners take out a policy for $100,000, they can get up to an extra $20,000 or $25,000 of coverage. Guaranteed and extended replacement cost policies are more expensive; but they offer the best financial protection against disasters for a home. These coverages, however, may not be available in all states or from all companies. Replacement cost coverage is available for the structure of the home, but only actual cash value coverage is available for possessions.