Definition of Insured. The policy clearly defines who is considered an insured person. Typically, the definition includes: the insured, the spouse, relatives living in the home, residents living in the home who are under the age of 21, full-time student living in the home and persons caring for family pets or using owned watercraft (with permission).
Insured Locations. The policy defines the locations that are insured under the homeowner’s policy. Typically, the definition includes: the resident premises,
other parts of the premise’s grounds, the insured’s temporary living space (including vacation), vacant land, and a cemetery plot. Note that personal prop- erty that is being used by the insured anywhere in the world is also covered under the homeowner’s policy.
Unscheduled Personal Property
Market Value. This coverage refers to personal household contents not specifi- cally listed by name and value in the policy. The homeowner’s policy typically provides insurance on these items equal to 50 percent of the amount of insur- ance on the house, although some insurers do offer a higher percentage of per- sonal property coverage. When property is destroyed, in order to estimate the value of the damage, the company asks for proof of ownership and an estimate of the depreciated value of such property. So one should have a video or an updated itemized inventory of personal property.
Actual versus Replacement Cost. A policy covering the actual cash value of a prop- erty (that is, the replacement cost less depreciation) can be a problem. Such a method requires the owner to maintain detailed records of the date of purchase, purchase price, estimated percentage depreciation on the date of loss and other related bookkeeping records. For another, the reimbursement amount is likely to cover only a fraction of the replacement cost of the article. So several years ago insurance companies started to offer replacement cost coverage. For an additional premium, some 5 to 15 percent of the policy’s total premium, the homeowner can receive the complete replacement cost of a destroyed or stolen item. However, even homeowners purchasing a replacement cost policy should maintain a detailed inventory of personal effects and video tapes of all the con- tents (both front and back) located inside the house.
Unfortunately, today insurance companies are covering themselves first and shifting more of the final burden to homeowners. Many insurers are phasing out guaranteed replacement cost policies that require companies to pay whatever it took to restore structures to their original condition. Some companies are also changing dollar-based deductibles to percent deductibles, which typically require consumers to pay more when catastrophe strikes. Instead of guaran- teed replacement, firms such as Travelers, All State, State Farm and Farmers now offer extended replacement. This limits the buffer to 20 or 25 percent above the rebuilding cost to account for potential price-gouging in a disaster.
There are special discounts available for new or updated utilities. A special cover- age also pays for damage by water backing up from sewers and drains. Building
ordinance and law coverage protect homeowners against code changes. As a result of these changes in home replacement cost policies, homeowners should reexamine their coverage and consider insuring their homes closer to their full value.
Endorsements
Inflation Guard. In view of the rising cost of replacing a home, purchase cover- age for the actual replacement value of the house (excluding the lot). Do so in updating by an inflation-guard endorsement so the home will always remain adequately insured. This provision annually increases the coverage to keep pace with inflation. The cost of the endorsement does vary, depending on the type of coverage and variations in the cost-of-living index.
Personal Property Replacement Cost. After taking an inventory of personal valu- ables, a homeowner may want additional coverage by choosing between two viable alternatives. First, the basic homeowner’s coverage can be raised, which would automatically raise the unscheduled personal property protection (sub- ject to sub-limits). Second, valuables like furs, jewelry, fine art, silverware, cam- eras, stamps, coins, and sports and hobby gear can be listed individually in special endorsements or floaters. The personal property replacement cost rider is designed to recover losses based on replacement rather than the actual cost.
Unfortunately, this rider does not apply to antiques or rare items like fine art, antiques, rare coins, stamps and musical instruments.
Scheduled Personal Property Floater. In situations where personal properties are valued in excess of the coverage or limitations offered by a typical homeowner’s policy, two types of floater policies are available. The personal articles floater pro- vides all-risk protection for each article specified in the policy. By contrast, per- sonal property floater offers protection on all articles on a worldwide basis. These policies can be expensive. So only cover those articles that warrant special cov- erage, such as original paintings, authentic artifacts, jewelry, furs, and boats.
However, the insurance company may require the homeowner to have these items appraised before insuring them. When buying floaters, obtain the infla- tion-guard endorsement to have protection against rising replacement values.
Although it may vary from one company to another, the amount of coverage can be adjusted upward on a regular basis.
Additional Living Expense Coverage. This endorsement increases the payment for Part D. Considering the time required to build a home after a major loss, the
additional living expense coverage ensures that the family’s normal standard of living will be maintained for a prolonged period during which the new home is built.
Other Endorsements. Other items that might be considered as endorsements to the homeowner’s policy are: backup of sewer or drain, identification of resto- ration coverage, home business coverage, and building ordinance and law coverage.
Specialty Forms of Insurance
Flood Insurance. Since it was not available through homeowner’s policies, in 1969 the federal government and the private insurance industry introduced a joint program to make flood insurance available to homeowners at rates subsi- dized by the government. To qualify, the property must be located in a commu- nity that has declared its intentions to carry out land-use control measures to reduce future flooding.
Earthquake Insurance. Homeowner policies typically do not cover earthquake damage. The cost of earthquake insurance has escalated in some places due to the actual loss experiences. For example, in California the cost for earthquake insurance includes a premium costing several thousand dollars, plus a deduct- ible stated as a percentage (e.g., 10–20 percent) of the replacement cost.
Private Mortgage Insurance. Home buyers who make a down payment of less than 20 percent of the purchase price are required to buy a private mortgage insurance (PMI). At a cost of $50 to $100 for every $100,000 borrowed, this insur- ance protects the lender against the potential default on the mortgage. While the cost of this insurance appears to be insignificant when compared with the monthly mortgage for an expensive home, PMI does add up, simply because it can take years to reach that magic 20 percent equity threshold when it is no longer required. Indeed, before the Homebuyers Protection Act was passed by Congress in 1998, lenders were not required to notify homeowners when the equity in their home reached a level where PMI was no longer required. As a result, many homeowners continued to pay this cost unnecessarily for years.
That problem, however, has disappeared.
Home Office Protection. Most home office equipment, such as computers, fax machines, copy machines and others, are generally excluded from conventional homeowner’s policies. Homeowner’s and renter’s policies typically cap coverage
for business property at $2,500. A typical policy provides no liability coverage for business-related claims, either. For instance, if a deliveryman slips on the front door while delivering a business package, the policy may not cover that liability.
In order to solve this problem, the homeowner may wish to obtain separate insurance. This additional insurance becomes particularly important if the owner sees clients in the home office. For a low-risk home business, a rider that increases business-property and liability coverage to the same amounts as stated in the homeowner’s policy costs only a few hundred dollars per year.
Other Specialty Insurance. Other specialty insurance that might be useful in risk management planning include: insurance on watercraft, wind exposure or hur- ricane insurance, title insurance and crime insurance.
TAXATION OF BENEFITS
Indemnification for property losses is not a taxable item. The IRS position is that the cash proceeds are designed to put the insured back in the same position as prior to the loss. Of course, premium payments for the homeowner’s policy are not considered a deductible expense.