What is homeowners insurance, and who should buy it?

A Homeowners insurance policy is one of the most popular forms of personal insurance on the market. The typical homeowners policy has two main sections: Section I covers your property, and Section II provides personal liability coverage (to cover you in case of lawsuits arising from things that happen on your property). Almost anyone who owns or leases property should have this type of insurance. Often, homeowners insurance is required by lenders as a requirement to obtain a mortgage.

What should I consider when buying homeowners insurance?

The most important thing to remember is to buy the amount and type of insurance you need. Remember: if your policy limit is less than 80% of the replacement cost of your home, you will face a "coinsurance penalty," which means you'll have out-of-pocket expenses to cover costs beyond your policy's deductible. For example: Your home's estimated replacement value (RCV) is $100,000. The co-insurance clause requires you carry at least $80,000 (80% of your RCV), so you would be underinsured by half if you bought a $40,000 policy. In such a scenario, the company would pay half of a loss less the policy deductible - so if you had a $500 deductible and suffered a $10,000 covered loss, your policy would only pay $4,500.

Also, figure out how much personal property insurance and personal liability coverage you need. Personal property, like a home, should be insured for its replacement value. Personal liability is a bit more subjective, but limits should not be less than those on other liability insurance such as auto. Seek advice from a financial or legal professional if in doubt. Finally, think about the extras you could add to your policy. For example, do you want the personal property replacement cost endorsement or the earthquake endorsement? Finally, once you have decided on the coverage you want, you can decide which insurer you would like to purchase the insurance from. You should also decide whether you would like an insurance agent to help you make decisions or you want to buy the product directly from an insurer without an agent.

What is the difference between "actual cash value" and "replacement cost"?

Covered losses under a homeowners policy can be paid on either an actual cash value basis or on a replacement cost basis. When "actual cash value" is used, the policy owner is entitled to the depreciated value of the damaged property - so the older the item is, the less money you may receive for it. Under the "replacement cost" coverage, the policy owner is reimbursed the amount it costs to replace the property with something of a similar type and quality at current prices.

What is the difference between an "all risks" policy and a "named perils" policy?

A named perils policy covers losses that are due to only those perils listed in the policy. Those typically include fire, windstorm, hail, and other physical losses. An all risks policy covers losses that are due to any peril except those specifically excluded in the policy. An all risks policy provides broader protection than a named perils policy.

If I have an accident I think is covered under my homeowners policy, what should I do?

Insurance contracts are conditional contracts which means policy owners have certain responsibilities to meet if a covered loss occurs. Not completing these can result in non-payment by the insurance company for losses that otherwise would have been covered. These include: (1) notifying the insurance company or the agent that a loss has occurred -- this should be done as soon as you discover the loss; (2) protecting the property from further damage and/or making any repairs necessary to prevent further damage; (3) preparing a detailed list of the personal items damaged that contains descriptions, the items' actual cash value, or their replacement cost if you have added the replacement cost endorsement to your policy; (4) being prepared to show the company and/or the insurance agent the damaged items; (5) completing a statement for the insurance company that explains how the loss occurred -- for example, the time the damage occurred, the cause, etc.