Consumer's Guide to Homeowner Insurance
Please note: This information is intended only as a general guide to concepts relating to homeowner's insurance. Terms and conditions of coverage may vary. This guide does not override provisions of your own policy, and it is not intended to substitute for the advice of your insurance agent, attorney, or other professional advisor, should you have questions about your policy.
Bewildered about buying homeowner's insurance? Does the idea of trying to understand your policy give you a headache? Many people feel this way. Perhaps you have always had someone else handle this chore and now you're faced with doing it yourself. Insurance coverage may not be as difficult to understand as you had feared once you break it down into its simpler parts, as this guide does. When you buy an insurance policy, you are basically paying for a collection of promises by a company to pay you (i.e. provide coverage) for very specific kinds of losses, up to a certain amount of money (limits).
It's very important for you to know what coverage and limits you presently have or perhaps should have. Not knowing could prove very costly for you.
This booklet's job is to help you become a more knowledgeable policyholder. It explains policy terminology in plain English to help you buy what you need--so you won't pay for coverage you don’t really need, and you won’t be caught with major losses that aren't covered by your policy.
People rarely shop for insurance the way they do for other things, such as cars or computers. Yet, insurance companies vary substantially both in the price of their policies and levels of customer service. Premium rates (what you are charged for your policy) are not regulated by the State of Vermont. The State Insurance Division monitors the market to make sure it stays competitive. Therefore, it definitely pays to shop around.
After reading the guide, should you have any further questions regarding homeowner's insurance coverage, or have problems with a company, an agent or a particular claim, you can request help from the Insurance Division. Contact as follows:
Call the Consumer Assistance Section toll-free at 1-800-964-1784, or e-mail them at firstname.lastname@example.org .
Or write to:
Consumer Assistance, Insurance Division 89 Main St.Montpelier, VT 05620-3101
2. What is homeowner's insurance? What is the purpose of homeowner's insurance?
Your home may well be your most valuable financial asset. Yet, owning a home is not without risk. Realistically, you must face the possibility of damage or loss. The loss could be small, such as a broken window, or something serious, such as the loss of your entire home due to a fire. Or, someone could be injured on your property and sue you for a large amount of money. The reason you carry insurance is to protect yourself against such financial losses.
Although homeowner's insurance is not required by law, if you have a mortgage, the bank will almost certainly require you to have insurance - at least up to the value of your home and other structures, such as outbuildings. The home itself is referred to as the "dwelling" for insurance purposes.
Simply put, homeowner's insurance protects you against two kinds of risks, within the stated limits of your policy:
1. The risk of damage to your own property. "Property coverage" refers to coverage for your dwelling, loss of the use of the dwelling, other structures on your land, and your personal possessions, including protection against theft.
2. The risk of liability. Liability coverage protects you from being liable or financially responsible for injury to other people or injury to their property. It also covers other people's medical costs when you are the responsible party.
How is a dwelling policy different from a homeowner's policy?
A dwelling policy provides more limited property coverage than a homeowner's policy. (See descriptions of homeowner's coverages ahead.) The dwelling policy normally provides property coverage only (protection for individuals and families against damage to a dwelling or losses in connection with personal belongings.) However, some companies will sell you liability coverage as an option with a dwelling policy.
There are a number of fairly standard homeowner's policies, often called forms by the industry. They are sometimes referred to by numerical designations as shown in the parentheses after the form names below. Forms vary by the degree of dwelling and personal property coverage they provide. The liability coverage is the same for all forms.
You will encounter these words often in explanations of coverage:
A peril refers to a cause of damage or loss, such as fire or wind.
A named peril is a cause of loss specifically included in your policy.
Extended coverage perils is a fairly standard block of add-on coverages as described in the Basic Coverage Form below:
The Basic Coverage Form (HO-1)
As the name suggests, this form provides a minimal amount of coverage. It applies to both dwelling and personal property, and insures against fire, lightning, vandalism and malicious mischief, and extended coverage* perils.
*Extended coverage perils usually include:
The Broad Coverage Form (HO-2)
The Broad Form, which applies to both the dwelling and personal property, includes all the coverages of the basic form above, plus these named perils:
* Coverage is provided for perils marked with an asterisk when the cause of damage is sudden and accidental, such as when an appliance bursts, burns or cracks apart. Damage due to gradual deterioration, such as rust or corrosion, would probably not be covered.
Special Coverage Form (HO-3)
The Special Coverage Form provides the most extensive coverage of all the forms. For a dwelling, the policy covers "open perils," which means that any cause of loss is covered except those specifically excluded in the policy--as a rule, these exclusions would be flood, war or nuclear accident. Personal property, however, is covered only to the same extent as in the Broad form.
The Tenants Form (HO-4; also known as Broad Coverage Form, Contents)
This form is designed to offer insurance to people who do not own the building they live in. It covers the same perils detailed in the broad form, but applies to personal property only, since the renter does not own the building. Many renters assume their landlord's insurance covers them. Most often it does not. This kind of insurance may be more reasonable to purchase than you think, and is sometimes cheaper if you buy it in combination with auto insurance from the same agent.
The Condominium Form (HO-6)
For personal property, this form provides Broad form coverage similar to the Tenant's Form. The degree of structural coverage will vary. You will need to talk to your insurance agent to learn what you are responsible for insuring under the by-laws of your condo association.
The following product is worth noting but has very limited availability:
Modified Coverage Form: This form provides minimal coverage similar to the Basic form. However, there are certain restrictions on the value of losses. It's primarily used to insure older or sub-standard homes whose cost to replace would be far greater than their market value.
4. The different parts of a policy
Policies do differ in their actual structure, but should contain basically the same components. The parts of the policy are most often referred to this way:
The Declarations - Almost always on the first page, this section contains information at a glance such as the name of the insured, the address, the dollar amount of the coverage provided, a description of the property and the cost of the property.
From a consumer standpoint, one quick, important thing you can do is to check the Declarations page to make sure you have the amount of coverage you need and/or asked for. If there is some mistake, the time to correct it is before you have a claim.
The Definitions - This section explains, in precise form, the meanings intended for terms used in the policy. These definitions are the key to understanding the extent of coverage your policy provides.
Coverages - This section explains the extent of property and liability coverage.
Exclusions - This section details what is not covered by your policy, under both Property and Liability.
Conditions - The insurance policy is a type of contract. This section explains the obligations of the insured and the insurer (insurance company) under the policy, for both property and liability coverage. It explains your duties in the event of a loss, and some details about how the company will settle any losses.
Endorsements - An endorsement is an amendment to your policy which adds, removes or otherwise changes the standard coverage you have under your policy. You can negotiate many kinds of endorsements with your agent, and thus tailor a policy to any special needs you may have. An insurance company could also use an endorsement to limit your coverage. Therefore, it’s very important to read this section.
Within the Coverages section of your policy, you will find the following common terms of coverage. The information below is an example of standard coverages only, sometimes referred to by the letters "A" through "F," and "Additional Coverages." Be sure to check your own policy for variations.
Coverage A: Dwelling -- Will generally include the dwelling plus any structures attached to the dwelling as described in your policy.
Coverage B: Other Structures -- means buildings on the premises described in the policy which are separated by a clear space from the building.
Coverage C: Personal Property -- means anything owned or used by an insured person. Property which is not on the home premises is covered at a much lower limit (usually 10% of the regular limits) than property on the premises.
Coverage D: Loss of Use -- provides additional living expenses if a loss makes your property uninhabitable. This section also covers rental value if a loss makes a rental portion of your property uninhabitable.
What property generally is not covered?
Is your home business covered?
Note that certain types of property often are not covered by your policy. These include paper or electronic records containing business data, animals, credit cards, and radio and stereo systems in a motor vehicle, such as CD players, CB's, etc.
If you operate a business in your home, even if you consider it a sideline or more hobby than business, you should not assume that it will be covered by your homeowner's policy. Check with your agent. Some companies do offer complete business coverage as part of the homeowner's policy, while others may require you to purchase separate coverage.
Also watch for certain types of property which have specialized limits that are lower than your general property limits. Such items often include: cash, coins, some precious metals, securities, manuscripts or other documents, firearms, theft of jewelry, watches, furs and precious stones.
For coverage to apply in each of the following categories, the damage must be caused by a loss you are insured for under the policy. Check your policy for exact wording.
Debris Removal: Policies generally pay the reasonable cost of removing debris. Removal of fallen trees may be included.
Reasonable Repair: Pays the cost of reasonable repairs to protect your damaged property against further ruin.
Trees, shrubs and other plants: Offers coverage not to exceed 5% of the amount of insurance on the dwelling.
Fire Department Service Charge: Commonly covered.
Property Removed: Covers cost of removing property from the premises to protect it from further damage, usually for up to 30 days.
Credit card, forgery, ATM and counterfeit money: Offers a number of protections up to $500 if you are a victim of theft, forgery or an unwitting recipient of counterfeit bills. There are a number of situations not covered. These include any loss arising from a dishonest act on your part, or in connection with a business operation.
Coverage E: Personal Liability -- Covers bodily injury to other people or to other people's property which occurred as a result of your negligence (or the negligence of a family member living with you, or a dependent child.) Coverage normally extends to relatives living in your home and to dependent children under the age of 21 regardless of where they live.
Note: This coverage does not apply to another person's property while it is in your "care and control." (However, there may be limited coverage for such property damage under "Additional Coverages" below, Damage to Property of Others.)
Coverage F: Medical Payments to Others -- Covers the medical expenses of someone who was injured on your property, injured as a result of your unintentional actions, or harmed by your pets.
Claims Expenses: Covers your insurance company's cost to defend you in the event of a lawsuit.
First Aid Expenses: Covers your cost to provide emergency aid to others.
Damage to the Property of Others: Covers loss or damage unintentionally caused by you.
If your home is financed, your lender may require that you carry at least enough insurance to cover the value of the dwelling and outbuildings. Buying insurance is a matter of figuring out what your dwelling and personal property are worth, in addition to deciding how much liability coverage you should have.
How much liability coverage is reasonable?
Most policies are sold with a fixed amount of liability coverage. However, you can purchase more than the standard amount if you choose. You may want to consider purchasing enough to cover the value of all your financial assets -- home, savings, etc.--which are vulnerable to a lawsuit. Understand that your insurance company is liable only up to the limits of your policy. You would be liable for anything above that.
Tip: Additional liability coverage is not terribly expensive. In many cases, for about ten to twelve dollars more, you can double the standard limit.
Your Dwelling Policy: "Actual Cash Value" vs. "Replacement Cost"
Some homeowners may still have an older type of coverage known as an actual cash value policy. It covers the cost to replace to your home up to the amount of insurance you have purchased, minus depreciation. Depreciation is subtracted because you have already had some use of the property before it was destroyed, and it is presumably worth less than when it was new. For example, if your roof burned and it's 15 years old, there would be depreciation for its age and condition.
Most policies today cover you on what's called a replacement cost basis. A replacement cost policy covers the cost to rebuild your house or repair damages, up to the amount of insurance you have purchased on your dwelling, without subtracting depreciation. Under a replacement cost policy, you must rebuild to collect the cost of your home. If you suffer a loss and decide not to rebuild your house, you will be paid only the actual cash value of the policy, which subtracts for depreciation.
Tip: One way to estimate the value of your home is to use the square-foot cost for residential construction in your area.
When selling you a policy, most insurance companies, as a safeguard, insure your home for at least 80% of its replacement value. If you are underinsured and you suffer a total loss, you may be reimbursed up to the policy limit you have purchased. But if you are insured for less than 80% of your home's value, and you have a partial loss, the settlement will be pro-rated by the amount that you were underinsured. For example:
Suppose your home is worth $100,000, you have a loss valued at $40,000, but you have a $60,000 policy limit. 80% of the replacement value on $100,000 is $80,000. Your $60,000 is only 75% of $80,000. Therefore, you would receive 75% coverage of the $40,000 loss, or $30,000. It looks like this:
80% of $100,000 = $80,000
$60,000 (policy limit) is 75% of $80,000
75% of $40,000 loss = $30,000
Tip: You want to be sure to purchase enough insurance on your dwelling to protect its increasing value over the years. Generally, the cost to increase your coverage is small, relative to the added coverage you could receive. Some companies offer an inflation guard endorsement. This allows your insurance company to periodically increase your limit. Normally, you pay such a premium increase at the time of renewal.
How do you know if you have enough insurance on your personal property?
Insurance policies have standard limits for additional structure, personal property, and loss of use. They are figured as a percentage of the amount of coverage on the dwelling. Many companies use these percentages:
Other structures: 10% of dwelling
Personal property: 50% of dwelling
Loss of use: 1-20% of dwelling
Some limits also apply to categories of property, such as jewelry and firearms, and will be noted in your policy. You will need to decide if the policy limits give you enough protection, or whether you own some valuable items which need more coverage. You can buy extra coverage two ways. You can pay for a policy with higher policy limits, or you can purchase a special endorsement to the policy for specific items.
All property covered under the regular policy limits is called unscheduled property. Property which you list separately is called scheduled property. Licensed agents and brokers are knowledgeable about the insurance products they sell. They can be a ready source of information to guide your decisions.
Does your policy automatically pay you the limit when you have a claim?
No. Many people misunderstand the meaning of a limit. A limit is the most your insurance policy will pay for a loss. Your loss may not be as high as the limit. In that case, your policy covers only the amount of actual loss. You must also be prepared to substantiate what you have lost.
Tip: Most policies cover your personal property (the contents of your home) on an actual cash value basis, which is the replacement cost minus depreciation. That depreciation can take big bite out of your settlement. You should consider buying a replacement cost endorsement for your personal property for very little added cost. This would insure you for today's replacement cost of your items, up to the limits of your policy.
How do you show what you've lost after you've lost it?
Make a list now. It's very helpful to prepare some type of inventory of your possessions now, before something happens to them. A simple way to do this is to go methodically from room to room and make a written list of your property and its value. You may want to stick with items worth $100 or more, since adjusters generally don’t question items which most people would be expected to have in their homes. Do make special note of property which is unusual, or unusually valuable. Don't forget the garage, basement, attic and outdoor storage areas. Taking pictures of your belongings is even easier. A video camera does an especially quick and thorough job of documentation.
Preparing an inventory does two things:
First, it will make the process of filing a claim easier -- more orderly and less stressful-- should you someday need to. If you were to try to call to mind all the property your house contained today, it would be tough enough to do. Imagine doing this in an emotional turmoil after a devastating event such as a house fire.
Second, doing an inventory now can help you determine whether your possessions actually require more coverage than you presently have. Items that often require special coverage are:
jewelry, furs or leather garments, firearms, artwork, antiques, heirlooms, silver, silverware, china, crystal, unusual collections, hobby materials or tools and computer systems.
If you find items that require more coverage than your policy provides, you can obtain it one of two ways: either by increasing your property limit, or by scheduling items separately through the purchase of an endorsement. Insurance companies often require appraisals for scheduled items.
While a list may be very helpful, it may not be acceptable proof to an insurance company that an item existed, or that you owned it. You should keep receipts and photos with your inventory list and arrange to store your documentation somewhere other than your home -- for example, in a safety deposit box or the home of a responsible friend. That way, you won't risk losing your documentation if something happens to your home.
An insurance policy is a legal contract. You and the company each have responsibilities under this contract. You pay a premium (charge for your policy) to the company in exchange for the insurance company's promise to pay your covered losses. There is an expectation of good faith, i.e., that you and the insurance company will be fair and honest in your dealings with one another.
When does coverage begin?
To obtain a policy you must fill out an application which contains information to help the company decide whether to accept or reject the risk your application poses to them. The agent or company may issue you a binder, which is a statement that you have immediate protection for a specified time. The binder guarantees temporary coverage only, during which time the company decides whether or not to issue a policy. At the end of the binder period, if the company formally accepts your application, you will be issued a policy, usually for one year.
If the company decides not to issue you a policy, you will be covered for the period specified in the binder. If you near the end of the binder period and haven't heard from the company, it’s best to contact your agent and company.
Can the company stop coverage?
Renewal and non-renewal: When a policy reaches its expiration date, it's customary for the company to offer to renew the policy for another term, if both you and they want the coverage to continue. Under Vermont law, the company must provide notice of its intent to renew, and the premium to be charged, 45 days prior to the expiration date. Nothing requires the company to renew your policy.
Cancellation: The provisions for cancellation differ, depending on how long the policy has been in effect. During the first 59 days following the issuance of a new policy (not a renewed policy), a company may cancel coverage for any reason it sees fit. This period gives the company a chance to evaluate the risk involved. After the initial 59 day period and up until the expiration date of your policy, the company can't cancel your policy unless one of the following reasons apply:
· Non-payment of premium -- If you pay your premium in installments and you don’t pay an installment on time, the company can cancel your policy. In such a case the company must furnish you 15 days notice prior to the cancellation date. If the company receives your payment prior to the cancellation date in the notice, your policy will not be cancelled.
· Fraud on your application -- Any dishonesty or misrepresentation on your original application would entitle the company to cancel your policy, i.e., stop coverage from that point forward. In addition, an act of fraud could potentially entitle the company to cancel your policy.
· Fraud on a claim, or violation of a condition -- If you make a dishonest claim for a loss during the policy period, or violate other agreements of the policy, the company may cancel. Under most circumstances you would be entitled to 45 days notice prior to cancellation.
· Increase in risk -- If a change in your circumstances makes you a substantially higher risk than you were when you first applied for your policy, the company may cancel. Reasons for cancellation of a policy are first subject to approval by the Vermont Insurance Division, after which you would receive 15 days notice. There have been very few cancellations of this type in Vermont. Examples have included a change to a more hazardous use of the property, or a change in occupancy. (Rather than cancel you policy mid-term, a company may simply not renew at the end of the policy period. This is a more common occurrence than cancellation and not subject to state approval. Remember, nothing requires the company to renew your policy.)
Other actions affecting coverage or payment of a claim:
· Your insurance will not provide liability coverage for an Insured (the person who is covered under the policy) who intentionally causes a loss.
· The insurance contract requires you to take reasonable precautions against loss. For example, if you take a winter vacation, you should protect your plumbing. Depending on how long you were away, you might do this either by draining your pipes or having someone check the house while you were gone. If you took no such precautions and wound up with damage from frozen pipes, your claim would probably be denied.
Can you cancel your own policy whenever you want to?
As the policyholder, you may cancel your coverage any time. You would want to cancel if you sell your home or change companies. If you cancel during the policy period, the company generally will refund you a pro-rated portion of your premium, minus an administrative charge. Note that if your property has an on-going mortgage, the lender may either require you to maintain insurance coverage, and could actually replace your policy with a more expensive one.
The homeowner's market is competitive in nature. Therefore, it pays to shop around. Rates may vary considerably from one company to another. However, rates are not the only factor to consider. A company's service record and reputation are important, and may justify paying slightly more for a policy. Also, some companies may be more willing than others to insure you for a certain type of risk.
How can I find out about a company's or agent's reputation?
You can learn a lot about an insurance company through word of mouth. Another way to find out about a company or agent is to call the Vermont Insurance Division, as follows:
For this type of inquiry...
Call this section of the Vermont Insurance Division at the Department of Financial Regulation
To learn whether the Division has any record of complaints against a company or agent:
(You can also call if you need help resolving a problem with an agent or company.)
Call Consumer Assistance at
Local to Montpelier call 828-3302
Fax them at: 802-828-1446
To check the financial rating of a company doing business in Vermont:
Call Company Licensing at 802-828-2470
To check whether an agent is licensed to do business in Vermont, or is licensed to represent a specific company, or has any record of disciplinary action:
Call Agent Licensing at 802-828-3303
Please note that the existence of a complaint against a company or agent is not proof of any wrong-doing. However, a pattern of complaints should certainly raise a red flag.
To sell any type of insurance in Vermont, companies and agents must be licensed or otherwise authorized to sell in this state. There is a safety net for consumers in the unlikely event that a licensed company cannot pay claims. Customers of unlicensed companies have no such protection.
What are some ways I could lower my premium cost?
· Shop around. In Vermont's competitive market, rates will vary.
· One way to lower your premium is to agree to a higher deductible. This may be practical for some people, such as those who can make do-it-yourself repairs and thus absorb some of the initial cost of replacing a loss.
· If you have done major repairs or improved your property in ways that reduce your risk of loss, you should contact your agent to see if this could translate into premium savings.
· Check out special discounts offered to safety conscious homeowners. Companies sometimes offer discounts for smoke alarms, sprinkler systems, or burglar alarms.
What should you do in the event of a loss?
Call your agent or broker immediately. If this person is unavailable, call the insurance company directly. Vermont law requires insurance companies without a claims office to have a toll-free line or to accept collect calls.
Take photos or a video of the damage for documentation, following any instructions the insurance company gives you.
Do any temporary repairs necessary to protect your property from further damage. For example, board up windows or cover any holes in the roof. Do not make permanent repairs at this time.
If your house in uninhabitable, be sure to ask about loss of use coverage to take care of the expense of living elsewhere.
Arrange for your insurance company to inspect the damaged property as soon as possible.
Obtain repair estimate from contractors but do not authorize any work until you, your insurance company and your contractor have agreed on the repairs needed and their cost.
What can you do if you have trouble collecting on a claim?
If you have been unable to resolve a dispute with a company on your own, you can contact the Vermont Insurance Division.
9. Questions Vermonters often ask:
Q. I have what you might call a mini-farm, including a barn and a small number of income producing animals. Am I covered for this under my homeowner's insurance?
A. Probably not. Farms, even small ones, are usually covered by a special farm, business or other type of multi-line (multi-purpose) policy. There are a few agents in Vermont who specialize in this type of policy. If you have trouble finding one, contact the Vermont Insurance Division.
Q. I own a few horses. They are used for pleasure, not business. What if my horse injured a neighbor on my property? Is this covered under my homeowner's policy?
A. If an animal of yours injures someone on your property, your liability insurance will usually cover you up to the limits of your policy. Your liability coverage will also apply if your animal injures someone on another person's property.
Q. I have an RV/motor home. Is it covered under my homeowner's policy?
A. No. In most cases, RV's require coverage under a motor vehicle or other special policy.
Q. I live near a river. Will my policy cover flood damage?
A. No. Flood insurance is sold by the Federal Government but can be purchased through your agent. For free publications about flood insurance you can contact your agent or the Federal Emergency Management Agency (FEMA) at 1-800-480-2520 or go to their web site: www.fema.gov
Q. We took a vacation for two weeks in February and when we returned, we found that our water pipes had frozen and burst. Are we covered?
A. Yes, if your policy covers this type of damage and you took steps to prevent such a loss - such as leaving on a reliable heat source and arranging for it to be checked. Otherwise, your claim may be denied. You have a responsibility to take precautions.
Q. We own a camp we use mainly in the summer months. Can this be covered under a homeowner's policy?
A. Because it is not occupied on a full time basis, the camp would probably not qualify for the more extensive types of homeowner's coverage. You might be able to get a very basic policy, but you could also take out a more limited coverage known as a dwelling policy.
Department of Financial Regulation, Division of Insurance
89 Main St.Montpelier, VT 05620-3101