Homeowner’s Insurance Policies: Reading the Fine Print


Owning a home and having homeowner’s insurance go hand-in-hand, but how well do you really know your policy? Have you taken the time to read over your policy front to back? Few homeowners fully understand their insurance policies and all the little details that they contain.

One of the worst surprises for homeowners is making a claim only to find out the damage done to the home is not included in the policy. It’s often during the claim process that homeowners discover how limited their coverage is.

To avoid these unpleasant surprises, be sure to read the fine print on your policy.

Not Everything is Covered

The average homeowner’s insurance policy covers personal property in the home. Generally, the amount of coverage provided is calculated as a percentage of the cost of the home. For instance, if your home is insured for $300,000 in replacement cost, the personal property you have in your home would be insured for a certain percentage of that value. Every insurance provider has their own way of calculating personal property coverage, so it’s important to find out what that exact percentage is.

Having said that, certain items in your home might not be covered, such as expensive electronics, high-end jewelry, or fine art. The majority of insurance policies will place a limit on coverage of personal property. If you have certain belongings that very valuable, you might need to take out a separate personal articles policy to make sure they are sufficiently covered.

Your Coverage Has Limits

There are limits to what type of damage homeowner’s insurance will cover. Carefully review your policy to identify what types of disasters fall under the umbrella of your coverage. Fire damage is usually covered, but other types of disasters aren’t, such as:

• Floods

• Sewer backups

• Sump pump failures

• Hurricanes

• Earthquakes

• Mudslides

• Sinkholes

• War

Check with your insurance provider about the details regarding what is and isn’t covered. While you’re at it, check the deductibles to ensure that you’re fine with the amounts so that it won’t be tough for you to recoup any losses if the damage to your home is limited.

To be on the safe side, you may want to take out a more comprehensive policy to ensure you’re covered no matter what the disaster may be. This is especially important if you live in a certain area that’s prone to certain types of disasters that aren’t usually covered under a typical policy. For instance, earthquakes are more common in California than they are in New Jersey, so California homeowners may be wise to take out a policy that provides coverage for damage caused by this type of natural disaster.

Understand the Difference Between Replacement Cost and Actual Cash Value

Homeowners are compensated by their insurance companies in two different ways: replacement cost or actual cash value. The type of coverage that you have should be outlined in your policy. Generally speaking, replacement cost provides better coverage because it helps replace the contents in your home with similar ones instead of giving you the current market value of your belongings.

For instance, if your dining room table was demolished in a fire, you would get the value of the table back with replacement cost. On the other hand, you would only get the value of this item minus depreciation with the actual cash value method of indemnification.

The Bottom Line

It might not sound very exciting, but the best way to know exactly what your homeowner’s insurance policy covers is to read the whole thing. Get on the phone with your agent to have your questions answered. If you’ve just bought a house and have yet to take out a policy, be sure to ask all the important questions upfront so you can make a more informed decision about what type of policy to purchase so that it covers absolutely everything you need it to.