Extreme weather events are on the rise. In August alone, we’ve got Hurricane Laura, tropical storm Marco, California and Colorado fires and the Midwest is dealing with the fallout from a derecho.
When we find ourselves in Mother Nature’s path of destruction, one of the only defenses we have against catastrophic financial loss is homeowners insurance. If you purchased your policy a while ago — or haven’t reviewed it in the last year — now’s the time to make sure it’s up to date and provides adequate protection. Here are five things to review on your homeowner’s policy:
1. Do you have home insurance and hazard insurance?
Home insurance is standard in insurance policies. It covers damages to your personal property (the rugs, your wardrobe, the wine fridge you bought for the rumpus room) and provides liability coverage in case someone sues you for an injury that occurred on your property.
Hazard insurance (aka dwelling coverage) covers your actual house — the walls, roof, studs, etc. — and pays to rebuild or repair any damage caused by events covered by your policy.
Together they give you maximum coverage. But you may still need more for items that aren’t included in standard homeowners insurance policies.
2. How much will you be reimbursed?
The next thing to check on your homeowners insurance policy is to what extent your hazard insurance covers your losses. There are three types of terms that will determine the amount you’ll be reimbursed. From least to most pricey they are:
- Actual Cash Value pays out the amount your home is worth minus depreciation (e.g. wear and tear). Since rebuilding your home requires using new materials — new pipes, flooring, roofing materials — you’ll be responsible for paying the difference between what your old pipes were worth at the time of damage and what new pipes cost.
- Replacement Cost Value takes into account today’s costs of making repairs or rebuilding your dwelling. You’ll be reimbursed for more than with Actual Cash Value (and you’ll pay for the additional coverage in higher premiums). But there are limits to how much the insurance company will cover.
- Guaranteed Replacement Cost and Extended Replacement Cost provides the replacement cost coverage with higher limits (e.g. 25% higher) if prices exceed the caps. For example, if your home is damaged or destroyed along with many others in your area, rebuilding costs like labor and materials may come at a premium because of increased demand.
3. Are you insured against natural disasters and other perils?
Getting reimbursed for damage (wind, hail, fire, floods, landslides) caused by natural disasters like hurricanes and earthquakes is a mixed bag. Check to see what your home insurance covers specifically, and then consider buying separate policies to cover the likeliest threats. The cost will depend on the likelihood of them happening where you live.
See what your flood risk is using FEMA’s flood map. The National Flood Insurance Program website has a lot of good information about policies, flood risks and costs and filing claims. Use the California Earthquake Authority to search for your risk of earthquakes by county.
4. Does your coverage reflect your 2020 home?
Have you updated your kitchen or bathroom, upgraded your HVAC or installed hardwood floors since you originally purchased your home insurance policy? Make sure that information is reflected in your coverage. Same with any accounting for any home additions.
Consumer Reports recommends asking your insurance agent for a “new policy” estimate every two years. Unlike a policy renewal quote, a new policy quote requires recalculating your home’s reconstruction value. It will incorporate any rising construction or materials costs, and ensure you get coverage for any updates you’ve made to your property. CR also recommends getting a copy of the reconstruction valuation report to double check that it’s accurate.
5. Can you prove what you lost?
An insurer can only pay a claim on what it can confirm you lost. An up-to-date home inventory (saved to the cloud!) is a key document for disaster victims. An easy way to knock this out is to take your phone room to room and record a narrated tour of your stuff. Make sure to open closets and drawers, and don’t forget the garage and basement.
During this exercise you’ll probably realize how valuable your belongings are. A standard home insurance policy won’t fully cover things like jewelry, artwork, rare books and other collectibles. Plus, a lot of us have set up home offices and may have upgraded our equipment.
All of these things add up. Consider adding a rider to your home insurance policy so that you’re fully covered for any losses. Once a year, review the limits of your policy and the value of your possessions. Account for what you’ve bought — and anything you’ve sold that no longer needs to be insured.
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