What to Consider When Buying Homeowner’s Insurance

By Richard A. McGrath, CIC, LIA

Your home is your most valuable asset.  So what should you be doing to protect it?

Even when you have homeowner’s insurance, it doesn’t mean that you are adequately protected.  As with any insurance policy, it may or may not provide the coverage you need.  Inadequate coverage can leave you with a large bill if something happens to your home or a costly lawsuit if someone is injured on your property.

To determine whether you are adequately covered, you will need to know whether you are insured for 100 percent of the amount needed to rebuild your home if it were destroyed.  This may seem like a simple piece of information, but it even confuses some professionals in the housing and banking industry.

The confusion stems from the meaning of market value, which is the price your home would sell for, versus replacement cost, which is the cost of rebuilding your home.  The market value of a home varies based on location, and what a willing buyer and seller would negotiate for a price.  Replacement cost is based on the cost of rebuilding the same kind of home with the same level of quality.

The replacement cost provisions within a homeowner’s policy are standard.  However, when a value is selected that is lower than the replacement cost, costly penalties could apply for a significant partial loss or total claim.  As such, it is of great importance to the homeowner that your homeowner’s insurance policy covers the replacement cost of your home.

Your homeowner’s policy should also protect you in case someone is injured on your property.  If someone slips and falls, is bitten by your dog or is otherwise injured on your property, you could end up with a large liability claim.  Litigation against homeowners has been rising and there have been large settlements for liability lawsuits across the United States.  Be certain the liability limit on your homeowner’s policy is adequate and, if possible, buy an umbrella policy to provide additional coverage.

It is important to review not only what is covered, but what is excluded on your policy.

For example, damage caused by floods, earthquakes and normal deterioration of your home is typically excluded from coverage.  It may be added to your policy, but if the location of your home puts you at high risk for floods, high winds or earthquakes, your insurance carrier may restrict coverage or require a high deductible to cover such risks.  A complete review of these exposures is essential in developing your homeowner’s insurance protection.

Depending on the type of home you own, you may want a special policy.  For example, some carriers offer special policies for condominiums, historical homes or estate-quality homes.  Your agent should explain why the policy chosen is in your best interest and meets your needs.

In addition to understanding your insurance policy, it is important to research your insurance company.  Given the value of your home, it is essential that your carrier has the financial means to pay for any damages.  Look for a carrier with an A.M. Best rating of “A” or higher.  You may also want to check with the state insurance department to see whether the company has had a significant number of complaints filed against it.  Your insurance agent should be happy to provide this information.

An in-depth review of your insurance program every three to five years is also recommended.  Regulations change, personal needs change and product offerings change.  For example, today total losses require debris removal and rebuilding to comply with building codes.  Make certain your policy covers such costs.

Saving Money

If you have a good understanding of your insurance needs, what can you do to keep your premiums in line?

First, keep in mind that the purpose of your insurance is to protect your home in case of serious damage.  Don’t try to use insurance to cover routine maintenance costs.  If you file too many small claims, your insurer may drop your coverage and it won’t be available when you truly need it.

Your location also will affect your premiums.  If you own coastal property, you will find coverage expensive, although Massachusetts offers a special program for coastal properties.  Living in a high crime area or in a home where the previous owner filed many claims will also affect your costs.

A well-maintained property, owned by people who behave responsibly and have a good credit score will qualify for lower premiums than property owned by people who do not maintain it and have a low credit score.

You may also receive lower premiums for having protection devices, such as dead bolts, security systems, smoke detectors and water leak detectors.  Companies may also give credits for having a non-smoking household, being loss-free over a period of time, living in a newly built home or for other reasons the carrier believes are important.

For most people, their home is the largest investment they will ever make.  Insuring and protecting this investment requires a complete review.  A professional, independent insurance agent is most qualified to design a homeowner’s policy tailored to your specific needs.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at rmcgrath@mgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.