Keys to Understanding Homeowners’ Insurance Policies 

MAY 2, 2023

Part 1: Property Coverage

A homeowner who is lacking proper guidance may shop for insurance and move forward with the least expensive policy — potentially leaving their home underinsured. Sadly, mistakes are usually not discovered until it’s time to file a claim, and the uninsured damage can wipe out a homeowner’s savings. Typically, homeowners’ policies increase protection with a corresponding rise in investment.

The homeowner’s policy contains two sections: property and liability. In this first article of our two-part series, we focus on:

• The property portion of the policy
• The claims process for property damage
• Other important sections of the policy

Property Highlights

The declaration page of the homeowner’s policy can be confusing, with a number of different terms and dollar amounts. Many owners don’t fully comprehend what those figures represent. To better understand a homeowner’s insurance policy, consider the following breakdown:

Dwelling — The dwelling coverage is the maximum amount you receive if the home is destroyed. This number includes the cost of removing debris and clearing the lot. Depending on the policy, homeowners may request an increase in this coverage via an extended replacement cost endorsement, which can provide additional coverage ranging from 10% to 50% of the dwelling amount.

Other Structures — This amount pays to repair or replace structures other than the home. These can include outbuildings, pools, tennis courts, and hardscapes such as patios and driveways.   

Personal Property — This coverage pays for personal property in the home. To determine what is considered personal property, visualize your home being flipped upside down— anything that falls out would be designated as your personal property.  

Deductible(s) — The amount the homeowner must pay toward a loss before the insurance company is required to pay. Some policies may have more than one deductible. For example, there may be a deductible that is applicable to the home (covering thefts, broken pipes, etc.) and then a separate deductible for hurricanes, wind, and hail.

Homeowners should consult with a knowledgeable insurance broker to determine if their various coverage amounts are adequate given the location of their home, the potential cost for repairs or rebuilding, and their personal finances. 

Homeowners’ Claim Requirements

Policyholders have certain contractual responsibilities in the event a disaster damages their insured property. First, they must prevent any possible injury, and second, they must protect the property from further damage. If steps to mitigate additional damages are not completed to the best of the homeowner's ability, the insurance carrier may decrease the claim settlement. Insurance companies ask that policyholders do what is practical and reasonable to secure and protect the damaged property. It is important to document all measures taken to satisfy this requirement and to notify your insurance carrier of the loss in a timely fashion.

The insurance company may require proof of ownership to show you own the property and any belongings inside. This can include receipts, bills, and an inventory of your possessions. This inventory can be as simple as recording a video walkthrough of your home, showing everything you own. If possible, plan ahead—keep a folder for receipts and a spreadsheet inventory of important and expensive belongings which will make the claims process easier. A proof of loss, which is a legal document explaining what has been damaged, may also be required.¹

Who Has the Burden of Proving That Coverage Applies?

Initially, the burden falls on the insured to prove the damage occurred during the policy period. Once this burden is met, the burden shifts to the insurance company to prove that the cause of the damage is excluded under the policy. Losses caused by accidents that are not specifically excluded under the policy will be covered.²

How Do Insurance Carriers Determine the Claim Settlement Amount?

After the exchange of initial information, an adjuster will be assigned. The adjuster will review the documents and assess the damage, using software to determine the value of the loss. The software’s calculations are based on your home's square footage and construction materials. Estimates and receipts will also be taken into consideration when insureds replace damaged items. Finally, the adjuster will look at the coverage afforded by the policy.

Fine Print Matters – Avoid These Pitfalls

A homeowner’s policy is usually a lengthy document. While many homeowners won’t read it cover-to-cover, there are important areas of the policy that should be reviewed prior to moving forward with the coverage.

One such area is the “Special Limits” portion of the policy which includes coverage for collectibles. If you have a valuable item and suffer a loss, you may not have enough coverage in place to be made whole. Think of items such as jewelry, art, silverware, guns, trailers, watercraft, or even cash, just to name a few. If you have valuable items, you should always confirm with your broker that the specific items will be covered under your policy and are not subject to any exclusions. If the value of your collection is greater than the amount afforded in the policy, you may be able to endorse more coverage onto the homeowner’s policy for an additional premium, or obtain a separate valuable articles policy.

Catastrophes That Require Separate Policies

Depending on where you live, you may need more than one policy. Certain causes of loss are typically excluded from a homeowner’s policy. For example, if you live in an area that may be susceptible to floods, high winds, or earthquakes, your homeowner’s policy may exclude these perils. To obtain coverage for these types of losses, you will need to purchase a separate policy.³