Buying Insurance

Lesson 3: Homeowners and Renters Insurance

In this lesson we will take up the parts of a homeowners insurance policy and discuss the provision for "replacement cost." We will examine some of the additional coverages a homeowner would wish to consider. We will review homeowners Liability and what it covers. Finally, we will discuss renters and condominium owners insurance as it differs from homeowners insurance.

Parts of a Homeowners Policy

Homeowners insurance policies are for the owner-occupant of a home to cover the dwelling building, personal possessions, other than an auto and certain specifically excluded items, and personal liability. Homeowners policies come in several types (insurance jargon:forms). These policies can be written as Basic, or named perils, Broad Form, or most comprehensive, Special Form. Basic form covers the least, Special form covers the most. Many companies issue all three types. You want Special form. (Buyer beware: if you are not sure if a particular policy is special form, ask!). Homeowners insurance has three basic parts: dwelling, contents, and liability. The dwelling part is pretty straightforward. If the home is fairly new, determining its value should be relatively easy. When you are establishing value bear in mind not to include the cost of the land. If you are unsure about the value of the dwelling alone, ask your agent to do a "cost estimator." (Buyer beware: remember the coinsurance requirement discussed in Lesson 1). Be sure you get an optional coverage called "replacement cost". The replacement cost option obligates the insurance company to pay for the cost of replacing (not improving nor enlarging) your home even if, due to current costs, the cost to replace exceeds the limit stated on the policy. The replacement cost option protects you against unanticipated spikes in the cost of building materials or labor. One further word abut replacement cost. Typically, the insurance company will pay the policy limit first. When all work on the dwelling is completed and it is ready for reoccupancy, the insurance company will then pay any additional money if required. For further discussion on the parts of a Homeowners policy see Hungelmann, pp. 64-71.

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