By Peter Mastrantuono
Too often homeowners discover after the fact that the damage sustained to their home and property is not covered by their homeowners insurance, leaving them with a financial exposure they never anticipated.
While homeowners can never be insured against all possible events that result in damage, they may be able to better protect themselves through careful research and asking their insurance agent lots of questions.
What a Homeowners Policy Covers
There are two basic types of policies available to homeowners. The first is an HO-2 policy, typically referred to as “broad form,” which covers 16 perils, including, among others, fire or lightening, windstorm or hail, explosion, riot or civil commotion, smoke, theft, and damage caused by cars and aircraft.
The HO-3 policy, or “special form,” is the second option. This policy covers “everything except certain perils.” These exceptions are outlined in the policy and generally include damage arising from earth movement (e.g., earthquakes or mudflows), floods or sewer backups, power failure, neglect, war, government action, among others.
Homeowners should carefully review the policy’s list of excluded events. Some may be insurable through an endorsement (i.e., paying an additional premium to include a specified peril or to raise coverage amounts) or through another policy (e.g., flood insurance through the federal government).
Major Risks Not Covered by Homeowners Insurance
One of the biggest surprises a homeowner may face is that any personal property loss incurred may only be covered up to the actual cash-value (i.e., the replacement value less depreciation, or fair market value) rather than at replacement cost. This matters because replacing a stolen television, for instance, may cost a homeowner far more than the actual cash value paid by the insurance company. Every homeowner needs to determine whether their current policy covers losses at actual cash value or at its replacement cost.
Another surprise is when rebuilding a new home structure occurs under a new set of local ordinances that add to the cost of rebuilding. A typical policy will not cover the added expense of new building codes. This cost differential will come out of the homeowner’s pocket unless he or she has purchased additional protection against this risk.
There are also limits to how much liability protection a homeowner has against the claims by others of injury or property damage. Many policies will actually exclude trampolines, pools and certain aggressive dog breeds from coverage.
Without paying more, personal property losses are generally limited to very low amounts, with separate limits placed on jewelry, computers, cash and watercraft. If a homeowner has property above the policy limits, they may want to increase them by paying a higher premium or purchasing special coverage.
And, in a time where so many are now working from home, business-related claims are generally very limited or not covered at all. So, if you already have business insurance in connection with the company you own, you may want to verify that coverage extends to working from home, for you and your employees.
Unexpected financial losses can undermine or delay the most thoughtful of financial plans, so it’s prudent to make sure that the homeowners policy you bought potentially many years ago still fully protects you today.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.
