HE-0665, Reprinted October 1998. Fred Waddell, Extension Family Resource Management Specialist, Associate Professor, Human Development and Family Studies, Auburn University. Originally prepared by Josephine Turner, Extension Program Specialist, Professor, Human Development and Family Studies, Auburn University.

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Homeowner's Insurance

Why You Need Homeowner's Insurance

Whether you rent or own a house, condominium, mobile home, or apartment, it is home to you and your family. It is where you keep most of what you own. In case of disaster, replacing your home and your family's belongings could wipe you out financially. A homeowner's insurance policy can protect you against such a loss.

A 1986 study found that about 95 percent of the nation's homeowners carry household insurance to protect themselves against loss. Fewer than 25 percent of those who rent their homes carry such insurance.

Often, policyholders don't know or understand the contents of their policies. Sometimes they discover--too late--they don't have enough coverage. Of those studied in 1986, 2 percent of the homeowners and 8 percent of the renters weren't sure if they were insured.

How do you pick the right homeowner's insurance policy? How much coverage is enough? How often should you review and update your policy? What insurance do you need when you rent an apartment or own a condominium? These are common questions for people buying insurance.

In general, you can insure any property you own except land. For insurance purposes, the term "property" refers to either of two categories:

1. Real property includes physical structures such as your home, a detached garage, or other permanent buildings.
2. Personal property includes belongings such as your furniture and clothing.

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How Much Insurance Do You Need?

If you own your home, you need insurance coverage on both real and personal property. If you rent your home, your policy will cover just personal property. To decide how much insurance you need, first figure out the value of all the property you own.

Real Property Value

You can estimate the value of your real property two ways. One way is the market value--what you could get if you sold your house. The second way is the replacement cost--how much it would cost to replace your house at today's construction prices. For insurance purposes, replacement cost is used most often.

To estimate replacement cost, multiply the square footage of your house by the current construction cost per square foot. A local builder can give the figures to do this, or you can hire an appraiser.

If your house would cost more to replace than you could get by selling it,l check into an "older home" or HO-8 policy. Under this policy, you can insure your house at the lower market value amount. (See the following section on HO-8 policies.)

Personal Property Value

If a disaster struck your home, could you list all your possessions and estimate the value of furniture, clothing, china, silverware, sporting goods, lawn-care equipment, appliances, and so forth?

Few people can make such estimates. That is why you should inventory your belongings. Go through each room and note every item. Write down the price you paid, model numbers, and date of purchase of furniture, appliances, and other household items. Make this inventory as exact as you can, because replacement cost on many "every day" items is high. Your County Extension office has inventory lists (ask for Circular HE-351, "Records And Important Papers"). You can also get inventory lists from insurance agents or from the Insurance Information Institute.

In addition to making a written record, it's smart to take pictures of room furnishings and certain items. Make sure the back of each picture is dated. Photograph every room from several angles, and open all the drawers, cupboards, and closets as you do so. It would be better to get an inventory done on videotape. Try to borrow a camera if you don't own one.

Keep your inventory lists, pictures, and videotapes in a safe-deposit box or fireproof container. Update your inventory as you get new items or get rid of old ones.

It's important to examine the value of your personal property at least once a year. Once you get everything listed, the yearly update won't take long.

Real Property Coverage

If your home is insured for at least 80 percent of its current replacement cost, a homeowner's policy usually pays any claim in full, minus the deductible, up to the amount of coverage. If your house is insured for less than 80 percent of its current replacement cost, the amount you get paid--even for small claims--will be reduced. The lesser amount is based on the difference between the percentage of coverage you have and 80 percent replacement cost value.

For example, say the replacement value of your home is $100,000 (100 percent). You need to insure it for at least $80,000 (80 percent of the replacement value) to get full payment for a claim of just $10,000. If your house is insured for only $60,000 (60 percent of the replacement value), the insurance company will divide your actual coverage by 80 percent (60 percent divided by 80 percent = 75 percent). You will get 75 percent of your $10,000 claim reimbursed or only $7,500, less the deductible amount.

Some policies contain an inflation guard which increases coverage as costs increase. Such clauses are often tied to a residential construction cost index. However, this may not give you enough coverage. Again, check costs in your area annually to make sure your coverage is keeping up.

Personal Property Coverage

In most policies, the total amount of coverage for household goods on the premises is 50 percent of the total real property coverage. This means if your house is covered for $80,000, the contents would be covered for up to $40,000. If your personal property is away from home (when you're on vacation), it's usually covered for up to 10 percent of the insured property on the premises, or $4,000 in this example.

Most policies don't include loss of property from vandalism or malicious mischief if your house has been empty for 30 days before the loss. For example, this clause would apply if you moved from your home to a new house before you sold the old house. Also, most policies don't cover any part of your house used for a home-based business or the tools of your trade. For example, if you do bookkeeping for one or more businesses out of your home and have a typewriter, file cabinet, adding machine, desk, computer, etc., your regular homeowner's policy will not cover these items nor the space you use to work. You must insure these through a separate policy or an endorsement to your homeowner's insurance called a "floater."

Floaters may also be purchased to cover jewelry, furs, stamp or coin collections, antiques, or heirlooms. With the standard homeowners policy, these items and others are insured as personal belongings, but only for a limited amount. Typical limits on coverage for specific kinds of items are:

• $200 on money, bullion, or coins.
• $1,000 on securities, accounts, bills, deeds, or passports.
• $1,000 for loss by theft of jewelry, watches, or furs.
• $2,000 for loss by theft of guns and firearms.
• $2,500 for loss by theft of silverware and goldware.
• $5,000 for loss of electronic data processing equipment located on the premises.

Policies vary in the terms of coverage. Check your policy for the limits of coverage on your belongings. In each category, the dollar limit is the most you will collect each time there is a loss, no matter how many items are involved. With a personal-articles floater, you can get coverage on specific items, as well as by category. The floater provides "all-risk" coverage which can apply to personal items that people usually carry when they travel. Such items include cameras, tape recorders, and golfing equipment.

It can cost a lot to insure a number of items with a floater. Instead, you could also get a special plan offering standard coverage as well as broader coverage where you need it.

Personal property is usually insured for its actual cash value at the time of damage or loss. Actual cash value equals the replacement cost minus depreciation, up to half of the amount of insurance on the structure. Say you have a policy that covers theft without a deduction. If the television set you bought 5 years ago for $450 is stolen, you'd get what you could have sold the set for, not the $450 you paid for it, or the cost to replace the set at current prices. However, if you buy "replacement-cost" coverage, the insurance company will pay what it costs to buy a new comparable TV set. Replacement-cost coverage will add from 10 percent to 15 percent to your basic premium.

More Basic Coverage

Most homeowner' policies cover damage or injury happening in the home in addition to the coverage given for real and personal property. The following are the two common extra features:

Living Expenses needed to keep a normal level of living while your home is being repaired or rebuilt are often included. The amount is a percentage--usually 10 percent percent--of the total amount of coverage on your home.

Liability Protection covers damages for which you are legally responsible and is usually provided by your homeowner's policy. The standard policy pays up to $100,000 to others if a claim is filed against you as the result of injury or damage you or a family member might have caused. The policy will also cover an accident which happens on your property. You can buy larger amounts of liability coverage for a small cost. Many experts advise buying extra liability coverage.

The liability section of your homeowner's policy pays medical expenses related to an injury to others on your property, or injury elsewhere resulting from an accident caused by you, a family member, a domestic employee, or your pet. The typical amount of basic coverage is $500, but some companies pay up to $1,000. You can buy larger amounts of coverage.

The liability section also covers any minor damage that a family member might cause to another person's property by accident. For example, damage caused by children younger than 13, whether deliberate or accidental, is usually covered. The basic coverage for minor damages is $250 per incident.

When reading your homeowner's policy, look for what is not covered. Liability protection does not cover bodily injury or property damage you might cause while doing commercial (business) activities. Commercial activity is often defined as regular business-related activities for a profit. Even part-time businesses may require extra coverage. Also, any business use of your home could affect the insurance on your dwelling and the coverage on your personal belongings. Each insurance company defines "business activities" in different ways, so check with your insurer if you run any type of business in your home.

Your county Extension office can tell you more about its home-based business programs. Ask your insurance agent for more details about insurance coverage needs for a home business.

Extra Coverage

You can buy umbrella liability insurance along with your homeowner's policy. This insurance gives you extra coverage--usually $1 million or more--over your existing insurance coverage. It may also give you coverage for some risks not insured otherwise, but umbrella liability coverage cannot replace your homeowner's policy. It starts where your current coverage stops.

Not everyone needs umbrella liability coverage. It's mostly for people who have many assets and who may be especially at risk from lawsuits and costly court judgments.

Most insurance, called HO-1 through HO-8. (See the following table.) If you own a house, you will be choosing from HO-1, HO-2, HO-3, HO-5, or HO-8.

The policy for renters is HO-4. The rental policy covers personal property, including furnishings. It also covers alterations or improvements you make at your own expense up to 10 percent of the amount of your personal property limit. The building owner usually carries insurance on the building.

HO-6 is for condominium owners. As with a renter's policy, the main coverage is for personal property. The condominium buildings and other structures are usually covered in one general policy for the condominium community.

HO-7 is written especially for mobile home owners.

HO-8, called "older home" insurance, lets owners of houses whose replacement cost would be more than their market value insure them at the lower market value rate.

Usually, the more coverage offered (the more perils covered), the higher the premiums you must pay. Rates vary with building materials and location of property, and coverage varies from company to company.

The most popular homeowners' insurance is HO-3 because it offers enough coverage at fairly low rates. The basic form (HO-1) satisfies most lenders that carry mortgage loans, but it offers less coverage.

The more expensive comprehensive form (HO-5) is sometimes called an "all-risks" policy. Don't let that term fool you into thinking you are covered against everything. Damages caused by earthquakes, floods, sewer backup, and other perils may not be covered. Check your policy carefully for the "exceptions" or limits on coverage.

Special Insurance

You can get insurance against flood and mudslide losses from the National Flood Insurance Program. Flood insurance is offered in communities that qualify by developing flood plain management or land use programs to limit flood damage on new construction.

The National Flood Insurance Program (NFIP) offers both emergency insurance and permanent insurance protection. If your community qualifies for the permanent program, single-family homes can be insured for up to $185,000, with coverage on contents up to $60,000. Premiums depend on the type of construction and location of a house. If your community doesn't take part in NFIP, even if it is designated as flood-prone, you won't qualify for the federal flood disaster assistance sometimes offered after a severe flood. To get more details about NFIP, call toll-free, 1-800-638-6620.

If you own property on the Gulf Coast, you should know about disaster insurance called "beach and windstorm protection." Beach and windstorm plans are available in seven states along the Atlantic and Gulf coasts. They are set up to deal with damage from hurricanes and other windstorms. You can get these plans from licensed insurance agents or brokers. For more information, contact the Alabama Insurance Underwriting Association, 315 E. Laurel Avenue, St. 216-D, Foley, AL 36535; telephone (334) 943-4029.

Perils Against Which Properties Are Insured Under The Various Homeowners Policies.

Basic HO-1	Broad HO-2	Special HO-3	Renter's HO-4	Compre- hensive HO-5	Condo- minium HO-6	Older Home HO-8	Perils
DP	DP	DP	P	DP	P	DP	1. Fire or lightning.
DP	DP	DP	P	DP	P	DP	2. Loss of property removed from premises endangered by fire or other perils.*
DP	DP	DP	P	DP	P	DP	3. Windstorm or hail.
DP	DP	DP	P	DP	P	DP	4. Explosion.
DP	DP	DP	P	DP	P	DP	5. Riot or civil commotion.
DP	DP	DP	P	DP	P	DP	6. Aircraft.
DP	DP	DP	P	DP	P	DP	7. Vehicles.
DP	DP	DP	P	DP	P	DP	8. Smoke.
DP	DP	DP	P	DP	P	DP	9. Vandalism and malicious mischief.
DP	DP	DP	P	DP	P	DP	10. Theft.
DP	DP	DP	P	DP	P	DP	11. Breakage of glass constituting a part of the building.
	DP	DP	P	DP	P		12. Falling objects.
	DP	DP	P	DP	P		13. Weight of ice, snow, sleet.
	DP	DP	P	DP	P		14. Collapse of building(s) or any part thereof.
	DP	DP	P	DP	P		15. Sudden and accidental tearing asunder, cracking, burning, or bulging of a steam or hot water heating system of appliances for heating water.
	DP	DP	P	DP	P		16. Accidental discharge, leakage, or overflow of water or steam from within a plumbing, heating, or air-conditioning system or domestic appliance.
	DP	DP	P	DP	P		17. Freezing of plumbing, heating, and air-conditioning systems and domestic appliances.
	DP	DP	P	DP	P		18. Sudden and accidental injury from artificially generated currents to electrical appliance, devices, fixtures, and wiring. (TV and radio tubes not included).
		D		DP			All perils except flood, earthquake, war, nuclear accident, and others specified in your policy. Check your policy for a complete listing of perils excluded.
DP--Dwelling and Personal Property, D--Dwelling only, P--Personal Property only. *Included as a peril in traditional forms of the homeowners policy; as an additional coverage in the simplified (HO-76) policies. Reprinted with permission from Hot To Protect What's Yours, by Nancy Golonka, Acropolis Books, Ltd., 2400 17th Street, N.W., Washington, D.C. 20009.

For more information, contact your county Extension office. Look in your telephone directory under your county's name to find the number.