When Disaster Strikes Does Your Homeowners Policy Have Your Back?

One of the big lessons of last year’s major hurricanes and current California wildfires is in many instances; homeowners couldn’t fully repair their damaged homes with insurance proceeds because they didn’t understand until too late what their policies did and didn’t cover. And in general, over the past couple of decades, insurers have made it tougher on consumers. Increasingly, they have made home policies less generous and more complicated, shifting risks and costs off their books and onto policyholders. As insurance rates go up, people will go without, and that’s not acceptable.

A perfect example is Earthquake insurance. Your standard homeowners insurance policy doesn’t cover earthquake damage and destruction. That’s because the standard homeowners policies sold these days are a variation of a standard form called the HO-3. The more recent versions of the HO-3 have very limited coverage for household water damage leaks and pipes and expressly exclude coverage for a flood event and any type of earth movement,like what happens during an earthquake.That’s assuming you’re able to obtain earthquake coverage at all. According to the Actuarial Foundation’s and the Federal Alliance for Safe Homes’ “If Disaster Strikes, Will You Be Covered?” report, “the closer a home is to a fault line, or sits on soil types with greater exposure to loss in an earthquake, the more limited insurance options may be because of the extreme risk of earthquake loss.”If you are able to obtain it, though, you’ll likely be required to prove that your home has been bolted to its foundation before an insurer will extend this sort of endorsement or coverage to you—a renovation that can cost as much as $6,000 depending on where you live as well as the size and style of your home. You also may have to agree to a property inspection or show that you’ve properly secured certain fixtures, like hot-water heaters, using strapping guards.

A major question to consider is, with all these natural disasters dominating the headlines, will this drive up home insurance rates for everyone in 2018? You would assume so. The insurance market is already overdue for an upward correction. So for most of us, it’s a good bet that home insurance rates will rise somewhat, but not enough to give you a heart attack.Homeowners in some, but not all, high-risk areas could face big increases or even problems getting insured at all.Along with — and because of — the recent disasters, there’s growing concern about what climate change may bring, which may soon put more upward pressure on rates.

Understanding what is and is not covered by your homeowners insurance policy can be daunting. If you’re like most, your policy is in an envelope somewhere, and you probably haven’t referred back to it for a while (maybe even since buying your home). Well, find that envelope! Because in addition to understanding just where you’re protected, you may be able to make some simple changes that can save you money.

Homeowners insurance is no place to skimp, but we’ve found eight smart ways for you to save:

1. Wildfire damage is covered by standard home insurance, too. The key here is to make sure that your particular policy provides you with enough coverage. Review your policy to see if it’ll allow you to rebuild your home from the ground up, should the need arise. Also, your insurance company may require you to make a few changes to the exterior of your house and the property that surrounds it if they’re located in an area that’s especially vulnerable to wildfire.

2. Hazard insurance on a standard homeowners insurance policy covers many natural disasters, like tornadoes or hurricanes. Other natural disasters, including floods, mudslides, and landslides, aren’t covered by most homeowners insurance companies. That’s why you should always refer to your policy documents for information about coverages under your particular policy.Hurricane Harvey showed last year that flooding could damage properties outside the highest-risk zones and leave empty-handed homeowners who aren’t required to buy flood insurance. People with federally backed home mortgages must purchase the coverage if they are in a designated high-risk flood area. The government policies provide up to $250,000 for rebuilding and $100,000 for contents for roughly $600-a-year policy. Consumers typically have a 30-day waiting period after purchase before the government policies take effect. A small number of private-sector insurers also provide the coverage, typically for amounts that kick in above the federal policy limits. Just make sure your policy doesn’t include an “anti-concurrent cause.” This type of clause limit(s) coverage when multiple perils combine to cause loss or damage. Wind and water is a good example.

3. For affluent families, you should consider a flood policy for the peace of mind, even if not required under terms of a mortgage. During Hurricane Harvey’s aftermath, the U.S. Army Corps of Engineers released reservoir water that caused additional flooding in areas not initially affected.

4. Check your policy limits. The maximum payout in a standard home policy may be insufficient to rebuild and replace contents. Homeowners often fail to increase policy limits if they upgrade their homes. In the past 10 years, about 10% of residential properties nationwide had remodels worth more than $25,000, according to data provider BuildFax. Homeowners also can find that their policy limits are inadequate when everyone in a disaster-hit area seeks building materials and contractors’ services simultaneously, driving up costs.

5. Homeowners also need to be aware of another pitfall: Insurers sometimes provide “actual cash-value coverage,” which takes depreciation into account, rather than replacement-cost coverage. Actual cash value could fall short of covering replacement, leaving the policyholder to foot more of the bill.

6. Make a list. Homeowners should inventory possessions and store the list outside the home. People with expensive items like jewelry can get specialized coverage.After wildfires in California last year, the state insurance department asked insurers to immediately pay policyholders for living expenses and a portion of personal contents, without requiring a very time-consuming inventory when someone had just lost everything. Many insurers agreed to waive the inventory requirement partially.

7. When you renew, scour the fine print. Especially if you’re in a recently affected area. Insurers have been known to quietly change the terms, moving more risk to the homeowner rather than raising the premium. Apparently, they hope you won’t notice. Don’t be afraid to shop around. Different insurers calculate risks in different ways, so another company’s formula might come out in favor of a lower rate. Plus, some companies offer new customers attractive rates, while loyal customers find their rates creeping up. (What the heck?!) They’re counting on you not to shop around. Just make sure you’re comparing the same coverage and the same replacement value. I tell all my clients that you can always save money on insurance, but you won’t necessarily have enough coverage.Many companies offer discounts if you take certain steps to prevent damage to your home — steps that you should consider anyway. For example, installing hurricane shutters or fire-resistant roofing, or participating in a Firewise community program.

For many people, their home is their greatest asset, so it is crucial to avoid being underinsured. To properly insure your home, it is important to ask your insurance professional three key questions: Do I have enough insurance to rebuild my home and replace all my possessions? Do I have enough coverage for additional living expenses?Do I have enough insurance to protect my assets?

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