Homeowner’s Insurance, Dwelling Insurance, and Coverage, Oh My! For those of you who have bought a home, you are aware of the mass of papers that await you before you can close escrow. There are legal documents, government documents, vesting documents, loan documents, documents to document that you got documents….it can be VERY intimidating! One of the documents that must be submitted if you have a loan is proof of insurance. This is usually one of the very last items requested because you don’t want to pay for insurance on a home you don’t own yet! After looking at piles and piles of paper, many of which, to be honest, you didn’t read, what kind of insurance policy you need probably takes way more mental energy than you’re ready to engage! Never fear! That’s why you have me, your friendly Hometown Agent who lives for examining insurance policies for you! I’m going to break it down for you so that you can make a good decision on what will probably be the largest purchase you will ever make: your home. The reason insurance is required when you get a loan is that your mortgage company doesn’t want to be left with a pile of ashes in the event your home burns down. In a home purchase, the mortgage company initially takes on the bulk of the risk in that they have more invested in it than you. They want to make sure that they will get their money back should your home go up in flames. That being said, the mortgage company is looking out for their own interests, not yours. They just want to make sure that if the house is destroyed, they get paid. They have no real concern about your liability, your personal property, or whether or not your guests get hurt at your home. Fortunately for you, I care a great deal about that and it is my mission to make sure that you have a policy that meets your specific needs. Here is what you need to know about coverage for your home. Homes can be insured in a variety of ways. The two most common are the Homeowner’s Policy (insurance shorthand calls them “HO” policies) and the Dwelling Policy (insurance shorthand called, you guessed it, “DP” policies). To differentiate the different classes of policies, they are given numbers. You might see an HO-1 policy, but those are very rare because most savvy homeowners realized that the coverage provided under the HO-1 policy just wasn’t sufficient. Much more common is the HO-3 policy. For people who live in their homes (as possessed to owning an income property), I ALWAYS recommend an HO-3 type policy. These policies are much broader in that they provide replacement cost coverage, liability, personal property coverage, and offer a large variety of endorsements that you can pick to cover specific items or situations. It is important that you sit down with an insurance professional at some point to go over what you want to cover. On occasion, I have written a policy for someone because they needed it to close escrow before we had a chance to get together, but I always insist that we get together shortly thereafter to go over everything. As I often say, AFTER the claim is a really bad time to learn about your policy! The second way to cover a home is with a DP policy. The DP policies are based on older policy language than the HO policy and is much more limited in what can be covered. The most basic building coverage you can get is a DP-1. This policy is very bare bones, but your mortgage company will accept it for the purpose of closing escrow. Since the coverage is so limited, the premiums are usually much lower than the HO policies. The term used in the insurance world is “Named Peril.” That means that the policy specifically names what is covered by the policy. You’ll often seen fire, lightning, hail, and windstorms as covered losses, but….theft, water damage, and liability may be left off. If someone was not paying attention, they could be leaving themselves open to a devastating loss that is not covered by their policy! At the same time, there is a place for the DP policy. Many property investors purchase Dwelling policies for their investment properties because they have quite a bit of liquid assets that they use to “self-insure.” They apply some risk management techniques to calculate risk versus reward and figure out what types of risks they want to retain, and what risks they want to shift (also known as insuring them). Where the rubber often meets the road on Dwelling versus Homeowners policies is that, when someone is buying a home, keeping costs down is often very important. Every dollar counts when coming up with what type of monthly payment someone can afford. Rather than buying a home that may be a little smaller than what they want, they make the unwise choice of getting a bigger house and skimping on the insurance. I have seen people with very expensive homes being covered by DP-1 policies because they made the double mistake of buying too much house and underinsuring it. Your best bet is staying within your budget and buying a policy that will adequately cover your investment. Insuring your home improperly could have devastating consequences for years to come. Just to give you the whole gamut of insurance number combinations, you may see an HO-4 or an HO-6. The HO-4 policy is coverage for Renters. This policy provides pretty much the same coverage as an HO-3 MINUS the dwelling coverage. You can cover your liability and personal property while leaving the dwelling coverage to your landlord. Renter’s insurance is one of the best kept secrets in insurance in that it is very inexpensive, provides broad coverage, and can qualify you for discounts on your auto insurance with many companies. The HO-6 policy provides coverage for Condominium owners. Condominiums are kind of unique in that, the homeowner owns the unit, but they don’t directly own the structure they live in. In condominiums, there is a Master Policy that covers the structures, but does not cover the individual unitowners’ liability and personal property. A general rule of thumb on Condominium coverage is that, if you can see it, it’s NOT covered by the Master Policy. It’s also called “paint to paint” coverage. The individual owner usually needs to insure all of their buildouts like their sink, their bathroom commode, and possibly even the walls within the unit. For condo owners, having an experienced insurance agent is extremely important. Not all agents are familiar with the unique requirements of a condominium owner, so make sure that your agent knows his or her stuff!
I could cover quite a bit more, but I think for most people, this information will give you a framework to form the basis of an educated decision. As always, if you would like more information, please feel free to call my office at (661) 946-4224, or shoot me an email at dave@thedaveowens.com. While this information is useful for many folks, it is no substitute for sitting down with an insurance professional to look at your individual situation.
2 Comments
3/24/2016 03:11:13
Thanks Chuck. I'm hoping to create a body of insurance related articles that will be useful to real estate professionals like yourself as well as the casual insurance purchaser. If you have a topic that you would like for me to address, please feel free to shoot me an email (or drop by my office and see me!), and I will be happy to tackle any topic you would like addressed.
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AuthorDave Owens, Owner/Agent. I have proudly served in the Insurance Industry for over 20 years. Archives
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