What Does A Typical Insurance Policy Cover?
Many people don’t understand what’s in your homeowner’s insurance policy, and you may not have coverage for certain items. Let’s evaluate a typical homeowners insurance policy and the four primary coverages they provide (Coverages A-D):
- Coverage A – Dwelling/Structures
- Coverage B – Other Structures (usually 10% of A)
- Coverage C – Personal Property Coverage (contents)
- Coverage D – Loss of Use
We often mistakenly think the mere fact that our property is insured guarantees extensive protection against all or almost all the risks. But in the event our home is damaged or destroyed, you will find that the insured’s coverage is not enough even to make up for the greater part of the expenses associated with rebuilding or repairing the dwelling, or the personal property.
The Coverage A section of the Homeowners Insurance, known as Dwelling Coverage, offers protection against direct physical damage caused to the dwelling, including rooms, fireplaces, carpeting, tile floors and elements of decor. Structures, which are attached to the insured dwelling on the same foundation, such as a garage, are also liable to coverage under this section of the Homeowners Insurance policy. This section of your policy also covers materials and supplies necessary to rebuild or repair the home.
It should be noted that structures which are part of the property but are not attached to the house are usually liable to the Coverage B section of a Homeowners policy, entitled Other Structures, which is typically limited to 10% of the Dwelling Coverage amount. Among the structures which are covered under Coverage B are detached garages, gazebos, patios, swimming pools, storage sheds, barns, guest houses, sidewalks, driveways, fences, etc. The risks against which insureds are protected with Coverage A and Coverage B are basically the same, but the conditions are different.
“Covered Perils.” Dwelling Coverage provides protection against such risks as fire and lightning, explosions, windstorms, hail, snow, damage from smoke, in some states – tornadoes and hurricanes, vandalism, freezing of plumbing and overflow from the plumbing, damage from vehicles, falling objects and, possibly, other damages stipulated in the policy.
The part describing the risks that Dwelling Coverage embraces are similar from policy to policy, but there may be variations concerning the perils covered. For example, in the states (like here in Florida) where the risk of a hurricane is higher, protection against this peril will be available only by endorsement.
You also need to determine what occasions and perils are excluded from it. Coverage A usually does not apply to exterior walls which do not support the roof of the house, fences and the piece of land on which the house is located.
Dwelling Coverage typically does not cover damage resulting from floods, earthquakes, or any type of earth movement. Neither does it cover damage resulting from war or nuclear hazard.
All the limits of coverage and optional coverage types are stated on the Declaration Page.
There are extra policies extending the coverage – such as an optional coverage for perils is purchased as a supplement to a Homeowners policy. For example, the extended replacement cost coverage to the policy will provide the insured with coverage above the usual dwelling coverage limits stated on the Declaration Page.
On another note, it is important to know at least the basics of how the Dwelling Coverage works. The insurance contract does not only specify the coverage available under “dwelling,” but it also reflects a dollar amount the insured will be paid in the event of a loss to the home. Ideally, the limit amount of Dwelling Coverage should compensate for the cost necessary to rebuild or repair the dwelling in the event of a loss, which leads us to one more factor important for Dwelling Coverage. It is whether coverage is designed for replacement value (RCV = Replacement Cost Value) or for cash value (ACV =- Actual Cash Value).
The principle difference lies in the fact that if coverage is for replacement value, the insurance company reimburses the replacement cost of the home – as contrasted with actual cash value the company will pay only the actual market value of the home. To illustrate this difference with figures, if the home, evaluated as worth $300,000, is destroyed and it costs $400,000 to rebuild it, the insured gets $400,000 with a replacement value policy, but only $300,000 with an actual cash value policy.
A dwelling policy can take various forms such as a 1) basic form, 2) broad form and 3) special form. The main differences underlying these forms are the perils covered.
The basic form is essentially a very limited policy, covering only such major events as fire, lightning and internal explosion. All the other perils and typical benefits, including additional living expense coverage, can be added to this policy form by endorsement.
The broad form includes all the benefits offered under a basic form contract as well as additional living expense and the perils which are optional under a basic form (for example, accidental discharge or overflow of water or steam, freezing, damage by burglars, etc.).
The special form is like the broad form, but the former insures the dwelling and other structures against whatever perils (i.e. on an open-perils basis), and also covers personal property on the premises.
Other Structures or Coverage B applies to the other structures that are on the property, yet not attached to the primary dwelling. Other Structures may be any of the following: Detached Garage, Barn, Fences, Guest House, Pool House, Shed, etc.
Replacement Cost Calculation
A fair method to calculate Other Structures coverage for the policy would be to estimate how much it would cost to build a home per square foot and multiply that number by the amount of square feet of the Guest House or Garage. Construction costs may vary by locality and can change from as low as $100 to upwards of $500 per square foot for just a common construction grade home. This also is dependent on locality. Reconstruction costs in Manhattan, New York are going to be significantly higher than in Sioux City, Iowa.
Extended or Guaranteed Replacement
Other Structures or Coverage B generally does not carry an Extended or Guaranteed Replacement Clause. If there are structures that are not common to an average single-family dwelling, then an additional amount needs to be extended to the limit of Coverage B.
By default, the Coverage B Other Structures Limit is 10% of Coverage A amount.
For example, if the Coverage A amount is $400,000. The Coverage B would be $40,000. Coverage B can be increased at request by the insurance Agent per request or determination that an additional amount is needed. Coverage B is never lower than 10% of Coverage A.
If there are significant upgrades to other structures or have an additional guest house, detached garage, barns or other structures on the property, you really want to see if the insured properly added additional coverage on to Coverage B.
This is coverage for the personal property in the home.
Personal Property Coverage insures the contents of the home (items regularly used which are not a permanent part of the home structure, such as furniture, television sets, bikes, clothing, appliances, utensils and tools).
Personal Property Coverage can be used in appliance to valuable information saved in a hard-copy form or as electronic data. It can even protect against the credit card fraud, or at least minimize the risk.
With Personal Property Coverage, the insured is allowed to extend the coverage to the property used off the premises for a percentage of the fixed Coverage C limit (usually additional 10%).
This type of coverage can pay either the actual cash value of the property or the replacement cost of belongings. Personal Property Coverage is normally issued on an actual cash value basis at the time of loss. Though, experts usually recommend insuring property on a replacement cost basis, because if the item was bought several years ago, its current value may be considerably less than the total cost of replacement.
Coverage C is generally considered to be one of the most complicated coverage types because of many specific details concerning what is and what is not insured under a particular policy.
Remember to look for special endorsements that compensate for the limitations in the coverage.
On average, the limits set by Coverage C vary within the range of 50% to 70% of the Dwelling Coverage amount. There are certain types of possessions which are typically excluded from Personal Property Coverage or are subject to a limited coverage.
Every Personal Property Coverage sets some limits to the classes of property liable for financial reimbursement in the event of a covered loss for the insurer to be able to carry out its financial obligations to the client. Such items as jewelry, gold, silverware, furs, fine arts, collections and coins, antiques, securities etc., can be covered under the contract, though they typically have limits of coverage. However, when it comes to business property, recreational vehicles, trailers etc., there are considerable variations in the contracts of this type.
The remarkable feature of Loss of Use Coverage is that it reimburses the insured for additional living expenses (“ALE”), while the insured is living away from the home because it is unfit for living due to a covered reason of loss. This type of coverage applies only when the home is uninhabitable. If the condition of the home is questionable (i.e., allows objections as to its being unfit for living), it can trigger reluctance to reimburse for living expenses.
“Additional Living Expenses” (A.L.E.) are defined as any necessary expenses the insured incurs due to a covered loss so that the household can maintain the habitual standard of living. Additional living expenses usually include hotel and restaurant bills. Transportation expenses can also be included in the scope of Loss of Use Coverage. Besides, Loss of Use Coverage comes into effect if the insured is forced to leave the home due to the fire threat or any other threat coming from an adjoining dwelling. Generally, the insured must provide evidence of the imminent danger.
Loss of Use Coverage has its limitations – usually being restricted to 20% of Dwelling Coverage. Some policies provide Loss of Use Coverage only over a given time-period.
What is Ordinance or Law Insurance?
Ordinance or law insurance covers the costs associated with having to demolish and rebuild to code when the home/structure has been partially destroyed. For example, there are Code requirements that mandate replacement of the entire roof if more than 25% is damaged. Property insurance covers only the replacement value, not the upgrade, which is why this coverage is important to locate.
What is Debris Removal Insurance?
Debris removal insurance covers the cost of removing debris after a fire, flood, windstorm, etc. For example, a fire burns the building to the ground. Before rebuilding, the remains of the old building must be removed. Property insurance will cover the costs of rebuilding, but not for removing the debris.
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