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How To Understand Your Home Insurance Coverage

There are many options for procuring home insurance coverage. You can often find a coverage policy that meets your needs or the requirements of your lender during the home-buying process. One of the downsides, however, is that having so many unique policies can be confusing. Choosing the best policy for your situation is a challenge, even more so when you're trying to figure out what homeowners insurance covers.

Before you decide on a policy or group of policies for your home, you may want to consider some of the more in-depth issues focused on real estate dwelling coverage. This will help you determine whether you need additional coverage, property insurance, and coverage limits. Moreover, you'll have a better grasp of factors that can affect your insurance premiums, payouts, and levels of coverage.

Things That Can Limit or Deny Coverage

Limitations and exclusions can alter the provisions of coverage in an insurance policy. A limitation is an exception to the general scope of coverage and is applicable only under certain circumstances or for a specified period. An exclusion is a broader exception. It often rules out coverage for such things as intentional acts. It can affect whether the policy covers damages due to negligent acts. If an exclusion or limitation applies, your home insurance claim may be denied.

Some examples of exclusions and limitations include:

  • Violations of law: You were breaking the law when the accident occurred
  • Willful misconduct: You purposefully broke the item for which you're filing a loss of use claim
  • Uncovered events: Your standard policy might not cover damage from natural disasters, bodily injury, or vandalism. You might need to look into the National Flood Insurance Program, Earthquake Coverage, Renters Insurance, and so on. Insurance products like earthquake insurance are often separate and distinct from standard homeowners insurance.

Your policy limits are not just guided by a set dollar figure, but also by the type of occurrence. Property damage arising from personal property coverage might not extend to special items like antiques or collectibles. The insurance company might not extend replacement cost coverage for property lost after water damage in a windstorm. Therefore, it's important to verify the list of covered losses with your insurance company so you can properly secure:

  • Your personal belongings and additional living expenses after an accident
  • The extent of your personal liability to others
  • The amount of coverage you need

How Insurance Companies Determine Eligibility and Rates

State insurance laws dictate the manner in which insurance companies may conduct:

  • Marketing
  • Underwriting, which determines which policyholders or risks to accept or reject for coverage
  • Rate activities

Insurance underwriting decisions must be based on reasons that are related in some way to the risk that is to be insured. For example, home insurance companies might reject an applicant based on risks that come with:

  • The location of the property
  • The applicant's financial standing
  • The type of coverage sought

You may have trouble insuring your property if insurance companies consider you or your property to be high risk. In these situations, your state may offer a "Fair Plan" or Fair Access to Insurance Requirements (FAIR Program). To learn more about the programs available in your state, you should consult with your state's respective insurance department or division.

Cancellation or Discontinuation of Your Coverage

Some states also have laws limiting an insurance company's ability to cancel or discontinue coverage once a policy has been issued. Suppose a company representative gives you an insurance quote and then fails to honor it. If an insurance agent deceived you or otherwise misrepresented facts about an insurance product, you may have recourse under the laws of your state. In all U.S. states, it is illegal to refuse insurance on the basis of:

  • Race
  • Color
  • Sex
  • Religion
  • National origin
  • Ancestry

In many states, this list is expanded to include:

  • Marital status
  • Age
  • Occupation
  • Language
  • Sexual orientation
  • Physical or mental impairment
  • Geographic area in which you reside

If you are refused liability coverage, you have a legal right to be informed by the company of the reasons for their refusal. If an insurance company refuses to compensate you for a reasonable claim, the company may be acting in bad faith. As an insured (covered) policyholder, this may give you grounds for legal action.

How Companies Set Insurance Costs (Rating Factors)

Your monthly insurance bill is known as the premium. Insurance companies determine the premium of a policy based on circumstances known as rating factors. These rating factors must be reasonably related to the risk being insured. The insurance rates and rating factors must be filed with the state insurance regulatory agency for each state where the insurance is to be sold. In certain states, the rates must get regulatory approval before they can be used.

Examples of rating factors include:

  • The type of your home, including construction materials and square footage
  • Safety measures such as security cameras, anti-theft devices, and alarms
  • The age of your roof, plumbing, and electrical conduits

Out-of-Pocket Costs for Coverage

A deductible is a payment for which you are responsible before insurance will help. Even with the best coverage options, you may be responsible for paying a deductible. Often, a lower monthly premium might mean you have a higher deductible. In other words, if your insurance bill is lower than what you expect, the insurance company can still have the last laugh. You can get stung down the line through out-of-pocket costs that must be fronted before an insurance payout will kick in.

For example, suppose a tree landed on your detached garage. The roof was damaged, and the insurance adjuster estimates that it will cost at least $50,000 to remediate the structure. Assuming that the detached garage is even covered by your policy, you might still not get the entire $50,000 you need to fix it. Your policy might have a $5,000 deductible, or perhaps something even higher than that. That means you'll end up with a $45,000 check even though you suffered $50,000 in damages.  

It's important to review your insurance policy to get a better understanding of your deductibles and out-of-pocket costs in advance of any disaster.

Can the Insurance Company Cancel My Policy?

State laws limit items an insurance company can include in the cancellation provisions of its policies. In general, once a policy is issued, it can be canceled only for:

  • Your failure to make premium payments
  • Misrepresentation or fraud by the policyholder (you, the insured)
  • Violations of your policyholder's agreement with the insurance company

Most property and liability policies are issued for a stated policy term. The limitation on cancellation applies only during the policy term. Insurance companies can decide to discontinue or not renew these policies at the end of the term for any reason that is not prohibited by law. In most states, an insurance company is required to provide the policyholder with written notice if it intends not to renew a renter's or homeowner's policy.

Required Notice Before Policy Cancellation

A policyholder may cancel a homeowners insurance policy at any time by giving notice to the insurance company. Some clauses include financial penalties for early cancellation by the policyholder. Most personal property and liability policies require what is known as a short-rate penalty. When a policyholder requests a cancellation, the insurance company retains a larger, disproportionate amount of the premium.

A cancellation notice must be sent to the policyholder several days prior to the effective date of cancellation. For example, many state laws often require at least 10 days advance written notice, with a reinstatement period. Once the time period has expired, reinstatement after termination of coverage is discretionary by the insurance company.

Need More Help? Legal Assistance Is Available

Navigating the headaches of home insurance policies can be challenging. If you find yourself in a situation where you think you may need help, you may want to consider seeking out the services of an experienced real estate professional who can offer you guidance as you move through the insurance process. An insurance attorney might be able to help you with problems pertaining to your policy.

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