Home Insurance Policies and Regulation

Buying real estate can be an overwhelming experience. Once the ink dries on the closing documents and your stuff is moved in, you still have to get situated and make the house a home. Then there's the additional living expenses that you have to deal with, including insurance premiums.

One of the first things you'll have to decide is which type of insurance to purchase. Certain types of coverage are mandated by state law or required as a condition to getting a mortgage. Other property insurance policies may be helpful even if not required by law or mortgage contract.

This article focuses on home insurance regulation and insurance requirements as a condition for getting a loan. See Does Homeowner's Insurance Cover Natural Disasters? and Home Insurance Coverage Issues In-Depth for more information.

How Is Home Insurance Regulated?

No federal regulatory agency exists to monitor insurance companies. Instead, companies selling insurance are regulated by individual state agencies. These state regulatory groups are designed to ensure that insurance companies are viable. That means making sure the ones operating in the state have the financial ability to pay out claims.

A state regulatory agency is empowered to take action against an insurance company, with the office in each state listed here. For example, a company that fails to conduct its business in a financially sound manner may be fined. The state can even prohibit the company from doing business in the state.

Most states have laws regarding the conduct of insurance businesses. This is to ensure lawfulness and fairness to insurance applicants and policyholders. To ensure that insurance companies are compliant, state agencies can:

• Investigate complaints by consumers
• Sanction companies with unfair practices
• Review policy forms and rates charged for various types of insurance

Home Insurance as a Precondition to a Mortgage

Unlike car insurance, there is no law that requires a homeowner to have home insurance. However, banks and mortgage lenders can require it by contract. They may require that a borrower carry insurance to protect the interest of the lender until the loan is repaid.

A mortgage or deed of trust typically requires enough insurance to cover the repair or rebuilding of the house in the event it is destroyed. It may also require private mortgage insurance (PMI) to protect the lender if you stop paying your loan. Mortgages can be structured so that the lending company pays the insurance on your behalf directly. The cost is taken out of your monthly mortgage payment.

Other common homeowners insurance policies include:

• Theft and personal property coverage, also offered as renters insurance
• Flood insurance, including the National Flood Insurance Program, and earthquake insurance
• Personal liability to protect against property damage and bodily injury via medical payments

Not all of these policies are required, but combinations may be offered through package policies. A package policy expands the limits of coverage by combining different offerings. You may get combined policies for different covered perils. Examples include loss of use of your home or personal belongings as a result of vandalism, windstorms, or fire.

Depending on whether property is destroyed or made temporarily unusable, your insurance claim will vary. You may be eligible for:

• Replacement cost coverage
• Fair market value compensation by using actual cash value to account for depreciation

The insurance company may also deny your claim if your policy contains exclusions for certain events. For example, some insurance policies explicitly exclude flood damage unless it is purchased separately.

Policy Limits and Dollar Amount of Coverage

The amount of insurance you purchase will determine your insurance premium (monthly payment). Insurance rates vary, but additional coverage usually correlates with higher premiums. In the insurance underwriting process, policy limits and coverage are analyzed. That means underwriters calculate the cost of providing you with a certain amount of coverage. The cost is balanced against the risk to the insurance company, as well as the size of your deductible. Ultimately, your insurance costs will go higher as:

• The dollar amount of your policy limit increases
• The extent of your coverage for different perils increases

You might have the most generous policy and coverage in town, but make sure it remains in effect. So-called "Acts of God" come at the most unfortunate times and nonstop coverage is very important. Being late paying your bill can become a great expense when you need insurance the most. If you lose coverage due to nonrenewal or cancellation, your claim may be denied. If your insurance premium payments are on autopay, make sure to check your accounts regularly to catch any disruptions.

Insurance Problems? Call a Lawyer

An insurance agent might not always be able to address insurance issues. Insurance laws are complicated, and insurance companies are tough. They'll do everything they can to limit liability coverage. An insurance attorney can help you determine what your insurance policy covers and for what period of time. They can also explain what warranties your policy covers and whether an adjuster is being unfair or dishonest.