There are many variables when it comes evaluating property insurance policies but the most important thing you need to know is that your insurance policy is only as good as the wording inside of it. Most of us are just concerned with the price of the insurance. But understand there are ways to balance price with the value received if you can drill down on the basics behind your home insurance policy.
The problem is almost no one reads their policies and for those who try it’s like reading a foreign language. Insurance can be complicated and with so many clauses, exceptions, exclusions, and things to think about, it is easy to get lost or close your eyes and pick one out of a hat. Usually, when people are upset with an insurance company, it is about not having the right information (or any information) before they actually file a claim. Insurance companies are like robots; they follow their programming, meaning they follow the letter of the words in the policy and this is why it is so important to understand what you are signing up for.
PRO-TIP: DO NOT ASK YOUR AGENT TO “SIGN ME UP FOR THE CHEAPEST POLICY YOU HAVE.” You are essentially giving the insurance company permission not to pay the full value of your damages after you file your claim.
Deciphering the Code Used by Insurance Companies
The coverages offered to you are usually outlined in three different policy forms. For example, the Homeowners Broad Form (HO-2), Homeowners Special Form (HO-3), and the Homeowners Comprehensive Form (HO-5).
These policy forms offer different levels of coverage. As a general rule the higher the HO number, the broader the coverage. The HO-2 policy offers limited coverage, the HO-3 offers intermediate coverage, but only covers specific events/perils listed (i.e. limited coverage) on the contents, whereas the HO-5 is considered the best form which covers personal property and the building for full coverage.
Bonus: Questions To Ask Before Buying Home Insurance
- How does your policy cover various forms of water damage?
- Does coverage apply if a personal item is misplaced or disappears?
- What happens if my home is underinsured? Is there a capped payout?
- What happens if after a claim the neighborhood by-laws have changed and this increases the cost of rebuilding?
- What happens if I can’t find a contractor to perform the services for the amount of money the insurance company gives me to settle the claim?
- Will my claim be subject to depreciation? If so, how do I recover depreciation? What if I can’t afford to start the repair work because of the withheld depreciation?
- Is there a waiver of deductible if the loss reaches a certain amount? Does the policy contain certain coverages that are not subject to a deductible?