Our homes became the center of our lives starting in 2020. As another new year begins, the Whitney Agency recommends running a full insurance review so that you know you're covered, you know what you’re buying and you are ready, no matter what 2022 might throw your way.
Natural disasters have wreaked havoc across California four years running! The cost has run to billions of dollars in damage, and many lives. The damage and losses have been doubly devastating: If your home was destroyed, you may have lost your office, your classroom, and your gym. The COVID-19 pandemic meant that about 61 million Americans stopped their daily commute, with many transitioning to working, studying, and exercising at home.
As 2022 begins, the Whitney Agency recommends running a Homeowner, Auto and Life and Business insurance review. Planning can help you determine if you're overpaying or if you need more coverage — whether it's to protect your new Peloton bike, your family, your autos, or business.
But for this article, we’ll concentrate on protection for your home.
Here are some questions you should answer to make sure you have sufficient coverage:
What type of policies do you have?
Though we often refer to "homeowners’ insurance" generically, there are different types of homeowners insurance that offer different kinds of coverage. The cost of coverage in each type is a function of your home’s valuation not including the land it sits on. Let’s get into the insurance weeds!
- An HO-1 policy only covers damage done by a peril explicitly named in the policy. Unlike the other forms of homeowners insurance, it usually does not cover any damage to your personal belongings inside your home, only damage to the structure of the home, and it usually does not include liability Your mortgage company probably won’t allow you buy this.
- An HO-2 policy only covers damage done by a peril explicitly named in the policy. It covers damage to your personal belongings inside your home, as well as the structure of your home.
- An HO-3 policy is the most common type of homeowners insurance. All damage done to the structure of your home is covered unless the damage was the result of a peril specifically excluded from your policy. By contrast, only some damage done to your personal property is covered; the peril that caused the damage must be specifically named in the policy.
- An HO-5 policy covers all damage to the structure of your home and your personal property unless the peril that caused the damage was specifically excluded from the policy.
- An HO-8 policy is intended for an older home with a replacement cost greater than the actual cash value of the home. It only provides coverage when damage results from a named peril.
Almost no one opts for HO-1 because, while inexpensive, none of your personal property is protected. The other types of homeowners insurance protect you from these risks. If you have one of these policies, use the start of 2022 as an opportunity to consider the perils that could damage your home and the levels of coverage you want to have to protect yourself and your property.
How much Homeowner coverage is enough to protect your personal property?
Most homeowner’s insurance policies cover damage to personal property. It's easy to select the same coverage levels when renewing a policy, but the reality is that many policyholders accrue more property over the years, whether it's an expensive item like a new laptop or a series of smaller items like kitchen appliances and dishware.
Most Homeowner’s policies set personal property coverage levels as a percentage of the Dwelling’s valuation. Valuation, not market value. This is an important distinction. Many homeowners get wrapped around the axle over this. Let’s try and sort it out. For example, if you are in California, and your 1,700 square foot house in a typical suburban neighborhood goes for $600,00. The cost to replace it if it burned to the slab will run somewhere around $350,000. Typical personal property coverages are from 40 to 75% of that $350,000 or $140,000 to $262,500. Do you have that much stuff that isn’t nailed down to the house?
The best way to ensure you have sufficient (or too much) personal property coverage to replace your belongings is to do a home inventory. Simply put, a home inventory is a detailed and comprehensive list of every item in your home. That might sound like a lot of work, but it's a crucial step if you want to obtain quality replacements for your destroyed items in a covered loss. For example, if a fire destroys your home and your brand-new $5,000 standing desk, your insurer must replace it. But unless you provide the exact name and model, it's possible you might wind up with a cheaper product (from IKEA, that you’ll have to build yourself!).
The Whitney Agency recommends you include the following details about every item on your list:
- Name and model of each item
- A serial number, if available. Snap a picture with your Smart Phone.
- A description of the item
- The cost of the item
- A receipt with place and date of purchase, if available. Snap a pic here, too. Receipts fade!
After completing your inventory, total the value of your property and reassess your coverage limits.
What are your policy's limits?
More time spent at home in 2020 caused many Americans to embark on renovation projects. To ensure that these additions are protected, you'll want to reassess the limits on your dwelling coverage as well.
While home insurance policies cover the structure of your home, the fine print of your policy will reveal how much you'll be reimbursed if your house is destroyed, and you need to rebuild. Policies describe their dwelling coverage limits with one of three terms, and the payout that’s implied by each term can make a huge difference to homeowners.
The three types of coverage limits
- Actual cash value (ACV): The ACV is the market value of your house, minus any depreciation. It's possible that the value of your land may have increased since you bought it, but specific elements of your house, such as the plumbing or floorboards, have aged and therefore may have depreciated in value. Because of this, the ACV likely won't cover the entire cost to rebuild your home with new materials.
- Replacement cost value (RCV): The RCV is the amount it will cost to rebuild your house at the current prices for labor and materials. A policy that covers your home's RCV will have higher premiums than one that covers only the ACV, but it could provide a substantial amount of additional reimbursement if you need to replace all or a part of your home. However, a policy that covers the RCV is still subject to limits.
- Guaranteed replacement cost (GRC)/extended replacement cost (ERC): The GRC/ERC of a home is like the RCV but with a guarantee that the insurance company will pay a certain percentage beyond your policy's limits to rebuild your home. This is relevant if a regional disaster, such as a wildfire, temporarily drives up the cost of labor and building materials. However, this is the most expensive option.
Someone with ACV coverage who loses their entire house in a wildfire would likely pay tens of thousands of dollars out of pocket to rebuild. If your current homeowner’s insurance policy doesn't cover the full cost of replacing your home, you should consider increasing your policy limits this year. While this does raise your premiums, the extra coverage could be worthwhile if your home ever suffers significant damage.
Are you happy with your homeowner’s insurance company? Your Agency? Your Agent?
You may be surprised by the rates you can find if you shop around. However, rates alone do not imply the best deals. When shopping around, look for the factors we consider when comparing insurers, which include affordable rates, the best customer service, and the highest claims process satisfaction score.
Doing a homeowners insurance checkup might not be the most enjoyable way to start the new year. But by taking the time now to reassess your coverage, you can start 2022 confident that your home is protected, no matter what the coming year may hold.