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Home insurance is a "package" policy that generally covers not only your house itself (and any detached structures like garages and sheds), but also its contents, whether they're in the house or temporarily away from it. That means, if your state-of-the-art dvd and big screen monitor are stolen while you're in the chalet sipping hot chocolate, they're covered, but only up to the dollar limit specified in your policy. Or perhaps a thief nabs your luggage during your Florida vacation. Again, your property insurance kicks in. If someone breaks into your car and steals your expensive camera, it would be your home insurance -- not your automobile insurance -- that would cover the loss.

It also gives you legal protection if someone gets injured on your property and sues you, or if you accidentally injure someone or cause damage to a person's property. Let's say your neighbor trips on the loose board on your step, breaks her leg, and decides to sue you for damages. Or you go careening down a ski slope, accidentally slamming into a bystander and injuring him. In both cases, your liability insurance would come to your rescue, to cover not only any damages that you are ordered to pay, but also the legal fees to defend you in court.

If you're planning to buy a home, you won't be able to borrow money for your mortgage unless the lending institution knows you have home insurance to cover the property in case of a big loss, like a fire. Click here to get a free home insurance quote.  

Homeowners Insurance Resource Center

How Much Insurance do You Need?
Evaluating Your Home and Personal Property

Calculate how much it will cost to replace your home if it were totally destroyed. Your agent can help in determining this figure. In fact, most insurance companies make a physical inspection of your home when they first insure it. Using formulas that take into account whether your home construction, total area, number of rooms, etc., the company calculates your replacement cost.

Next, determine the value of your personal property. To properly make a determination, you must list every piece of furniture and fixture within your home. Some insurance companies provide household inventory schedules to help you.

As you compile your inventory you should supplement it with receipts indicating the purchase price and date of purchase and photographs of major items. Your inventory should be updated on an annual basis, or at the very least, whenever you purchase a large appliance or piece of furniture.

Some people periodically videotape all their possessions. If you videotape, make sure all the drawers and/or doors of your furniture are open so you have a record of what is stored. You may also want to verbally describe major items. Store the videotape in a safe place away from your home.

Actual Cash Value or Replacement Cost?

Now you must decide whether to purchase coverage on an actual cash value or replacement cost basis.

Replacement Cost Basis: Your insurance company determines the amount payable to you as a result of a covered loss by calculating the full cost of a replacement. If your sofa is five years old and is destroyed in a fire, a replacement policy would cover you for the full value of a new sofa that is of a like kind and quality.

Actual Cash Value Basis: Your insurance company determines any amount payable to you as a result of a covered loss by taking the current replacement cost of the contents and subtracting an amount for wear and tear and/or depreciation.

Generally, if you purchase coverage on a replacement cost basis and insure your home for at least 80% of its replacement cost, your insurance will automatically be issued on a replacement cost basis. Then, when you suffer a loss, your insurer would pay you the amount it would cost to replace or repair your home without deducting anything for depreciation. Of course, this type of coverage is more expensive than actual cash value coverage.

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If you do not insure your home for at least 80% of its replacement cost, you will not receive full payment for any loss!

Example

• Ms. Jones and Mr. Smith both own 15-year-old frame houses.
• The estimated replacement cost of each house is $100,000.
• Ms. Jones is insured for $80,000 (80%).
• Mr. Smith is insured for $50,000 (50%).
• Both homes suffer windstorm damage.
• Both roofs are destroyed.
• The cost to repair each roof is $5,000.
• Ms. Jones will be fully covered for her loss, less any deductible.
• Mr. Smith is only entitled to the greater of the actual cash value of the roof OR
• the proportion of the cost to repair the roof which the total amount of insurance bears to 80% of the replacement cost of the building.

The 15-year-old roofs are both expected useful life of 25 years. The actual cash value of each roof is only $2,000, computed as follows:

However the proportional cost of repairing the roof would be computed as follows:

After calculating these two formulas, Mr. Smith’s insurer would pay him $3,125 because $3,125 is greater than $2,000. Ms. Jones's insurer would pay $5,000. Both policies would be subject to deductibles.

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The replacement cost of your home is estimated when you take out a homeowners policy. In most cases, insurance company representatives will inspect your home and use formulas that take into account your house’s construction, size, quality, and location to approximate its current replacement cost. Insurers typically require periodic updates of the replacement cost of your home.

Coverage for contents is generally issued on an actual cash basis in homeowners and tenants policies. This means that you probably will not receive the full amount needed to replace or repair the property that has been damaged or stolen. However, some insurance companies will sell you an endorsement that provides replacement cost coverage for the contents of your home. Replacement cost coverage usually costs an additional 10% - 15% of your premium.

You should also be aware that the contents of your home (i.e., personal property) is usually covered for 50% of the amount for which the home is insured (see table below).

Maintaining Adequate Insurance

Remember if you fail to insure your home for at least 80% of its replacement value, your claim will not be settled on a replacement cost basis. Therefore, it is important to review your homeowners policy periodically to determine whether you are carrying enough insurance to be fully covered.

The addition of a room, or other substantial home improvements, will also increase the replacement cost of your home, and you should adjust your coverage accordingly.

The replacement cost of your home generally increases each year due to inflation. To anticipate inflationary increases, most insurance companies offer policies that automatically increase the amount of insurance periodically. If you do not have such protection, you should be reviewing you policy each year to make sure your coverage is keeping pace with inflation.

Additional Property/Liability Coverages

The amount of coverage available for personal property loses and other losses is generally a percentage of the amount for which the dwelling is insured. The following shows this relationship for the most widely used policy form, the Homeowners-3. Using a residence insured for $200,000, the following amounts and percentages generally apply:

In the following table, Column One is Coverage, Column Two is Amount and Column Three is Percentage of Residence Limit.

In addition to these limits on general categories of property, there are further limitations for specific types of property. Here are some examples of typical limitations:

$200 - On money, bank notes, bullion, gold & silver;

$1,000

On securities, accounts, deeds, letters of credit, etc.;

$1,000

On watercraft (including trailers);

$1,000 - On trailers not used with watercraft;

$1,000 - For loss by theft of jewelry, watches, furs, and precious and semi-precious stones;

$2.500 - For loss by theft of silverware, silverplated ware, goldware, goldplated ware and pewterware;

$2,000 - For loss by theft of guns;

$2,500 - On property on the residence premises used at any time or in any manner for any business purpose;

$250 - On property away from the residence used at any time or in any manner for any business purpose;

$1,000 - For loss to electronic apparatus (antennas, tapes, wires, discs, etc.) in or on a motor vehicle.

These special limits are not in addition to the total limit available for a personal property loss but part of that limit. Therefore, if you have expensive jewelry, furs, cameras, or a coin, stamp, or sports card collection, you should consider insuring them separately by endorsement with a higher limit of coverage or by purchasing a separate policy, called a personal articles floater.

Is My Computer Covered?

Home computers used for personal use are subject to the limit available for personal property (e.g., $100,000 on a $200,000 insured home). However, if they are used for business, the company will only pay up to $2,500, as shown previously. If you feel that you need higher limits for your business computer, you should contact your company, agent or broker to see if higher limits are available through the purchase of an additional endorsement or a separate policy.

If you do not purchase higher limits and use a laptop computer for business purposes, you should be aware that if it is lost or stolen, the location of the loss determines the coverage available. If the loss occurs at home, the coverage limit is $2,500, while if the loss occurs away from home it is only covered for $250.

Limits on Liability Coverages

The limits for personal liability and medical payments are not offered as a percentage of the residence limit and the medical payments limit is included within the personal liability limit. Generally, personal liability limits of $100,000 per occurrence and medical payments limits of $1,000 per person are sold to the public. Higher limits of liability for these two coverages can also be purchased.

Workers’ Compensation Insurance

In 1985, the Insurance Law was amended to require that any policy that provides personal injury liability and is issued for a one-to-four family, owner occupied dwelling or condominium apartment also provide workers’ compensation to any employee working less than 40 hours per week, in or about the residence. It should be noted, however, that certain classes of employees are exempt from coverage under the New York State Workers’ Compensation Law.

Home Day Care Coverage

There is limited liability coverage under your homeowner’s policy for day care activities. Ordinarily coverage is provided if you take care of one or two children for a mutual exchange of services. This means that if you take care of a friend’s children in exchange for their day care services for your children, with no exchange of money, liability coverage will be provided under your policy. If you provide day care services in exchange for money, it is considered a business enterprise and you must purchase additional coverage.

Y2K Coverage

As the year 2000 approaches, it is important to review your policy and determine whether your policy contains a Y2K exclusion. If a loss occurs on January 1, 2000 and your policy contains this exclusion not everything will be covered. For instance, if your security system fails on January 1, 2000 and a theft occurs, damage to the security system will not be covered but the theft will. If your policy contains a Y2K exclusion, contact your agent, broker or company for a more complete explanation of what coverage is available to you in the event of a Y2K loss. It is also possible that the company may have a "buy back" option for this type of coverage if you feel you should have it. This means you can purchase the coverage for an additional premium.

Miscellaneous Coverages

• Your homeowners policies will reimburse you for increases in living expenses you have to pay when your home becomes uninhabitable because of damage caused by one of the covered perils.

• Not all living expenses will be reimbursed, only the difference between your normal living expenses and any additional living expenses. Examples of these types of expenses are hotel bills, restaurant bills, telephone bills, etc.

• Generally, you are covered should your pet bite someone. Dangerous animals, such as pit bulls and snakes, may be excluded from coverage. Coverage for these pets is generally available through an endorsement.

If someone is injured at your home, your insurer will reimburse you for immediate necessary medical expenses, generally up to a limit of $500 or $1,000. Examples of the types of expenses that would be paid are transportation to a hospital or doctor’s office or a doctor’s bill for necessary first aid. You should check your policy for specific details about this coverage.

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