“Homeowner insurance 101” OR “Do you know what is in your homeowner insurance policy?”

I have seen many Bulletin Board posts and other discussions lately that lead me to think that many people possibly do not know what is in their homeowner insurance policy.  When was the last time you actually read your policy?

[tab: Introduction]

“Long, long ago, in a land far, far away……”.  Whenever I get into a discussion with others regarding how things are today I like to use that phrase as it truly has meaning!  With the subject of homeowner insurance it has a great deal of relevance!  Insurance companies are not unlike any other business in that they are there to make money and not spend it.  That part of this discussion has always been true even “Long, long ago”.  Over the years though the insurance industry has changed significantly.  Some will say the change is for the better but in reality it has not been for the better, at least not for the consumer.

In yesteryear when you purchased your homeowner insurance you could find an insurance agent you trusted and buy from that agent, who we will call Bob.  When you sat down with Bob he would discuss your insurance needs, what coverages were important to you, and the value of your home and possessions.  With that information Bob would go to his underwriter and craft a policy as close to these requirements as the underwriter allowed and present this to you.  Bob would also sit down with you and answer any questions you had regarding the policy language.  If Bob could not answer them he would obtain any answers from the underwriter.  Later if you did have a claim you could call Bob and he would help you through the claim process and was typically your point of contact if claim problems did arise.

So what happened in the insurance industry that changed all of that?  Well more emphasis by the underwriters was placed on finding ways to make more money and yet spend even less!  A gazillion new insurance policies were offered with new coverages and deletions of old, new procedures were implemented to add roadblocks to the policy holders, new underwriters came on the scene, and Bob’s job function was drastically changed requiring that Bob be force retired into oblivion!  In short the underwriters and insurance agency created a severely convoluted industry with poor customer service that helps them spend less on claims while still making money!

You the consumer have been shortchanged significantly and much of it was a result of consumers unaware of what their own homeowner insurance policy contains!  Of course it certainly does not help that it takes either an expert, or someone with a great deal of time, to even read the myriad of policy language used that has been crafted with such care by the underwriters to ensure you don’t have a clue what it says!!  As a result the typical consumer response is just to renew their policy and plug on for another year all the while not realizing that they are well over insured, under insured, or that other underwriters are out there with better and potentially less expensive policies!

Every year I review my current policy and obtain quotes from other underwriters.  With that every year I see the changes that continually erode the value of the policy, removing coverages, increasing premium prices, etc., etc.  This is a game the underwriters play and it is costing homeowners large sums of money every year while making the insurance industry participants rich!  Every year you too should be reviewing your policy closely to make sure you obtain the maximum you can and prevent headaches down the road.  This Blog post is intended to help you do just that.

Because the subject of insurance is so vast, and so convoluted, I will not attempt to explain it all.  As a matter of fact I will only scratch the surface with some extremely important points to help you with the process.  I certainly don’t claim to be an insurance expert, or even a licensed Agent, but as a homeowner tired of being taken advantage of I do perform as much due diligence as possible each year.  Whether you are renewing your policy or are buying a new one for the first time these points will hopefully help you avoid the insurance industry money pit!

[tab: Types, Coverages, Issues]

It is unfortunate that we can no longer find many Bobs out there, but they do still exist to some extent.  Today the insurance industry has changed so much that agents really are nothing more than salespeople intended to be one more barrier between you and the underwriter.  If you don’t believe this then look at your policy for the number you are suppose to call when you have a claim.  Is it your Agent’s number?  If you make a claim will it be your Agent calling you back or some claims center and person you have never dealt with before?  Most likely not and instead it is a claims center staffed by people whose job it is to take your information and assign an insurance adjuster to your claim.  Yet if you do have general questions about your policy the company has you call your agent who may or may not return your call or obtain answers to your questions.

A very good example of the lack of Bobs and lack of customer service in the insurance industry is when your policy comes up for renewal.  The Bobs of the world knew that every year your needs might change and so too can your policy.  When it came close to your renewal Bob used to pull your file, review your policy, review any new offers the underwriter might have, then contact you.  Bob would tell you the latest and greatest, or even bad news, and discuss options with you.  Nowadays the underwriter or large corporation will generate a renewal notice and send it out in your agent’s name making it look as if your agent cared.  You will most likely never receive a call or even impersonal email from your agent at renewal time.  If you renewed your policy then your agent will receive their annual cut of the policy premium and you go on paying to much for to little coverage!

When it comes to the policy itself one of the largest traps that homeowners fall into is purchasing the wrong “type” of policy.  There are many categories of “Policy Types” so here we will only talk about the largest yet si9mplest to understand category that is a real “Gotcha”!  In this category we have two policy type called “Named Perils” (NP) and “All Risks” (AR).  With an NP policy you are only covered for the specific perils listed in the policy and even those perils typically have exclusions.  I have seen plenty of these policies to know I would never, ever, ever, pay for one!!!  Here are some of the reasons why.

  • They are very, very limited in what they will cover and because they only cover the named perils if your problem is a derivative of the actual peril they might not even cover that.
  • Many of these policies have numerous exclusions even to the perils they will cover.
  • None of those policies have yet to identify themselves in the policy document as an NP policy.  They are very well worded to display that maybe you have coverage and maybe not due to the exclusions.  In other words most, if not all, of these NP policies are truly junk!
  • I have not seen one yet where the premium price is very much different than an AR policy.

Be very careful about NP policies and think ahead at the potential coverages you might need.  The language used in the what is covered section is very broad in scope.  However the exclusions are sometimes broad in scope as well.  Whether you are covered or not for a particular peril is based on the incident that occurred and a very subjective determination by the underwriter if they will pay out on the claim.  If insurance underwriters are in the business of making money then how do you think they will interpret their own broadly worded policy?

The AR policy is worded to where the underwriter will pay for all risks (perils) with the exceptions listed.  Even though it is a better policy you must be very careful about the wording in this type policy as well.  For example I read one policy where they specifically stated that “XYZ peril is covered” and yet in the exclusions they stated “XYZ peril is not covered under the following circumstances”.  It just so happened that the circumstances they would not cover XYZ peril were all of the most common causes of the peril.  By the time they were finished wording the exception (and it had a list of exception conditions) then that particular peril would only be covered under a direct invasion of the world by aliens from outer space!  Obviously I’m being facetious about the aliens but with the remaining causes of the peril that they would cover you have a better chance of winning the lottery for $100,000,000.00 rather than being covered under the policy.

Without a doubt along with the type of policy above the other major “Gotcha” is price shopping without even obtaining a copy of the actual policy to review it.  Every insurance agent is going to provide you with an insurance quote when you ask.  What they will not provide you is a sample copy of the policy unless you ask for it.  The quote is so generic that it is almost useless unless you know what the policy actually covers.  For example here in Texas we have many foundation problems and every insurer provides insurance for foundations.  But if you obtain copies of the actual policy you will see the very wide differences in coverages and exclusions that are not on your quote page.

Another large item cost you need to be aware of is the “Reconstruction Cost” estimate that the insurance underwriters use to set your premium price.  In the event that your home is a total loss the underwriter has already calculated how much it would cost to raze the old home, haul away the debris, and then reconstruct your new home with the features you currently have.  Some time in the past decade the underwriters starting getting away from a set dollar deductible amount and started to move towards a percentage of the reconstruction cost as your deductible.  Not long ago I had a $1,000.00 deductible on wind and hail damage and my home’s reconstruction cost was fixed at a believable $180,000.00 amount.  Eventually I could not find a policy that offered the coverages I wanted without a jump to a 1% deductible.  All of a sudden my home’s reconstruction cost jumped to an unbelievable $305,000.00 according to the underwriter!!  Do the math and you can see the deductible amount difference when it was based on a 1% of reconstruction cost.  Gee whiz now who do you think is benefiting from that move?  Certainly not the consumer!!  Oh and by the way, the higher the reconstruction cost the higher your annual premium price is as well.  So you get taken advantage of with a higher deductible and get to pay for the privilege of being taken advantage of.  What a deal!

There is another revenue generator for the insurance companies and that is the amount of coverage for tangible personal property that they are providing coverage for.  Tangible personal property are the physical possessions of value such as your, kitchen and other appliances, furniture, electronics, clothing, etc.  These are the things that are not fixed to the structure and can be, and are intended to be, readily moved out if you move.  These typically do not include things such as your central heating and cooling equipment, water heaters, etc.  Most policies have a set amount with the basic policy which is typically a percentage of the reconstruction cost of the home.  Some policies have a very small amount set with the basic policy.  In either case if the value is to low based on what you feel is the value of your personal property then you can increase the coverage but at times with a hefty additional add-on charge.  Be careful about any added cost to the premium in this category and ask why and what is the basic coverage amount?  Keep in mind that if you insure your personal property for say $250,000.00 you are still going to have to prove you have $250,000.00 worth of personal property to collect that much.  So it does not benefit you one bit to over insure in this category.

In addition to the above items are a myriad of other coverages that you might have no use for and might be charged for.  Some examples are coverage for furs and jewelry, antiquities and collectibles, etc.  Even though there is no line item charge for these they are being factored into your premium price.  The higher the coverages of course the more they add to the premium.

So now that you know about the main coverages and issues how do you make sure that you buy only the insurance you need at an affordable price?  Read on for more!

[tab: What To Do]

So the first point for this lesson is to plan your renewal time.  At least 30 – 45 days before your policy is due to renew have some type of system to let you know it is coming due.  Many people don’t realize how fast that day comes and their current insurance provider knows this.  They will send you out a renewal letter on short notice, many times to late to shop for a new policy.  Obtaining quotes and reviewing all the paperwork and policies can take time.  One way to do this is using a calendar and making a note on it the date of your current policy start day and then 30 or 45 days before the policy is due.  If it extends into a new calendar year (most calendars only span the year) then at the beginning of the new year transfer any information to the new calendar including the renewal reminder.

When you’re ready to shop around make sure you speak with independent Agents as well as the big national chain insurance companies.  Many people do not realize that many independent Agents have access to some of the same policies that the big chain Agents offer.  Additionally the independent Agents shop your policy out to many other providers as well.  Since the independent Agents typically have less overhead they can also cut the policy price some as well.  But be aware that not all independent Agents shop to all of the same providers.  So when you shop your policy out for quotes go to multiple independent Agents and find out who they shop it out to so you can obtain as many of the offerings as possible.

When you request a quote from an agent make it a rule to request a copy of the policy you will be buying and save that copy until you buy your insurance.  When you buy the insurance and the underwriter sends you the policy description you need to compare it against the sample policy you were provided.  After all you did contract for what was in the sample policy and if the actual policy is negatively different then somebody needs to explain why!  I’ve already had Agents purposely send me sample policies that were outdated or wrong for the package they were quoting me.  I ask for the sample policy before the agent even provides a quote.  I will allow them to send the sample policy with the quote.  If an agent ever balks or refuses to send you a sample policy then you need to RUN FROM THAT AGENT AS FAST AS YOU CAN!  You have obviously encountered a problem, as how can you make a decision and compare policies if they won’t send you one?  Also what is that Agent trying to hide??

With regards to the policy coverages and exclusions you need to read your current and possibly new policy through and be very vigilant to crosscheck everything.  Unless you do detail oriented work as a profession the easiest way to accomplish this is to print out your current policy.  Then number the coverages and use letters for the exclusions.  As you are reading the proposed new policy then crosscheck it with your numbers and letters to see what is there and what is not.  If you don’t want to waste paper printing out the proposed new policy then use a scrap piece of paper to keep track as you read the soft copy on your screen.  If you run into a useful coverage not on your current policy make a note of it.  Humans are by far visual creatures and receive the most reinforcement from seeing rather than just reading.  If your current policy has 50 numbers (coverages) and 3 letters (exclusions) and the new one has 3 numbers and 50 letters it is obvious that is most likely a bad policy!  Don’t forget to look at the type of policy and make sure you’re not stuck with a lemon “Named Perils” policy.

While we are on the subject of coverages and exclusions I did mention before to be very careful about the coverage and exclusion language.  Many people don’t know what specific items they need covered since they have not experienced a particular situation.  Underwriters have become very adept at wording policies to sound like something is covered when it might not be.  Here in Texas are some of the peculiar issues we face and coverages you should be wary you are obtaining or know you won’t be covered for.

  • Foundation Coverage – Here in Texas we have many foundation related problems!  The underwriters know this and carefully craft their policies to exclude many or any incidents to preclude paying out.  Problems can be caused by Mother Nature in the form of droughts, heavy and continuous rains, a broken freshwater or sewage pipe (typically termed “Continuous or repeated seepage”), construction defects either in building the foundation or even properly preparing the soil, or even failure of a Post Tension cable inside the slab that causes damage.  Repairing the foundation and correcting the underlying problem is very important!  Watch the policy language that excludes these and the wording on how and when they are covered.
  • Soil subsidence damage to the foundation – This is a very important issue that needs to be specifically addressed by you as I have yet to find an insurance policy that will cover this.  Soil subsidence is when your soil shrinks, pulls away from foundations, creates voids under the foundation, etc.  This is common here in Texas with our highly expansive clay soils and has many causes.  The two main causes are a lack of soil watering around the foundation and large trees or plantings close by drawing moisture from the soil.  You need to make sure your sprinkler systems are fully functional and properly used and that large trees and other plantings are not close to the home or growing root systems near and under the home.
  • Water damage from “Continual and repeated seepage” – This one warrants repeating.  If you have a seeping faucet and it continually drips under your sink where you could have seen it, and it causes significant damage, then shame on you for not knowing and having it corrected early!  But what about repeated seepage in an area you can’t see such as under a sealed off tub, or a more common one is a leaking shower pan that is under your walk-in shower, or even a pipe in the wall that is slowly dripping and leaking?  If your policy has any language in the exclusions section that does not specifically state from what kind of continual or repeated seepage then get it in writing before you buy the policy!  Be on the lookout too for exclusions from cooling systems and water heaters located in attics.
  • Surface water damage  – Read your policy very closely with respect to this area as there will be many exclusions.  One of the major exclusions that has spread significantly since Hurricanes Katrina and Rita has been surface water damage.  Here in Texas our clay soils can only absorb approximately 1/16″ of water per hour.  As a result during the rainy season the soils around your house can easily become saturated.  At that point any further rain can easily pool, puddle, or even back-up to your house from drainage ditches nearby.  If you are in a flood zone, and are already buying flood insurance, then the flood insurance might cover this.  However a normal homeowner policy won’t.  You should be aware of if you have coverage for this and if not to make sure the potential flood conditions are corrected such as poor grading and drainage or blocked/improperly created drainage ditches, pipes, etc.

In Texas many people are not aware of a very handy tool offered by the Texas Department of Insurance (TDI).  TDI offers a link to a series of “Rate Guides” and “Comparison” tools that can help you select what policies are best for you.  These also include sample policy rates that are supposed to be the actual rates as filed by the insurance providers.  They are good guides to help you but the phrase “Caveat Emptor” (“Let the buyer beware”) is just as applicable here as anywhere else.  Just like anything else you contract for it only matters what is in writing and not what someone just tells you.  So be cautious when selecting your homeowner insurance policy and perform your due diligence.

[tab: Links and References]

PS Inspection & Property Services LLC is a full service home inspection and light commercial inspection company servicing the entire Dallas/Fort Worth metroplex.  We strive to for the satisfaction of our customers in everything we do.  Our services offerings include:

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Whole Inspections Or Inspections Customized To Your Needs

If you have an inspection need we can customize an inspection for it.  Please visit our main site at PS Inspection & Property Service LLC.

 

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