What's In Your Homeowner's Policy?

For many, our houses are one of our largest assets. Making sure you have the right amount and the right kind of insurance is vital. But as Joni Mitchell put it, many of us 'don't know what we've got till it's gone.' In this case, until our homes and/or possessions are gone, casualties of fire, hurricane, or theft. Around one-half of homeowners don't know what their policies cover. The time to figure out your coverage is before you need to file a claim, not after.

What's covered?

Typically, your house and separate structures (garage, shed, etc.) are covered for damage and loss. Most, but not all (see below), personal property is covered, including for theft.

Loss of use: You need a place to stay while your home is rebuilt or repaired, right? The typical policy is going to cover that.

What's not covered?

If you have 'Open Perils' coverage, your policy will list the causes of loss that are excluded. They typically exclude earthquake and flood. These coverages, in particular, can be picked up through riders or separate policies. If you have 'Named Perils' coverage, only those causes named are covered. All others are excluded.

On the personal property side, specific items may be excluded in addition to causes. Typically, cash money, jewelry, and firearms are limited or excluded from coverage. Professional musicians and photographers often find coverage on their instruments and equipment excluded as well. Again, riders or stand-alone policies are available to fill the gap at an extra cost.

Types of coverage

Replacement Cost Coverage: As you might guess, this pays for replacement of the damage with new construction. For example: if your 15-year old garage is destroyed by fire, replacement cost coverage pays for a brand new replacement garage. Often homeowners complain that their insurer requires coverage limits in excess of the market value of their property. This is because they've determined the cost to rebuild 'sticks-up' is more than the home is worth on the open market. Most insurers require the property to be insured to at least 80% of replacement value.

We push our clients to have Replacement Cost Coverage.

Actual Cash Value: This is replacement cost less a deduction for depreciation. To continue our example above, rather than pay for a new garage, actual cash value pays for a 15-year old garage. The problem is, you can't build a 15-year old garage so the insured has to pay the difference. The name is a little misleading: Estimated depreciated value is really what you get paid.

Functional Replacement or Market Value: Repairs are made using modern methods and materials - think drywall where the damaged wall was plaster. In the case of a total loss, only the market value of the structure (and contents if applicable) is paid out. Remember, part of your home's value is the land and that will not be paid unless it is unusable.

Stated Value: Selected by the insured, this is the maximum dollar value that will be paid by the insurer even if the loss is larger.

Even more limits on coverage

Outbuildings, detached garages, etc.: these are typically covered for 10% of the coverage on the home.

Personal belongings: usually limited to 50%-70% of the coverage on the structure. If stored off-premise, this limit typically drops to 10%

Wear and tear is not covered nor, typically, is termite damage, mold, sewer back-up, sinkholes, nuclear damage, or acts of terrorism. Trees and shrubs are usually covered, though not for disease or wind damage. They are usually capped at a low dollar amount.


If you have your emergency fund in place, you should raise your deductible as high as you can within the limits of your emergency fund. Insurance works best when it's used for infrequent, catastrophic events - not small, frequent losses. This is for two reasons:
  1.  Cost. Insurers are in the business to make money. Even mutual insurers have overhead and risk margins to worry about. Higher deductibles mean lower premiums.
  2. Use it and lose it. Some insurers refuse to renew customers who file too many (or any) small claims and the black mark against you may make it hard to get coverage from other carriers as well. Even if you do renew, you may find your rates have risen substantially. Unfair? Yes, but rather than pay for coverage you're afraid to use, raise your deductible and save your claims for when they really count.
Read your policy

I've used a lot of weasel-words like 'typically' and 'usually' in here, but the only way to know for sure is to read your policy. The last thing you want after a disaster is to add insult to injury and find out you're not covered.

(For free online home inventory software, visit www.knowyourstuff.org)

Compton Advisors, LLC is a Registered Investment Adviser (RIA) firm regulated by the Securities Division of the Missouri Secretary of State office. Compton Advisors, LLC does not render personalized financial, investment, legal, or tax advice through this blog. This information is for informational purposes only and does not constitute financial, investment, legal, or tax advice. This information has not been approved or verified by any governmental authority.