How to Evaluate a Homeowners Insurance Policy

Most of us meet with our insurance agents to purchase homeowners insurance, pay the premium and then toss the policy and other paperwork we receive in the mail into a file folder or drawer somewhere without looking at them again. In reality, a prudent person should at least skim the policy and other materials to be sure you know what is covered under your policy--and more importantly what is not and what the limits of your coverage are. You should also evaluate your homeowners insurance policy at least annually to be sure your coverage is keeping up with any changes in your home, family or lifestyle. Here's what to look at.

Difficulty: Moderately Challenging

Instructions

1. Pull out your homeowners insurance policy and any supporting paperwork you received from the insurance company, especially any riders or exclusion disclaimers. If this information is scattered and disorganized, correct that problem now. All of your insurance paperwork should be kept in one file folder in a safe place, preferably a fireproof safe or a safe deposit box. If you cannot find your paperwork, contact your insurance agent or company to request new copies.

2. Review the most recent appraisal on your home and property to find the fair market value of your home. If you have made any significant (not just cosmetic like painting) improvements to your home since it was last appraised or valued, consider the value those improvements may make in the property value. Add those two figures together. Make a note of this figure. Consider this your home's "appraised plus value."

3. Look at your appraisal to determine the square footage of your home. Find the telephone numbers of local home builders in your telephone directory and make a few calls to inquire what each contractor charges per square foot to build the type of home that is most similar to yours. You may get several different answers from various contractors, so take an average of the figures you get. Multiply that average by the square footage of your home to come up with an estimated cost of rebuilding your home if your home were destroyed. Take note of that figure. Call this the base rebuilding cost.

4. Scrutinize the inventory (list) of your home's contents. If you do not have an inventory of your personal property, furnishings, tools and all the other items in your home, take one now. This is crucial information to have if you ever have to replace all of your possessions and you want to get paid for their actual value. Place values next to each item on your list. Total the values and call this your "personal property value."

5. Study your homeowners insurance policy paperwork. You should have a declarations page and an actual policy that will be divided into several common sections: an insuring agreement (contract language establishing the contract between you and the insurance agency to provide the agreed upon coverage), definitions (specific language that clarifies terms used in the policy), property coverages, supplementary coverages, a list of the perils your property is insured against and a list of those perils that are excluded from coverage along with certain specific conditions pertaining to your policy, liability coverage (including supplementary coverage, exclusions, and conditions applicable to that section), general conditions that apply to th entire policy and a list of additional coverages available at extra cost.

6. Examine your declarations page to determine the dollar limit of your policy's coverage for your home, often referred to as the dwelling. Compare that figure with the "appraised plus value" you arrived at earlier. Then compare that figure with the "base rebuilding cost." That amount is the minimum amount you can expect it will cost to replace your entire home if it were destroyed by a disaster tomorrow. If the dollar limit of your policy's coverage for your home is less than either the "appraised plus value" or "base rebuilding cost," this means you do not have enough insurance coverage on your home to replace it with a similar home in the event of a loss. You should meet with your insurance agent to increase the coverage.

7. Look at the dollar limit your policy will cover for the loss of personal property on premises. Compare this figure to the "personal property value." If the limit in your policy is significantly less than the "personal property value," you need to increase your coverage in this area. Again, meet with your agent. If you do not increase these limits, this is the maximum amount you will be paid for the value of all your personal possessions in the event of a complete loss, even if it costs much more to replace everything in your home.

8. Check to see if your declarations page includes a dollar limit or notation on coverage of your personal property when it is off your property. Also look for a loss-of-use provision to help cover your living expenses during the time you cannot occupy your home in the event of a loss and how much this covers. If you don't have this coverage, you could have to fend for yourself financially while your home is being rebuilt or repaired after a loss. If you and your family need to stay in a hotel, even for a short period of time, those expenses will quickly add up.

9. Look at the deductible dollar amount on your declarations page. This is the amount of money you would need to pay on any loss prior to the insurance policy providing any payment. In other words, if your deductible is $1,000 then you will need to pay the first $1,000 worth of any claim. If you have a total claim of $1,500 then you would pay $1,000 and then the insurance company would pay the other $500. A higher deductible usually results in a lower insurance premium because the insurance company knows you will not be making lots of small claims but will only file a claim in the event of a major loss.

10. Examine the dollar limit for personal liability and medical expense. This is the maximum amount the insurance company will pay for any claim made against you for damages incurred by someone not in your household for which you are found liable. In other words, if someone is hurt on your property due to an event covered under your policy (for instance a house fire), this is the limit of your coverage for that injury. If you have a $100,000 coverage limit and an injured party sues you for $300,000 and wins, you will be personally responsible for paying the $200,000 difference. Likewise with the medical expense limitation. Consult with your insurance agent to assess whether your current liability coverage is adequate.

11. Look for any additional endorsements or protections you purchased to be listed on the declarations page, as well. This will outline which of the items listed in the "additional coverages available" section you are paying extra for and getting extra protection or coverage for. Refer to the "additional coverages available" section to see what each of those endorsements cover. Review this annually to determine if these endorsements are still adequate or no longer required. These additional endorsements could include extra coverage for jewelry, guns, furs or other collectibles itemized in a rider because the base policy does not provide enough coverage for all the jewelry, guns, furs or collectibles to replace them in the event of a loss. Other endorsements might include additional coverage for having a home office or business, watercraft liability coverage or other coverages excluded under your base policy.

12. Read through all of the property, supplementary and liability coverages sections of your policy to guarantee you won't get an unpleasant surprise in the event of a large loss. Take note of all limitations, exclusions and conditions. Many people are stunned to find out that some things they thought would be covered under their homeowners insurance policy are not covered at all under the base policy and, without purchasing an additional endorsement and paying an extra premium, they are on their own in the event of a loss. Others are not happy to find out that items or occurrences they thought were covered by their policy are, in fact, covered, but only for a limited dollar amount which may fall far short of the actual cost of replacement or repair in the event of a loss. For example, there may be a dollar limitation on the amount of coverage for the theft of jewelry or guns. If you have lots of jewelry and/or lots of guns with high values, you will likely need to purchase additional coverage to provide insurance for the total value in case your home is robbed. Some items simply aren't covered at all by your insurance policy without a separate endorsement (examples could include pets, aircraft, trees and shrubs, among other things). You need to know what is and is not covered by your policy and to what degree.

13. Examine the list of perils you are insured against--and note which ones you are not covered for. This is an other area that may surprise you. For instance, some policies will not pay for a loss incurred if your pipes freeze and your home is flooded unless you have taken certain specific precautions. Some policies will not cover mold or wet or dry rot damage or damage or infestation caused by insects, birds, or pets. Many policies will not cover theft or vandalism losses if the property is under construction or vacant for more than 60 consecutive days.

14. Determine whether you reside in a high-risk area for any specific natural disasters and check to see whether these kinds of event losses are covered under your policy. For example, many insurance policies do not cover losses caused by earthquakes, floods, tidal waves, sewer backups, nuclear hazards, radiation or radioactive contamination, pollution, war or terrorism. You must purchase separate insurance that specifically provides coverage in the event of such losses at an additional cost.

15. Read your policy to learn what you need to do, when you need to do it and how you need to substantiate to make a claim in the event of any covered loss. Review the general conditions of your policy, as well.

16. Remember that your homeowners insurance policy is a contract. Like most contracts, the language can sometimes be difficult to understand and interpret. Read it anyway and take whatever steps are necessary to be sure you understand what is and is not covered under your policy and what the limitations of coverage are.

17. Meet with your insurance agent at least once a year to ask questions about anything you are uncertain about, to be sure your coverage is adequate, to determine whether your home is insured for a specific listed value or actual replacement cost, to see if he recommends any supplemental coverages based on your home's location or your family's lifestyle and to review any changes in your home or household that may affect your insurance coverage.

Tips & Warnings

• If you don't want to create a lengthy paper inventory of your home's contents, at the very least you should video or photograph your entire home. Include every nook and cranny. Open cupboard doors and closets and photograph or visit the interior so you will have something to jog your memory about everything that was in there and will need to be replaced in the event of a loss. Then at least develop some ballpark numbers for the majority of the contents of your home so you know what it might really cost to replace everything if you had to.