From Coverage to Claims: How Homeowners Insurance Really Works

Most of us can be forgiven for not thinking about home insurance very often, especially if we don’t work in the insurance industry. But if you’ve ever been in a car accident, then you know that the time to figure out how an insurance policy operates is not in the minutes after you’ve just been T-boned at an intersection. Likewise, if someone broke into your house and absconded with your television and laptop, that would be a bad time to learn that you needed to document those items in advance if you want your insurance company to reimburse you for them.

If you’re buying a house, then you might already be somewhat familiar with the idea of insurance, especially if you have an auto policy. But sometimes insurance –– especially homeowners insurance –– can feel untouchable and out of reach, like it’s a thing to be kept in a “break in case of emergency” glass case.

In reality, homeowners insurance should be a tool that every homebuyer interacts with regularly. Understanding insurance coverage limits, deductibles, and claims processes is an important part of owning a home.

Rob McGarty, a top real estate agent in Seattle who works with 69% more single-family homes than average agents in the area, recognizes that often buyers get insurance just to check that box off for closing. He says, “For most people, insurance is reactionary. We try to help make it more proactive.”

As an agent at Magnolia Insurance, Toni Matous works closely with McGarty. She says, “A home is one of the biggest financial assets that people have in their portfolio, so we want to let them know the options that they have to protect it properly.”

With those perspectives in mind, we’re going to break open the glass box –– figuratively, of course –– to help homebuyers understand the ins and outs of insurance policies.

How does homeowners insurance work when making a claim?

Understanding homeowners insurance has to start with function. When you really need it, what does your insurance policy actually do, anyway?

Louise Juracek, an expert real estate agent for almost four decades in Bakersfield, California, says it’s important for buyers to be informed about how their particular insurance policy works.

“It’s an education process. You’re building equity in your home, and you want it protected. If something were to happen there, like a natural disaster, homeowners insurance is going to step in and give you some monetary remuneration.”

Coverage limits

Every homeowners insurance policy is set up with certain coverage limits. That means if something bad happens, the insurance company will give you money — but only up to that limit.

Your mortgage lender will likely require you to have coverage limits that will at least cover your loan amount. But in practice, it’s best to have the entire value of your home covered.

Let’s say a meteor strikes and completely demolishes your $200,000 house. If you only have a coverage limit of $150,000, you’ll suffer a pretty devastating $50,000 loss.

Coverage limits can get a little tricky, though, because insurance companies have different valuation methods when it comes to paying out on a policy. Every homebuyer should look at the terms of their coverage. Is the policy based on replacement cash value, extended replacement cash value, or actual cash value?

Replacement cash value

Policies written with replacement cash value (RCV) will pay the homeowner the cost to replace or repair home damage and make it new.

Meaning: If a wind storm knocks a tree through your roof, an RCV policy will give you the money to pay for a completely new roof.

Extended replacement cash value

Extended replacement cash value (ERCV) is kind of a bonus RCV package, if you will.

ERCV is an inexpensive add-on, usually designed for homeowners in areas that are more prone to large-scale natural disasters. When a natural disaster hits, the price of supply and labor goes up, and your regular RCV coverage limit may not be enough. So if a hurricane ruins your roof –– and roof prices skyrocket because your whole community needs a new roof at the same time –– ERCV is there to give your coverage a limited boost.

Actual cash value

Policies that cover actual cash value (ACV) will pay the homeowner the amount necessary to return the home to as-is condition.

This coverage looks at depreciation when determining how much the payout will be. So if a windstorm knocks a tree through your 12-year-old roof, an ACV policy will give you money for a roof … depreciated by 12 years.

Obviously, ACV is not ideal for most homeowners, but sometimes older homes will only qualify for ACV coverage.

Insurable events

An insurable event refers to disaster-related damage that is covered by your insurance policy. Matous says that it’s important to realize that not everything is covered by all policies, so it’s important to speak with your agent about the specifics of your coverage.

Usually, the insurable events on homeowners insurance policies are written in one of two ways: named perils or open perils.

Named peril policies cover only the disasters that are listed, or named, on the policy. If something happens to your home, and the event is not on the list, the damage is not considered an insurable event.

Open peril policies cover all disasters except those listed on the policy. Therefore, if something happens to your home, and the event is on the list, the damage is not considered an insurable event.

In some cases, it’s possible to add additional coverage for an event that you’d like to be insurable. For instance, floods are not usually considered an insurable event for most regular insurance policies, but homeowners have the opportunity (and sometimes the requirement!) to purchase separate flood insurance.

Read your policy carefully to make sure that it covers the major hazards in your area. Talk to your insurance agent and your real estate agent if you have any questions about your insurable events.

Deductibles

If damage from an insurable event happens to your home, you can file a claim with your insurance company. Your insurance agent can assist you with the actual process, since it differs from company to company.

In the event of a claim, Matous says, “We always ask clients to call us first. We want to be there to advocate for them and help them through the claim process.”

After the claim is filed, you’ll pay a deductible amount, as outlined in your insurance contract. A deductible is your out-of-pocket portion due for the damages. After the deductible, your insurance should pay for the rest of the repairs, up to your coverage limit.

What else does homeowners insurance do?

Most people think of homeowners insurance in terms of dwelling coverage (sometimes called hazard coverage), but that’s usually just one line item on a home insurance policy. Your homeowners insurance might also include these other types of coverage relating to your property.

Liability coverage

If someone is injured on your property, and you are found to be liable, the liability coverage on your homeowners insurance policy may kick in. In some cases, off-property injuries may even be covered.

Basically, if you or someone in your household is sued due to negligence or an accident, your homeowners insurance protects you from the possibility of losing your house as a result. Liability coverage comes with certain limits, just like dwelling coverage.

Additional living expenses coverage

Additional living expenses coverage is the part of your homeowners insurance policy that covers costs related to being displaced from your home. If you need to stay in a hotel during insured event repairs, your insurance should cover that cost under additional living expenses.

Personal property coverage

While dwelling coverage usually only refers to the structure of the home, personal property coverage refers to your belongings inside the home. However, it’s important to have documentation of those items in order to prove both their existence and their damage to the insurance company.

After you move into your new home, take photos or a video of each room for personal property insurance purposes. Don’t forget to photograph any valuables that may be hidden from sight as well.

Store a physical backup of the photos/video in a fire-proof safe or utilize a cloud storage platform, just in case your phone or camera is damaged.

Juracek relates an instance when homeowners suffered an electrical fire in their home. The fire damage was minimal, but the smoke damage to their personal property was extensive. Under this portion of their policy, the homeowners were able to get everything –– even their clothing –– professionally cleaned or replaced.

Where can you get homeowners insurance?

Homeowners insurance can be purchased from an insurance agent. If you already have insurance for a vehicle, you may want to start with that company; sometimes they can offer you a package deal for home and auto insurance. But it’s always best to get several quotes (at least two or three) before making a decision about insurance.

Ask your real estate agent for insurance agent referrals, if necessary. McGarty and Matous recognize the value-added for buyers when they can work together. McGarty says, “We want our clients to have an amazing experience,” and he knows that connecting clients with high-quality professionals is a big part of ensuring homebuying success.

When comparing homeowners insurance quotes, make sure to compare “apples to apples” when it comes to coverage and deductibles. Sometimes one company’s quote may look less expensive, but on closer examination, the policies aren’t equal in terms.

Make sure that the quotes you’re comparing have identical terms for the following line items. If not, have the insurance agent readjust the quote so you can have a more accurate picture across the board.

• Dwelling coverage: Coverage for the actual structure of your home. Make sure each policy is the same in regards to payout –– replacement value, extended replacement value, or actual cash value.
• Other structures coverage: Coverage for things not attached to your home, such as fences or sheds.
• Personal property coverage: Coverage for your belongings.
• Liability coverage: Coverage in the event you are found responsible for another person’s injury.
• Deductible: The amount you pay out of pocket for a hazardous event. A higher deductible will usually lower your premium payment, and vice versa.

Once you’ve decided on an insurance company, that doesn’t mean you’re locked in for life, so remain vigilant about pricing changes and coverage limits. Reviewing your policy with your insurance agent each year is in your best interest as a homeowner.

Let your agent know about any updates that may impact your coverage needs. Have them run new pricing models for you. Gather competing quotes if necessary –– you never know; another company may be in the position to save you money at a later date.

At its best, homeowners insurance should offer you more peace of mind than hassles. With the right policy coverage, insurance claims should be a simple tool for homeowners to use –– in case of emergency!

Header Image Source: (Soroush Karimi / Unsplash)