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It's Time to Revisit Your Homeowner's Insurance Policy

When was the last time you thought about your homeowner’s insurance policy? If you have not made a claim recently, you are forgiven for answering “Ummm...maybe never?” And yet, this is the insurance that covers the risk of damage to your most treasured, or at least the most expensive, asset that you own. It’s worth a look, don’t you think?Broadly speaking, homeowner’s insurance covers the risk of damage or complete loss of your home (the actual structure) and the contents within the home. When you bought your home, the insurance company assessed the value of the building as it stood on that day. But what has happened since? Have you made major structural improvements to the property such that it is worth more than it used to be? If you have, it may very well be the case that you are under-insured.Every policy, even an “all-risks” policy, will have numerous pages of fine print describing what is excluded i.e. the particular circumstances under which your claim will be denied. Many of these are rather obscure. (Apparently, I am not insured if a spacecraft crashes onto my roof.) It is worth your time to at least skim these pages, if for no other reason than to appreciate the sheer volume and variety of property damage that you will be responsible for from your own emergency savings. For example, common exclusions include damage caused by:

  • Power failure
  • Neglect of your property
  • Mold and fungus
  • Vandalism if you home is vacant for more than 2 months
  • Mechanical breakdowns
  • Your pets
  • Structural defects to your foundation or walls

And that is just a start! If your emergency savings account balance is low, a close reading of your homeowner’s policy may be just the inspiration that you need to increase your savings cushion. Everyone should be aware of the fact that a homeowner’s policy will not cover flood damage. Particularly if you live in a flood zone, you must buy flood insurance separately through the government National Flood Insurance Program. Don’t overlook the possibility that while your home was not in a flood zone when you purchased it, climate change may have changed your circumstance. Similarly, earthquake insurance must be purchased separately.

Let’s move inside.

To take an extreme example, if all of the contents of your home were destroyed by a tornado and you had to replace each and every item, would that payment from the insurance company cover the bill? If your policy does not specify replacement cost, then the answer is almost certainly “no.” Absent that, you will receive compensation based on the depreciated value of what was lost...not the $1500 that you need to buy a new refrigerator, but the market value of the 10 year old fridge that you lost, which is likely pretty close to nil. (Who wants a 10 year old fridge?) If you are unsure what kind of coverage you have, pull out that policy document today and find out.I get it. Thinking about your homeowner’s policy is never going to be high on the “want to do” list. This is probably why insurance commercials strive so hard to be entertaining. But the stakes could not be higher. Not fully understanding how your largest asset is protected is a threat to your financial security.