Choosing the Right Homeowner's Policy
By JAY ROMANO
Published: May 8, 2005
WHETHER you are a homeowner, apartment owner or renter, it is important to have the appropriate type and amount of property and casualty insurance coverage.
So all you have to do is visit your local insurance agent and buy a standard homeowner's policy and you're adequately covered, right? Not necessarily.
Depending on your circumstances, you might need a Special HO-3 policy with guaranteed replacement cost coverage; or a Condo/Co-op HO-6 policy with extended replacement cost coverage; or a Renters HO-4 policy with actual cash value coverage; or a Deluxe HO-5 policy with extended guaranteed replacement cost coverage.
"Some people are surprised at what is covered by their insurance," said Jeanne Salvatore, a spokeswoman for the Insurance Information Institute. "And some are surprised at what isn't."
Ms. Salvatore said there are two broad considerations for choosing property and casualty insurance: what risks the policy covers and what amount of coverage it provides. As for the type of risks that are covered, she said, policies generally fall into two subcategories: named peril and all peril. The former policies, she said, specify the risks that are covered and exclude everything else, while the latter specify risks that are not covered but include everything else.
Most "homeowners policies" - a generic term that also applies to policies available to condo owners, co-op shareholders and renters - are identified by the code "HO" followed by a number.
The most basic policy - the HO-1 - provides protection against losses caused by fire, lightning, windstorm, hail, explosion, riot, smoke, vandalism, theft and damage caused by aircraft, vehicles and even volcanic eruptions.
And while that list might appear to be comprehensive, there are other risks that are not covered by such a policy. For example, Ms. Salvatore said, in addition to insuring perils covered by an HO-1, an HO-2 generally will cover damage caused by other "named perils" like falling objects and the weight of ice, snow or sleet; leaks from plumbing, heating, air-conditioning and fire-sprinkler systems; cracking, bursting, burning or freezing of such systems; and sudden and accidental damage to fixtures or appliances caused by an electrical discharge.
Even better than an HO-2, she said, is an "all peril" HO-3 or HO-5 policy. Both cover the structure for all risks except those specifically excluded, with the latter providing broader coverage for contents than the former. Typically, Ms. Salvatore said, an HO-3 or HO-5 policy excludes coverage for damage caused by flood, earthquake, war, nuclear accident, landslide, mudslide and sinkholes. Some insurers now exclude or limit coverage for mold, she added.
Ms. Salvatore said that co-op and condo owners can get coverage similar to homeowners' by purchasing an HO-6 policy, and that renters can get coverage for their contents under an HO-4 policy.
Eric S. Koch, a partner in an insurance agency in Paterson, N.J., said that while most agents will recommend all-peril policies, there may be times when it is difficult to obtain that level of coverage. "Sometimes, with inner-city properties, you can only get a basic named-peril policy," he said.
It is also possible that homeowners who have owned their property for many years without updating their coverage may have a named-risk policy.
"There are so many policies out there that people haven't looked at for 20 years," Mr. Koch said. "Someone could have a basic policy and not even know it."
Next week: How much coverage is enough?
nytimes.com
How Much Coverage Is Enough?
By JAY ROMANO
Published: May 15, 2005
LAST week, this column addressed the types of property and casualty insurance available to homeowners, apartment owners and renters. This week, the issue is how much coverage is enough.
"Most people are somewhat confused about how much coverage they have," said Ed Mackoul, vice president of Mackoul & Associates, an insurance broker in Long Beach, N.Y. "They assume that if their house burns down, the house and its contents are going to be completely replaced, no matter what. And that may not always be the case."
Mr. Mackoul explained that homeowners often buy just enough insurance to satisfy the mortgage lender. In many cases, he said, that is the amount of the mortgage itself. If a house is destroyed, such coverage might not be enough to rebuild completely. And depending on the type of insurance in effect, coverage for the contents of the home might be much less than what it would cost to replace those items.
Mr. Mackoul explained that while two basic types of insurance coverage are available - actual cash value and replacement cost coverage - several levels of coverage are currently being offered.
The least expensive, and least desirable, is actual cash value coverage. With such a policy, the home is insured only for the face amount of the policy - no matter how much it might actually cost to rebuild it - and the contents are insured for their actual cash value, up to a cap that is typically a percentage of the face value of the policy.
So, if a house is insured for $400,000 and contents are covered for 50 percent of the policy limit, contents coverage would be $200,000. While that might seem like a lot of coverage, however, an actual cash value policy will reimburse a policyholder for only the depreciated value of an item. So, if a $2,000 computer system is worth $500 after depreciation, the insurance will pay only $500, no matter what the limit of coverage is.
Mr. Mackoul said another type of coverage is replacement cost coverage, with different types available.
Michael Spain, owner of the Spain Agency in Mahopac, N.Y., said homeowners typically think a replacement cost policy provides enough coverage to replace the structure and its contents item by item. In practice, most replacement cost policies do not provide that level of protection. For example, Mr. Spain said, most carriers have caps on the maximum reimbursement, with that cap being anywhere from 110 to 150 percent of the face value of the policy.
Ron Tepperman, an insurance broker in Manhattan, said that in addition to providing different levels of maximum coverage on replacement cost policies, insurers often define "replacement" differently. "You could have true replacement cost coverage, or functional replacement cost coverage," Mr. Tepperman said, explaining that the former would pay to replace an item with its equal, while the latter would replace it with a functional equivalent. So, he said, with true replacement cost coverage, a hand-hewed oak beam would be replaced with a hand-hewed oak beam. With functional coverage, it would be replaced with a beam that would perform the same function.
The very best coverage, experts say, provides true replacement of the structure regardless of the cost. Mr. Spain said such policies generally cost about 25 percent more than less-comprehensive policies.
Mark Schussel, a spokesman for the Chubb Group in Warren, N.J., said his company's "extended guaranteed replacement cost coverage" completely restores a structure - with original materials or their equal - no matter what it takes or costs.
"And if you don't want to rebuild, you don't have to," he said. "If your house burns down, you can sell the property, move somewhere else, say good riddance, and take cash for the face amount of the policy."
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