Understanding your home insurance policy coverage
Many insurance companies hide behind the law when it comes to writing policies. It is always possible to write things down in clear English and to print this information in a readable format. Unfortunately, insurers like to use complicated language so you find it hard to understand what you are buying. Worse, they often hide the bad news in small print in long documents. Other countries have laws to control the format of documents and to outlaw predatory terms. The US does not believe in consumer protection. The best this site can do is explain some of the more common terms and leave you to do what you can to protect yourself.
1. Distinguish between structure and contents
The structure can be anything put together in a hopefully permanent form and attached to the land. It can be a dwelling, i.e. the place where you live, or a shed in the yard, fences or a sidewalk. The contents are anything not permanently attached to the land that you own or use. Look carefully at the terms of your mortgage or tenancy agreement to see how much of the structure you are required to insure. Then decide whether you want or need to insure the contents.
2. Cost of repair and loss of use
You are not insuring the market value of the property. The “value” is the cost of repair or rebuilding if the structure is damaged in a way described by the policy. That means the cost of building materials and the labor. Loss of use covers situations where you cannot continue to occupy your home while it is being repaired. So, if your home burns down, you can rent someplace else to live while it is rebuilt. Be careful about the work you authorize. Improvements required by law, say as building code upgrades, are usually permitted. Any other unauthorized building improvements may be considered a fraud.
3. Replacement cost
You need to read these terms very carefully. In theory, the insurer will give you enough money to repair or replace the personal property you have. But this could lead to you benefiting because you old property is replaced by new. So many insurers include wording to limit the payment to the actual cash value. This allows the company to deduct the loss in value from fair wear and tear. With really old items that are not collectible, depreciation may wipe out all their insurable value.
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