By Ingrid Spencer

Additional Info Rocky Mountain Insurance Information Association www.rmiia.org. Insurance Information Institute www.iii.org. State of Colorado—Department of Regulatory Agencies Division of Insurance www.dora.state.co.us/insurance. Insurance for Dummies by Jack Hungelmann, Wiley Publishing, 2001. To view complaint ratios when choosing an insurance company: National Association of Insurance Commissioners www.naic.org. Free software to help you inventory your possessions www.knowyourstuff.org.

We have a teaching moment right now,” says Carole Walker, executive director of the Rocky Mountain Insurance Information Association (RMIIA). “I’m hoping it will motivate people to realize the importance of having and maintaining proper homeowner’s insurance.”

Walker is talking about the indescribable losses people in the ravaged Gulf States have experienced in the wake of Hurricanes Katrina and Rita. Although most of the homeowners in the region have insurance, according to Reuters, only about 40 percent of homeowners have flood insurance on their policies, which means they will have no recourse in replacing their homes and possessions. A teaching moment indeed. And yet, as with most legal contracts, homeowner’s insurance can be overwhelming and confusing. Let’s start with the basics.

Homeowner’s insurance is not required by law, although mortgage lenders require that you have it to get a home loan. Coverage has two main aspects—insuring both the structure of your home and your personal possessions against sudden and accidental loss or damage. Both of those circumstances come with choices and caveats. As Walker says, “You’ll never be handed a blank check. Policies include and exclude certain things. It’s important to understand what you’re covered for.”

Insuring the structure. You have options of what “causes of loss” you want to insure the structure of your home against—including any separate structures on your property, such as a garage or shed.

• Basic Form. This limited coverage covers only a few causes of loss, such as fire or wind damage.
• Broad Form. Fire, windstorm, hail, water damage, riots, explosions, theft, and others are covered according to the specific plan.
• Special Form. This one covers anything that is not specifically excluded from the policy (such as floods or earthquakes, i.e., if Martian invasion isn’t excluded, then you’re covered for it).

Special form is recommended. Define your causes of loss coverage based on the site of your home. “In the mountain states,” says Walker, “hail is our biggest concern, also wildfire, since many people live near wilderness.” If you live in a floodplain, your mortgage lender may require that you have flood insurance. Flood insurance is run by the U.S. government under the Federal Emergency Management Agency (FEMA). You can usually buy it through your homeowner’s insurance agent. Keep in mind that there is a 30-day waiting period between the date you purchase flood insurance and the date it becomes effective. Make sure you are clear on what your policy covers. If you notice an exclusion, you may be able to purchase a special rider to your policy to cover that particular disaster. “It’s often an up versus down situation,” says Walker. “Most things that come down from above are covered, while disasters that come from the ground up may not be.”

While the causes of loss refer to the specific disasters that may strike your home, property coverage limits refer to what you will expect to be awarded when you make a claim.

• Replacement Cost. Covers the cost of replacing the damaged property, limited to a maximum amount.
• Extended Replacement Cost. Covers costs up to a certain percentage over the maximum limit.
• Actual Cash Value. Covers the amount to replace your home, with depreciation costs subtracted for age and amount of use.
  

Walker recommends that you insure your home for its total replacement value. “It costs much more to replace a dwelling than what the homeowner originally paid. This is probably the biggest lesson we learned from Hurricane Andrew, or after the Oakland fire.” After those tragedies most insurance companies eliminated a very crucial optional coverage—the home replacement guarantee. “Those days are over, but if you buy extended replacement coverage, you’ll have a buffer of about 20 percent above the agreed-upon replacement cost.”

Insuring your possessions. When it comes to insuring possessions, Walker stresses taking an inventory of your belongings. “Imagine that you go out and return to find your home leveled,” she says. Do inventory the old fashioned way with a camera or a pen and paper, or use the free software, which you can find at www.knowyour-stuff.org.

There are two ways to insure your possessions: actual cash value and replacement cost. Purchase the replacement cost option. You’ll probably receive 30 to 40 percent on your claim for the 10 percent more that you’ll pay to get this coverage. Think of all your wonderful things—your furniture, jewelry, computers. It’s worth it. For particularly valuable items, you’ll want to purchase a special endorsement to cover them.

Other features. Homeowners insurance does more than just protect your assets from natural disasters. It also covers your legal liability. Your policy can help if you, members of your family, or even your pets hurt people or their property, and not just on your property. It can also help you pay for alternative housing when you have to move out of your home due to damage. Some policies even cover identity theft. Ask questions and be aware of what your policy covers.

The choice is yours. When choosing your homeowner’s insurance company, you should shop around and never buy insurance based on price alone. Companies such as AM Best (www.ambest.com) give ratings based on customer service, which has everything to do with who you should choose. Remember, this is no time for complacency. There’s a chance you’ll never face a disaster, but you will sleep easier knowing you’re prepared for one.