Think Homeowners Insurance Protects You From Everything? Think Again

When a 5.8 magnitude earthquake hit Washington, D.C., in August 2011, those of us (including me) who experienced damage rushed to find our homeowners insurance policies to see if we were covered.

The answer: nope. Earthquakes aren’t a covered peril under most homeowner policies.

I was fortunate – my damage turned out to be a minor crack, easily repaired with some caulk and a coat of paint. But this illustrates how important it is to know what’s covered and what’s not by your homeowners or renters policy; it’s easy to assume the premiums you pay automatically assure that no matter what happens, you’re “in good hands.”

Most insurance policies cover damage that’s of the once-in-a-blue-moon variety – like an airplane landing on your roof. Few, however, cover something experienced by thousands of homeowners every year: damage from flooding. The most common policy, an HO-3 (HO stands for “homeowners”), covers everything other than things specifically excluded. But the exclusions can be glaring…

What’s not covered

  1. When the earth moves – Think earthquakes, landslides, and sinkholes.
  2. Water damage – Burst pipe? Yes. But water coming from rivers, lakes, streams, or ocean? No. Also not covered: water seeping from the ground.
  3. Neglect – Failure to preserve your home and stuff to the best of your ability during or after a loss.
  4. War – Not covered, whether it’s an undeclared war, civil war, insurrection, or a “warlike act.” Also not covered: discharge of a nuclear weapon, even if it’s accidental.
  5. Governmental action: If your stuff is destroyed or seized by the cops or other governmental agencies, no coverage.
  6. Business-related property and liability: If you’re running a business from your home, stuff related to that business may be excluded and require additional coverage. Likewise, liability from business-related activity may also be excluded.
  7. Power failure: If you lose the food in your freezer because of a blackout, you might have limited coverage, but for other damage, no.

For more on what’s covered and what’s not, see this page of the Insurance Information Institute’s website. Better yet, find the exclusions in your own policy by looking at it – they can vary by state and type of policy. You can see what to look for by checking out this sample policy from the Insurance Information Institute. (Policy exclusions begin on page 11.)

How to save on homeowners insurance

If you want to save on homeowners insurance, don’t do it by cutting coverage. Maintain enough property insurance to fully replace your home and furnishings, as well as enough liability coverage to protect your net worth in case you’re sued. If there’s even an outside chance you could be affected by flood, get flood insurance. It’s probably cheaper than you think: Visit this page of floodsmart.gov for a quick estimate.

Another place to avoid scrimping is replacement vs. cash value coverage. From the clothes in your closet to your furniture, the things in your home are worth a lot less than you paid for them. If they’re destroyed and you want them replaced with new stuff, you need replacement coverage. If you have only cash value coverage, you’ll be paid their depreciated value – think yard-sale prices. If you can afford it, always get replacement coverage.

So how do you save? The best way is raising your deductible. The more you’re willing to pay before your insurance company has to, the lower the cost. Raising your deductible from $250 to $1,000, for example, can lower your premium by 10 percent or more.

And that’s just the tip of the savings iceberg. Check out 10 Ways to Cut the Cost of Homeowners Insurance.

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