Choosing Homeowner's Insurance Coverage Limits

You don't want to find out after you've filed an insurance claim that your coverage is lower than you expected. That’s why choosing the right coverage limit on your homeowners policy is so important.

The term “coverage limit” simply means the maximum amount an insurance company will pay for a particular claim.

There are many factors to consider when choosing an appropriate coverage limit. Ultimately, you need to understand the different coverage options available, how much risk you’re willing to assume, and any unique characteristics of your home and its contents that may require additional insurance. This can be especially detailed if you own a high-value-home, contents, and collectibles.

The more you know about available policy options, the better equipped you’ll be to select the right coverage limit for your individual situation. A good insurance professional should help to educate you. You don't want to find out after a loss that you were not covered the way you'd hoped and expected.

What do homeowners policies typically cover?

Although you’ll want to confirm specifics with your own insurance professional, a standard homeowners policy covers damage or destruction to the inside and outside of your home, as well as any possessions that are damaged, destroyed or stolen. Also included is personal liability coverage to protect you financially if someone is injured while on your property.

Depending on the insurance company, your home’s contents (such as clothing and accessories, electronics, furniture, fixtures and appliances) are usually covered at 50% to 70% of the home’s structural value. That means for every $100,000 your home is worth, you would be provided $50,000 to $70,000 of additional coverage for its contents. Your policy also has “off-premises” protection for any possessions you might have with you during travel or when you are not at home, though that coverage rate is typically much lower than on-premises protection.

With regard to personal liability coverage, homeowners policies include reimbursement for medical expenses, lost wages or lawsuits that may arise when someone is injured on your property. This can sometimes even include damage or injury caused to others by your pets.

How much risk are you comfortable accepting?

When choosing the proper coverage limit, you will first need to decide which level of loss repayment you want — recognizing that higher limits also mean higher premiums. Options include:

• Actual cash value — You will be paid for how much the item is worth now, which is the original cost minus depreciation. This is usually much less than you would need to purchase the same item new today. For example, you may recoup only a few hundred dollars for a decades-old furnace when filing a claim.

• Replacement cost — You will receive enough payment to rebuild your home or replace damaged property without any depreciation factored in. The goal is to provide an equivalent replacement without any additional expenditure to you. That same decades-old furnace will be replaced with a new model with similar features. Any desired upgrade in features would be at your own expense. Also, if you have an older home, it is important to note that different building methods may be substituted, such as when plaster walls are replaced with drywall.

• Extended replacement cost/value — This elevated level of protection offers a buffer against inflation and allows for replacement costs even higher than your selected coverage limits. However, there is a ceiling to this higher amount, with parameters, usually set at 20% to 25% above replacement values. This option provides a greater degree of security because it accounts for the reality of market fluctuations. For instance, a competitive real estate market or elevated construction costs in your area may mean the cost of rebuilding or repairing your home is actually more than its estimated replacement value. This option provides the cushion needed to replace lost possessions to the same level of quality, regardless of market conditions.

Be aware of exceptions

Don’t assume every loss scenario is included with your base policy. Here are a few of the more common exclusions or issues not covered:

• Other buildings on your property — Many insurance companies include coverage for other structures on your property but it's usually capped at a maximum of 10% of your homeowners policy limits. Other insurance companies require separate but similar coverage for any freestanding structures, such as garages or outbuildings.

• Sewer and drain backup — These dreaded events are not included on standard homeowners policies because they are not considered “sudden events,” but rather ones that build up over time. Added coverage for sewer and drains is particularly valuable for homes in neighborhoods with older infrastructures.

• Loss of living space — If you are unable to safely live in your home after it has been damaged or destroyed, specialized coverage known as additional living expense is needed if you want reimbursement for the cost of a hotel or home rental, meals and incidentals during construction. It also covers any money you would have collected from a tenant who rents another part of your home.

• Changes in building codes — Even if your homeowners policy includes replacement or extended replacement costs, any upgrades required by new building codes are not automatically covered. If your existing home is not up to current code, you should consider adding an endorsement known as “ordinance or law,” which will protect you against added construction expenses necessary to meet new code requirements.

• Catastrophic events — Not all natural disasters are incorporated into general homeowners policies, nor are acts of war or terrorism. Loss due to disasters such as fires, lightning or vandalism are usually included, while floods and earthquakes are not. Be aware that the same natural disaster may have specific coverage restrictions as well, such as when wind damage from a hurricane is included but flooding due to the same hurricane is not. If you are in an area prone to a particular type of disaster, confirm the need for additional policy riders.

• Variations in occupancy — If your home is used as an Airbnb or rental property, the resulting risks during these short- or long-term periods of occupancy are not part of a traditional homeowners insurance policy and will require specialized coverage.

• Home businesses — Working from home, particularly when customers visit your property or you have expensive business equipment, creates risks that you will need to cover separately.

• Animal/breed restrictions — Although pets are typically included in the personal liability part of your homeowners policy, many insurance companies do not extend this coverage for specific dog breeds, venomous animals or those considered aggressive or dangerous. If your pet is on this restricted list, there are rarely alternate insurance options available.

• High-ticket items — While your homeowners policy limits include coverage for contents, keep in mind that some items, including jewelry and electronics, often have a maximum standard coverage amount (see the 50% to 70% of home value rule above). If you have heirlooms, antiques, an extensive wine collection, fine art, an expensive engagement ring or any other valuable collectibles, you should consider increasing your limits or securing a special policy, often called a personal property floater.

• Unique property features — Any parts of your home that may be described as unusual or “above and beyond” should be evaluated to determine if you should increase your allowable policy limits. This could include chef-grade appliances, specialized flooring or unique architectural details (such as copper roofing), all of which would far exceed the standard coverage amounts. Consider outside features as well. A pool, trampoline or other equipment may dictate the need for an umbrella policy or more liability protection.

Never guess; ask a professional

Every homeowner faces unique risks. A qualified insurance professional will help you identify and assess property values based on geographic location, your type of home and how it is used. To facilitate this process, homeowners may be asked to complete a home inventory or lifestyle and usage questionnaire, provide pictures or forward details of any remodeling or building projects.

Answer any questions completely and share your expectations and standards for replacement if you do face a loss. This honest assessment and dialogue will help you identify the right policy limits for your own situation and deliver the level of comfort you need to enjoy your home and possessions for many years to come.

Contact an insurance professional at V.F. McNeil Insurance, located in Branford, Connecticut (203) 483.2988. We are happy to answer any of your homeowner's insurance questions.