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What to Look for in a Home Insurance Policy
Most home insurance policies cover similar risks to your home, as well as providing other coverages, but insurers approach these coverages in different ways. Not all home insurers are created equal, nor do their home insurance policies always provide coverage in the same ways. First, let’s understand the basic policy types and the main coverages provided.
Basic Home Insurance Policy Types
A homeowners insurance policy is for most single-family homes. Major coverages will include:
- Dwelling Coverage, which insures the house and attached structures
- Personal Property Coverage, which insures your belongings
- Personal Liability Coverage, which pays toward personal liability claims and legal defense costs
A condo insurance policy provides similar coverage to a homeowners insurance policy, except that the outside of the building is insured by the condo association. A condo owner owns the area from the studs inward. Coverages include:
- Dwelling Coverage, which insures the interior of the condo
- Personal Property Coverage, which insures your belongings
- Personal Liability Coverage, which provides coverage for personal liability claims and legal defense expenses
A renters insurance policy is very similar to a condo policy, with the notable exception of dwelling coverage. Because the building is owned by the landlord, the renter is not responsible to insure the building, nor can they. There’s no insurable interest. A renters policy is designed to provide insurance for personal belongings and liability. Coverages for a renters policy include:
- Personal Property Coverage, which insures your belongings
- Personal Liability Coverage, which provides coverage for personal liability claims and legal defense expenses
A landlord insurance policy is mentioned here because many people aren’t aware that a special policy is needed if the house they own is rented to others. Insurance companies have been known to be difficult if the incorrect policy type is in place at the time of a home insurance claim. The risk is rated differently if a home is not owner-occupied. Many people inherit or buy second homes, renting out one of the homes and becoming landlords in the process. A landlord policy usually includes similar coverages to a homeowners policy but some coverage amounts will likely vary.
- Dwelling Coverage, which insures the house and attached structures
- Personal Property Coverage, which insures your belongings. This coverage amount will likely be much lower than a standard homeowners insurance policy because a landlord usually doesn’t keep many personal belongings at the rented home.
- Personal Liability Coverage, which pays toward personal liability claims and legal defense costs. The available personal liability coverage options may be higher with a landlord policy than with a standard homeowners insurance policy.
A landlord policy is also called a dwelling policy and has three subtypes which refer to the way perils are covered for each type of landlord policy.
Basic Form vs. Broad Form vs. Special Form Coverage
It’s important to understand that home insurance coverage comes in three variants: Named Form, Broad Form, and Special Form. You can think of a “peril” as a risk to your home, something that might happen to your home which causes damage. A basic form policy covers the following perils:
- Windstorm or Hail
- Aircraft or Vehicle Collision
- Riot or Civil Commotion
- Sinkhole Collapse
- Volcanic Activity
A broad form policy covers all perils in a basic form policy plus these additional perils:
- Burglary/Break-in damage
- Falling Objects (like tree limbs)
- Weight of Ice and Snow
- Freezing of Plumbing
- Accidental Water Damage
- Artificially Generated Electricity
Of note, damage from falling trees or tree limbs would be covered by a broad form policy but not by a basic policy. Both basic form policies and broad form policies are “Named Peril” policies, meaning the policy only covers claims for the perils specifically named in the policy. If the coverage isn’t specifically named, you’re not covered if you suffer a loss due to that peril. A special form policy works differently than named peril policy. A special form policy covers all perils except those specifically excluded. This is the good stuff if you can get it. Most home insurance policies available from major insurers are broad form policies. A special form policy typically excludes the following perils:
- Ordinance of Law
- Power Failure
- Nuclear Hazard
- Intentional Acts
The above exclusions would also apply to basic and broad form policies because these policy types only cover named perils.
Flood and Water Damage
It’s important to note that none of the above policy types cover damage from floods. Flood insurance is a separate product. If your home is in a low-lying area or close to a source of flooding, a separate flood policy may be a wise choice to protect your investment. Flood damage is different from water damage as defined in an insurance policy’s fine print, which can often be confusing.
To simplify the explanation, a flood can be thought of as when the water touches the ground before entering your home. If a water pipe upstairs bursts and “floods” the downstairs area of the home, that’s not a flood and would not require a flood policy to place a claim. A basic form policy does not cover accidental water damage, but a broad form or special form policy would cover the accidental water damage claim. None of the home insurance policy types would cover the claim if a storm caused the basement to fill with water.
Replacement Cost vs. Actual Cash Value
You need to be aware of all aspects concerning your insurance policy, including where you are geographically located. For example, wind and hail, the most common claim types, typically cause the most damage to roofs and siding. Insurance companies generally treat a roof as a wear item. A roof won’t last forever. This seems reasonable until you start to do the math and don’t have a brand new roof.
If wind or hail damages the roof and the roof needs repair or replacement, the insurance payout for a covered claim will be on a pro-rata basis. This means the insurance company will pay out only a percentage of what it will cost to repair or replace the roof based on the age of the roof. An older roof may qualify not qualify for much in terms of reimbursement, and then the insurance company will also deduct the amount you chose for your deductible, often more than $500 and sometimes as high as thousands of dollars. It’s entirely possible that your roof claim may pay nothing at all if the roof is older and you have a high deductible.
This is a good example of how actual cash value works in the insurance world. Homes themselves are usually insured for replacement cost, with the frequent exception of mobile homes which are often treated as a depreciating value. However, personal property coverage can be vastly different depending on whether your policy is insuring your personal property for replacement cost or for actual cash value. You can think of personal property as your belongings, the things you would move in or out on moving day.
If you paid $1,000 for your flat screen television and 5 years later your television is damaged due to a covered claim, such as a small fire from a candle near the television, the amount paid for your claim will be much higher if your policy provides replacement cost coverage for personal property. Replacement cost coverage, as its name suggests, is designed to pay enough to replace the damaged item. If your policy provides actual cash value, you will only be paid a depreciated value for your flat screen television, which may not be enough to replace your television. This method of insuring for actual cash value shifts much of the risk back to the insured because a claim won’t pay enough to replace the damaged items. Combined with a deductible, which is the amount you pay toward a covered claim, many smaller claims can result in no money paid to the insured. Deductibles are usually $500 or higher and will be subtracted from the amount the insurance company will pay for a home insurance claim. To refer back to the example of the flat screen television damaged by small fire, if the insurance adjuster determines that your 5-year-old television insured for actual cash value was only worth $500 due to depreciation and your deductible was $500, the claim would not be paid.
The Best Home Insurance Policy Structure (If you can find it)
As detailed above, The ideal policy structure is a home insurance policy that provides special form coverage and replacement cost coverage for personal property. A special form policy insures for any damage a home might suffer except specifically name exclusions. This policy structure provides the best overall coverage for a home. Replacement cost coverage provides enough money to replace personal property damaged in a covered claim. Without replacement cost coverage, you may not be paid enough in a claim to replace your damaged items. The combination of special form coverage and replacement cost coverage is the basis of the best policies, those that offer the most protection. This is how most of us expect our insurance to work. In reality, many policies offered by major home insurers don’t provide options for both special form and replacement cost coverage. The absence of either option shifts additional risk back to the insured. Even if assured that a policy being offered by an insurer is a Cadillac, it might be a Chevy; good, but not the best available.Looking to find the most affordable homeowners insurance?
Does Geographic Location Matter?
Insurance companies are notoriously secretive about all the elements that go into determining premiums, but some are common knowledge, and some of those are common sense. Geographic location can and does play a role in home insurance premiums. Two identical homes, one located inside a housing development a half mile from the fire station, and the second home located on a rural road six miles away from the fire station, will have different home insurance premiums if all other rating factors are equal. The risk of a total loss due to fire is higher for the second home located further away from the fire station. Insurance premiums are a reflection of risk as determined by the insurer. A higher risk will lead to a higher premium. Areas more prone to wildfires, hurricanes, tornadoes, or other risks can also expect higher premiums than areas that have less frequent occurrences of these risks.
Additionally, geographic location can affect rebuild costs. The cost of labor or transport can be higher in some areas, which in turn increases the cost to rebuild a home. When binding a home insurance policy, the calculated rebuild cost of the insured home drives the cost of premiums as well as influencing other related coverages, such as other structures or even personal property coverage amounts if left at default amounts. In some cases, insurers won’t write home insurance policies based on the risks present in a geographic location, such as near a coastline where storms can cause more damage. Distance from a water source or fire department can also be a reason for coverage to be declined.
Home Insurance Rates By State
Given that the risk from storms plays a large role in premiums, some states are generally more expensive for home insurance. Exposed to incoming storms from three sides, Florida tops the list with rates doubled or higher when compared to some other states. Other states with exposure to hurricanes, tropical storms, or tornadoes also scored in the top most expensive states for home insurance. Louisiana, Texas, Oklahoma, Mississippi, and Alabama are all among the most expensive states in which to insure a home. Most of these states line the Gulf Coast or are more prone to tornadoes.
States that are more rural, which often coincides with a greater distance from fire departments, can also expect higher rates based on higher risk.
Online Tools for Getting Home Insurance Quotes
All of the major insurers offer online quote tools and most have a knowledge section on their website which provides articles to help consumers understand their coverage. Both of these features are expected in the industry and most websites were on par with the next. Navigating through several articles on any of the sites can provide some answers, but also generate new questions which aren’t answered in the article. While using an online quote tool is helpful for getting ballpark pricing, actual premiums for a bound policy may vary from the price quoted online. Speaking with an agent is often the best way to get answers to questions as they arise during the buying process and to understand the coverages as explained in plain English. Even if a policy is purchased online, most home insurers will select applications at random (or maybe not so random) for an inspection. An inspector will visit the insured home and take measurements of square footage, note the construction type and any special features, as well as record any existing damage to the home or nearby perils, such as branches hanging into a gutter or a pool without a fence. In some cases, premiums may be adjusted based on the inspection or if damage or unacceptable risks are found, the insured customer will be given time to remedy the problems or face cancellation of the policy. Speaking with an agent often helps customers to avoid these challenges and setbacks before they happen.
Buying Home Insurance Through Local Agents
Much of the insurance industry has moved toward online servicing and call centers, but there is still an important role for local agents. Insurance is a simple product, but it’s made complex by the fine print. Not understanding how a policy is structured can lead to uncovered claims and a less-than-perfect customer experience.
The biggest benefit to using a local independent agent is that we have access to multiple markets and carriers. Captive agencies most likely have only one carrier they are appointed with. This is important with insurance because no individual risk is the same and no carrier ratings are the same.
John BobrowskiLicensed Agent & Partner at E.W. Smith Agency
Local agents provide us with someone to walk us through our coverage options, in plain English, helping us to understand so we can make informed decisions. It is also worth noting that agencies and companies are different. For example “John Smith State Farm agency” represents State Farm while an agency like EW Smith represents Auto Owners, AAA, Citizens/Hanover, Frankenmuth, Grange, Progressive, etc. Additionally, many local agents are independent agents, as opposed to captive agents who only represent one company.Captives : Agents representing a single company
Captives, a lot of times, have producers taking the initial call, trying to write new business by any means necessary, they are paid commissions on new business premiums, but renewal commissions go to the agent. Independent agents want your business, but they also want you to stick around for years and years and refer more business (since their marketing is not nationally backed, they get local referrals by word of mouth). They get paid every year the same as long as your my customer. An independent agent can match your needs to the best policy available through their agency and may have access to smaller regional insurers that offer great value but did not appear in our review due to limited markets. When shopping for insurance, a call to a local agent or two will help you to make a better-informed buying decision.
Home Insurance Claims Process
Home insurance claims are more common than many people might realize, but most claims are on the smaller end of the range and many would-be claims never become claims at all, instead becoming just inquiries at the agent level once the coverage or lack thereof is better understood by the insured. Almost all major home insurance companies provide several ways to start a claim including online, by phone, or in person. Although, some insurers do not have a wide or viable brick and mortar presence which effectively prevents placing claims in person with an agent. To be fair, most customers who use a local agent place their claims by phone rather than visiting the agent’s office. While the processes for placing a claim may be similar, what happens after the claim is placed is where the companies begin to differ. Some companies may place a higher priority on price leadership than on claims satisfaction. Also, customer dissatisfaction can arise from misunderstandings regarding what is covered vs. what is not covered, deductible amounts, and replacement cost coverage vs. actual cash value. Consumers without a solid understanding of how their policy is structured may be disappointed with the outcome of their claim. Even when policy coverage is explained properly at the time of purchase, it’s often unpleasant to have a covered claim result in large out-of-pocket expenses for the insured customer. With this in mind, companies that offer better home insurance products which include special form coverage or replacement cost coverage tend to have better claims satisfaction.
The Insurance Contract: Legal Obligations
A home insurance policy, whether a renters policy or a homeowners policy, is a contract. The contract for insurance states which perils are covered and which perils are excluded from the policy. Additionally, your insurance policy will also detail the way in which a peril will be covered. For example, roofs are usually treated as a “wear item” by insurance companies. If your roof is older, it isn’t likely that you’ll be paid for the full cost of roof replacement. While coverages and exclusions are detailed in the policy, insurance policies, like many contracts, make dull and difficult reading and often customers don’t fully understand their coverage as a result.
It’s important to understand that insurance is regulated at the state level, but that the state usually does not take part in enforcing your insurance contract unless you go to court and sue the insurer. Each state has an Insurance Commissioner. This state office is in charge of appointing licensed agents and producers as well as enforcing state insurance laws. If insurance laws were broken in the process of writing your policy or during your time as a customer, the insurance commissioner can take your report and investigate as needed. However, the insurance commissioner’s office can’t change the terms of your insurance contract and won’t be able to help you get full payment for the roof claim used as an example above.
Public Adjusters and the Claims Process
A public adjuster is a third party company or individual that negotiates with insurers on behalf of the insured in the event of a claim. Usually, public adjusters do not collect payment unless your claim is paid, in which case they take a percentage of the payment. There are some potential pros and cons when hiring a public adjuster and consumer experiences vary from good to not-so-good. The public adjuster will ask you to sign a contract for their services, and if you accept their services, they will do a loss analysis to determine the extent of the damage, including hidden damage. The stated goal is to get a better claim payout amount than offered by the insurer. Public adjusters will take a percentage of the claim payout, sometimes as high as 20 percent. With this in mind, they would need to get a payout 20 percent higher than offered by your insurer just for you to break even when using their services. Also, when hiring a public adjuster, the public adjuster becomes your representative with the insurer in regard to that claim. This can make negotiations easier because someone else is negotiating, but some customers have been surprised to learn their insurer wouldn’t talk to them about the claim after they’d hired a public adjuster. Having a third party in the middle of things may result in a better payout or it may just slow down the process with no appreciable return.
Should You Hire an Attorney for Your Insurance Claim?
If all else fails and you feel that your insurer has not met their contractual obligations for your claim, you can hire an attorney who specializes in insurance claims. Hiring a specialist helps ensure that they understand not just contract law, but are experienced in navigating coverages and obligations specific to an insurance policy. This isn’t a quick process and insurance companies have lawyers as well. Consumers should brace themselves for a long engagement.
Ask for a Claims Supervisor
In most cases, the best solution if you aren’t satisfied with your claim is to ask for a supervisor. This doesn’t guarantee that your claim will be handled differently, but it may help in regard to communication. Perhaps some aspect of your claim was overlooked by the adjuster or perhaps something just wasn’t explained as well as it could have been. Many companies have a special department that helps to resolve difficult claims or claims satisfaction issues. Generally, insurance companies have the same goal as the insured: to handle the claim in a way that satisfies the customer. Satisfied customers are good for business.
What Role Do Government and Public Housing Departments Play?
Public Housing departments and government housing programs play a huge role in making housing affordable for families. Consumers can benefit from government housing programs through tax credits, lending assistance, or through subsidized housing costs. The programs available and qualifications may vary by state, so check with your state to see how you can benefit.
For customers purchasing a home through a HUD program or with the assistance of a local government program, insurance coverage will be similar to market rate purchases or standard lending. HUD or government approved lenders will require that the home be insured to protect their investment (and yours). In most cases, you’ll need to insure the home for at least 80 percent of its rebuild value, meaning how much it costs to rebuild your home in the event of a total loss. In some cases, you may be required to insure for a higher amount depending on the amount of the loan. Also, flood insurance may be required if you are in an area prone to flooding. Flood insurance is a separate insurance product and is not covered by a home insurance policy. Home insurance rates can vary by location, but also can vary widely by insurer. Customers purchasing homes through government programs or with government assistance may be sensitive to overall costs, so it’s recommended to shop around and compare at least a few quotes before buying a policy. The savings can be meaningful.
Public housing assistance for renters also plays a crucial role for many families. While renters don’t insure the building, they can purchase renters insurance to protect their belongings and to provide protection for personal liability lawsuits. These risks are not covered by the landlord’s policy. Generally, owners of subsidized housing (landlords) aren’t able to mandate renters insurance coverage as a leasing requirement, but renters can certainly benefit from the affordable coverage provided by a renters insurance policy. Key coverages for a renters policy include personal property coverage, including losses due to fire, theft, or vandalism, and personal liability coverage which provides coverage for personal injury to others at the insured residence, and often elsewhere. Less than a third of public housing residents have a renters insurance policy. Nearly half of market-rate (non-subsidized) renters have renters insurance. This latter number is helped, in part, by leasing requirements that mandate coverage for tenants prior to moving into the rental unit. However, renters who do not have a renters insurance policy may be surprised to learn a basic policy can cost as little as about $10 to $15 per month. Buying renters insurance for public housing residences won’t get a better rate or a special discount, but customers can choose the coverage options, deductibles, and coverage limits based on their actual needs, effectively managing the cost of the policy by customizing the the policy.
Key Public Housing Renters Insurance Considerations
- Subsidized housing may be located in areas that have crime rates higher than national or state averages.
- Public housing may be of older construction, creating a potentially higher risk of electrical fires.
- Families benefitting from the reduced housing costs of public housing or subsidized housing may not be in financial position to pay for the replacement of their personal property or to pay for a personal liability claim if there is a loss or lawsuit. A renters insurance policy can provide coverage for these risks and because you aren’t insuring the building itself, can be surprisingly affordable.
Some insurers may disqualify an applicant for renters insurance based on their credit score. If this happens, you’ll get a letter in the mail explaining that credit scores played a role in the insurer’s decision to decline coverage. Sometimes, bad credit will just result in a slightly higher rate. However, there are many insurers that don’t check credit for renters insurance. An independent agent can point you in the right direction and help you bind coverage if your credit is less-than-perfect.
How We Determined the Top Home Insurance Companies
Homeowners with a mortgage are forced to buy home insurance. For the rest, home insurance is a choice, but we all want to know we are well-protected by our policy and that if there is a claim, the process will go smoothly and will leave us financially intact. With this in mind, claims satisfaction was given high priority. The possibility of a claim is why we purchase insurance. It’s where the rubber meets the road, as the old saying goes. Our best home insurance pick also had to have performed well in JD Power’s home insurance survey which measures customer satisfaction in a number of areas ranging from price to customer service to claims satisfaction. To top the list, companies also had to have a complete home insurance offering. A specialty company that had great service but which only focused on one type of policy doesn’t meet the needs of a broad spectrum of customers as required for our ranking. Price is always a consideration, but a lesser consideration than some other criteria. For comparable coverage, there aren’t any home insurers who average half the rates of others or double the rates of others. Price ranges are much tighter, so the focus is more on service and policy features. Bundling is nearly ubiquitous in the market. Customers who buy a home insurance policy with a company can save money if they also have an auto policy with the same company. The difference is largely in how aggressive the discounting is and how much customers save in real-world dollars and cents Available discounts are largely similar as well, with the biggest differentiation being the dividends offered by a Mutual Insurance Company. Generally, all major insurers offer discounts for security systems, etc. and often the savings are small when compared to bundling discounts or dividends, when available. One of the largest weighing factors is the policy structure in regard to coverage features. Many home insurance products, even those from major insurers, provide less-complete coverage than others. While “buyer beware” may apply because an insurance policy is a contract, some contracts are simply better than others for consumers and leave less to confusion.
Best Home Insurance Company (Overall): Amica
Amica was the only company to score five out of five stars in every category of JD Power’s home insurance survey. While much of the company’s business is handled by phone or online, customers are overwhelmingly pleased with the service offered, including claims satisfaction. As a mutual company, Amica treats its customers to a dividend when there is an excess of premium after claims and expenses have been paid. This helps to reduce the cost of a home insurance product that already offers discounts for bundling and a level of value unmatched by other nationwide competitors. In a business where most policies look the same and often shift the burden of small losses or losses that customers thought were covered (but aren’t) back to customers, Amica’s Platinum Choice Home insurance product provides the best coverage available in our review. The Platinum Choice homeowners insurance policy is a special form policy, covering everything except specifically excluded perils. Replacement cost coverage, which pays the full amount needed to replace damaged items, is also standard on the policy, preventing unpleasant and expensive surprises when a claim is filed. Where some other insurers have structured their policies to favor the company in claims, Amica is fair with the customer and overages in revenue are returned to customers as dividends. Even often-overlooked smaller coverages such as Water Backup and Sump Overflow coverage are included standard with Amica’s Platinum Choice. This coverage is an option for many other companies and an unwelcome surprise if you have a claim and haven’t chosen the “add-on” coverage. The policy structure provided with Amica’s homeowner’s insurance product combined with the company’s proven commitment to customer service earn the company not only high scores for claims satisfaction because customer’s claims are paid as expected, but also earn the company its place as our overall “best of home insurance” choice.
Best for Number of Agents: State Farm and Allstate
Some customers like to do business face to face with an agent. Allstate and State Farm are both close in the number of exclusive agents the companies have on board. Customers in most areas are likely to find one or more agents for either of these companies nearby. While focusing this review on home insurance companies, many customers prefer to keep all their insurance business with one company. Most of the insurers in our review offer the most common types of insurance, but State Farm stands out as having a complete insurance product offering, all underwritten by the company itself.
Where To Go From Here
Price can be a big consideration in many households and low price is certainly among the top marketing messages for insurance companies. However, home insurance can be a complex contract and coverage choices or policy limitations can play a huge role in the real value of a policy. Our top pick, Amica, manages to provide both an affordable homeowners insurance product and one that offers better overall protection than most of its competitors.