When you purchase a home, lenders almost always require you to acquire homeowners’ insurance. What they don’t tell you is that they are primarily looking out for their interests, not yours. Lenders typically require you to protect against structural damage to the property up to the value of the loan they’ve provided. After that, they aren’t as concerned. They cannot require you to carry insurance on the property for more than the value of your loan.
It is important for anyone who has a home (whether they own or rent) to have homeowners’ insurance. The main difference between the two is that renters buy coverage for belongings and liability, while homeowners also include coverage for any structures on the property.
I was once married to an individual who did not realize this. After we went our separate ways, she canceled her homeowners’ policy because she did not think she needed it. After all, she did not own the property where she lived. Soon after, my stepson punched a kid on the playground, and she had to cover the cost of the ensuing dental repair. She then left an expensive camera in her unlocked car in her driveway and the camera was stolen. Homeowners’ insurance would have covered both of those expenses. After those two horses were out of the barn, she renewed her policy.
A standard policy covers property damage and liability, things like health care bills for the delivery guy who slips on your driveway, acts of vandalism, and even worker’s compensation for a handyman who is injured on the job while at your house.
It’s important to read your policy when you buy it, and to review your coverage annually. Don’t assume you’re getting away with something by buying the minimum that the bank requires. Remember, they only require enough to cover their interest in the property. You should purchase enough coverage to fund the cost of replacing your current house, including code upgrades. Will this increase your premium? Yes. Is it worth it? I sure think so.
The reason to review your coverage is because things change in value. If you bought your home 10 years ago, it would have been at the bottom of a recession. Your house might be worth twice as much now. And, if you bought enough liability insurance to cover your net worth then, it probably isn’t enough to cover your net worth now (hopefully, you have more financial assets now than you did a decade ago). Insurance policies need to be reevaluated on a regular basis and if your insurance agent hasn’t suggested this to you, you should look for a new agent.
In addition to increases in property values and net worth, other things can trigger the need for more insurance: buying a trampoline or a pit bull puppy, for example (if those are not exempted altogether).
You really do need to read your policy. You don’t want to inadvertently do something that gives your insurance carrier an excuse to cancel—or fail to renew—your policy. Remember, insurance companies are in business to make a profit. They do that by collecting more in premiums than they spend on administration and claims. One way they reduce claims is by reducing or eliminating coverage for high-liability items; I’m guessing pit bulls and trampolines are at the top of the list.
Insurance companies usually cancel policies at the end of the term, but they can stop coverage any time if you don’t comply with their requirements. Each time you renew, be sure your insurance company knows about any significant liabilities, like that 250-year-old oak that seems to be leaning toward your house.
Also, policies include limited liability coverage. If you pay for theft coverage, there is probably an exclusion for jewelry above a certain dollar value. Don’t assume your Great Aunt Mathilda’s $100,000 diamond necklace or your Great Grandpa Joe’s priceless art collection is covered unless you purchased a special rider. Your insurance agent can help you figure all that out.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.