In Part I, we focused on the physical structure of your home and how homeowners insurance works in the event of damage. This week we are looking at the actual “stuff” you have in your home, as well as the liability coverage. Next week, we are going to look at levers you can pull to lower the cost of your insurance.
Beyond your physical structure, there are other pieces to your homeowners policy. You will want to replace your personal belongings if they are damaged or stolen. Another involves liability coverage. Liability coverage protects you in the event you are legally responsible for certain damage to persons or things.
Cost to Replace
Car owners frequently trip up on this clause, and it can show up in your homeowner policy as well. A standard policy may only pay out what an item was “worth” at the time. In jargon, they pay the “depreciated value of the asset”. In other words, insurance pays what it determines to be the “actual cash value.” This assessment, based on its value at the time the item was stolen or destroyed, will be low.
For example, you have a two year old 55” television. You picked it up during a Black Friday sale, and it works great. A thief steals your TV. Your policy pays out what that old TV was “worth.” That worth is much lower after two years of depreciation and not what it would cost to buy a new one. We are talking thrift store pricing here.
With this fact in mind, if you want your policy to pay out at cost to replace, you need to upgrade your coverage to “replacement cost”. Unfortunately, this change will come at an upgraded price point.
Complete An Inventory
Next, a trip down memory lane. Back in 2000, I worked at a Fashion Bug (yup, I did). Twice per year we had to scan EVERY SINGLE ITEM in that ENTIRE store for the semi-annual inventory. Inventory allowed Corporate to review what we actually had in the store vs. what their archaic computer system thought we should have in the store. With that in mind, use an inventory to your advantage.
You want to document what you actually have in your home. You can’t rely on what the insurance company “reasonably” thinks you have in your home. A written inventory is a great start, but modern technology lets us do one better.
Complete a quick walk-through of your house taking video documenting your possessions and the contents of your home. Throw that video in the Cloud. If you ever need it to prove you owned the item, you’re golden. If the insurance company hassles you, you provide visual evidence. You will want to swap it out for an updated video every year or so.
Additional Valuables
Policies typically cap payouts to replace valuables. Valuables include furs (I really hope this is an inherited item), firearms, jewelry, and home-based business property. However, the company’s standard cap might not fit your needs.
If you have a Diego Rivera hanging in your bathroom (I actually saw this once!), you need to supplement this coverage with a personal property endorsement. The same goes for jewelry and other items of value. The insurance company will usually require you to have the item(s) appraised to confirm their value. After that proof of value, the company will issue a rider to your policy.
Depending on whether the item was destroyed or stolen, the payout level may vary. You may wish to double check that.
Liability Protection
The liability portion of your policy is more important than you know. (Did you even know this was a thing?) It covers scenarios where you or a family member are legally responsible for accidental damage to someone else’s property or person. As a homeowner, you are responsible to upkeep your property and ensure it is safe.
Liability protection generally covers:
- medical expenses in the event of an injury on your property,
- cost of your legal defense if sued for negligence causing bodily injury or property damage, and
- cost of repairs to another person’s property negligently damaged by a member of your family.
For example, that neighbor kid who drives you crazy? (You know the one.) Say he comes over and blows out his ACL jumping on your kids trampoline. His parents, who never seem to know where he is or what he doing, are devastated. Dreams of a future football career in the NFL, dashed forever. His mom’s Uncle Johnny files suit against you for the injuries and loss of future income. Your homeowners insurance is going to pay to mount a vigorous defense or pay them to go away.
Therefore, verify the level of coverage detailed in your policy covers your personal assets at risk if you get sued. In an extreme circumstance – think head injuries or paralysis – a lawsuit could cost hundreds of thousands of dollars. You can often increase you coverage to $300,000 or $500,000 to provide additional protection.
Umbrella Insurance
If you want additional coverage for liability, you can pick up an umbrella policy. Supplementing your homeowners insurance, an umbrella policy will increase your liability coverage into the millions. This coverage becomes available to you after you tap out the homeowners insurance limit. According to Consumer Reports, a $1 million umbrella liability policy usually costs a couple hundred bucks per year.
Umbrella policies cover you if you have significant assets to protect. If your homeowner’s liability limit is $100,000 and you are sued for $250,000 in damages, your 401(k) or other assets are all fair game. An umbrella policy would cover recovery over your homeowners insurance up to the cap you choose.
Alright, folks, that wraps up Part 2 of our series. In conclusion, take a look at how your current policy handles your belongings and your liability risk. In the next article, we’re going to discuss strategies to save on the cost of your homeowners insurance. I would not tell you to beef up all your coverage without providing some ideas on how to save money!
As always, reach out if you have any questions about your insurance, home maintenance or if I can help connect you with service providers!
Photo by Erik Mclean on Unsplash
