According to a recent survey (USA Today, 8/27/21) 42% of older and 61% of younger adults don’t think they understand home insurance.
I hope my clients are better informed than that, but just in case, this newsletter goes back to basics. Based on the survey results, parents should feel free to pass these principles on to their adult children.
Here are seven home insurance principles to remember:
1. Home insurance is necessary and valuable.
Home insurance protects against financial loss from risks to property and liability to others caused by family and pets (lawsuits). It is required to get a mortgage. Without home insurance it would be common for people to have a lifetime of work destroyed by events no fault of their own. With home insurance, in the event of a loss the financial impact is offset and additional support is provided. In the case of a lawsuit, support includes legal representation. In the case of loss of use, support includes alternative living expenses for as long as 24 months while your home is repaired.
2. Basic home insurance does not cover every peril.
Basic home insurance generally covers perils that are common to all homes such as:
- Interior water leak
Other perils are typically covered but at very restricted loss limits:
- Sewer back-up
And certain perils are not covered by basic home insurance:
Flood and earthquake are not covered under basic home insurance policies because people located where they don’t occur don’t want to pay for what they don’t need. So flood and earthquake insurance are available as an optional coverage.
3. For a claim to be paid, the insured needs to be prudent. Prudent means:
- Maintain the home properly
- Mitigate damage if possible
- Claim isn’t related to illegal activity
Prudent means common sense. Here are examples of not prudent: you leave your heat off during a cold snap and your pipes burst…wind blows shingles off your 35-year-old roof…you ignore a small visible leak, and it later leads to mold. In general, home insurance covers certain events that are sudden and accidental, not the result of poor maintenance.
4. Insurance is not a commodity.
There is no standard insurance contract or standard set of terms. Contract terms (exclusions, sublimits, replacement valuations, etc.) and claims service vary widely by carrier. When a TV ad says you can save by switching, they want you to assume insurance is a commodity. You don’t see Kia advertising you can save on car expense by switching from a Mercedes.
Differences in contract terms get complicated. Carriers generally try to develop terms to achieve market appeal to their target segments while still making a profit. My experience is high net worth homeowners who use midmarket carriers are using a suboptimal product designed for a different type of customer. For detailed information on the advantages of higher value home insurance carriers, click here.
5. Insurance is not a right.
When a client gets a non-renewal notice, their first question to me is often “can they do that?” The answer is yes. Carriers cannot discriminate, but they can and do underwrite based on risk factors:
- Wildfire zone
- Claims history
- Property condition
- Safety features (like water leak detectors)
Anybody looking to buy a house near a Western brush area or East/West coastal should do an insurance check before closing to avoid a nasty surprise. Over the last several years carriers have expanded their wildfire risk zones to include wide swaths of many areas in California, parts of Arizona, Oregon and Colorado, and the Lake Tahoe area. Gulf Coast/Florida markets are risk tightening as well.
And try to avoid multiple small claims. Carriers view a handful of small claims as a better predictor of future claims than if you had one claim where your entire house burned to the ground.
If you do get cancelled or non-renewed Desert Insurance Solutions usually has options, but they will likely be more expensive and/or more restrictive.
6. Insurance is not a savings account.
Some people have this unusual idea that because they’ve paid home insurance premiums for years they deserve “payback” via a claim. Insurance is designed to offset the financial impact of a covered loss (in legal terms “indemnity”). So even if your insurance completely offsets your covered financial loss, you still have the hassle factor. The best possible insurance outcome is never having a claim. Wanting payback on your home insurance is like wanting to get sick and have expensive surgery to get payback on your health insurance.
7. The key to the right insurance is the right agent.
Insurance is complicated and according to the survey about half the people who have it don’t feel they understand it. Well, I don’t understand how to fly a plane but still fly because I trust the pilot. The right insurance agent will get you the right insurance. Good insurance agents are:
- Experienced…at least 10 years with personal, commercial, professional and health lines. Even if you aren’t buying those other lines, if your agent sells them all they probably know what they’re doing.
- Independent…multiple carriers including out-of-state carriers for special situations. You want the optimal carrier for you and if non-renewed you want options.
- Resourced…accessible, responsive, licensed in all states, physical offices with real people.
Desert Insurance Solutions is all those things. Thanks for doing business with us and make it a great day!
This document is for information only and is not intended to provide legal or tax advice. Insurance limits, terms, conditions and pricing can only be established by specific contract agreed to by the carrier.