Home Insurance in California: Terms You Should Know

Customers buying houses are negotiating about the cost of home insurance with agents.
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A California homeowner or renter who is curious about the definitions of home insurance or renter’s insurance terms should consult the California Department of Insurance’s glossary. These definitions may not apply to real property outside California. A California homeowner or renter who does not understand ambiguous or vague terms in an insurance policy should clarify the terms with the insurer before signing the contract. California laws regarding ambiguous contracts favor the insured.

Home Insurance Basics

A home insurance policy provides property coverage and liability coverage. Property coverage includes coverage for the dwelling, such as the roof and walls, personal property, and the contents of the home, such as furniture. It also includes other structures on the property, like a detached garage or gazebo. Liability coverage pays for a policyholder’s legal defense if he is sued after a guest is injured on his property or after the policyholder damages the guest’s property. Liability coverage also pays the reasonable medical expenses of a guest injured on the policyholder’s property. In addition, the policy covers loss of use if the primary dwelling is damaged.

Loss of use usually covers additional living expenses (ALEs) for the time that the policyholder and her family must wait for the primary dwelling to be repaired or replaced. ALEs can include housing, meals and warehouse storage. There is typically a time limit on ALE of 24 months or until the primary dwelling is repaired or replaced, whichever is shorter. For losses arising from a declared disaster occurring after September 21, 2018, ALEs are available for no less than 24 months. It can be extended up to 36 months with good cause, and an insurer may grant six-month extensions for good cause.

Policy Limits

There are standard limits for every category of property coverage and liability coverage in a policy. A homeowner should read her policy carefully before signing the contract to understand the limits. These limits differ according to what is covered and are usually dependent on the amount for the primary dwelling. For example, personal property coverage is usually limited to 50 percent of the amount for the primary dwelling. Loss of use coverage is usually limited to 20 percent of the amount for the primary dwelling.

Renter’s Insurance Basics

Renter’s insurance typically covers personal property, loss of use, personal liability and medical payments to others. As there is no primary dwelling to utilize as a base for coverage, renter’s insurance policies usually use the total for personal property as the base. Loss of use is usually limited to 20 percent of the amount for personal property. Personal liability generally has a limit of $100,000.

What Isn’t Covered

In California, homeowner’s and renter’s insurance typically cover windstorm, fire, smoke, vandalism, damage by vehicles, breakage of glass, theft and sudden and accidental water damage. The policy usually does not cover flood, earthquake, insects, mold, termites, neglect, losses to homes vacant 60 days or more and water damage caused by seepage or leaks. Homeowner’s insurance usually does not cover a second home without the purchase of additional liability coverage for that dwelling. If a homeowner buys the additional coverage, the primary home’s insurance policy is likely to pay for medical bills and legal expenses for problems like a guest injured at the vacation home.

Exclusions and Alternative Coverage

There are some options for a homeowner or renter whose policy contains exclusions, or lack of coverage for certain types of perils. She can buy earthquake insurance from the primary insurer, a separate insurer or the California Earthquake Authority. She can buy fire insurance from the California FAIR Plan. The FAIR Plan is a basic type of insurance offered by the pool of companies that offer residential insurance in California.

A homeowner or renter can buy flood insurance if he lives in a National Flood Insurance Program (NFIP) participating community. The NFIP is administered by the Federal Emergency Management Agency (FEMA). This program provides federally backed flood insurance in communities that adopt and enforce floodplain management ordinances.

Replacement Cost Vs. Actual Cash Value

Replacement cost and actual cash value (ACV) are two ways to measure losses. Replacement cost is the cost of buying a new, comparable model to replace the item that was lost. This is the default in home insurance policies. It is more expensive than ACV. Typically, the homeowner must buy the replacement before receiving compensation for it.

Actual cash value is the value of the lost item. It does not include the cost of repairing the lost item. It is usually cheaper than replacement cost. Its main disadvantage is that most items in a home depreciate over time. After a loss, ACV may not compensate the homeowner to the extent that she will be able to afford to replace an item similar to the one she lost.

Many home insurance policies place limits on the extent of coverage for items that appreciate over time, such as jewelry. A policyholder can buy additional coverage for items like these. The policyholder will be required to prove the value of such items in the event of a loss. It is a good idea to get such items appraised by an expert or consider keeping them in a safe or in safe deposit box.

Comparing Policies

A homeowner or renter who is unfamiliar with the language in residential insurance policies can utilize the homeowner’s coverage comparison tool provided by the California Department of Insurance. This tool provides a breakdown of different types of coverage, required minimum limits of coverage and loss settlement provisions. This last category examines whether the policy will compensate the insured at a replacement cost basis, an actual cash value basis or another basis. The tool provides side-by-side comparisons of policies from up to three different companies at a time. It also includes links to the California Department of Insurance’s glossary.

Insurance Agent or Insurance Broker

An insurance agent works on behalf of the insurance company. An insurance broker works on behalf of the policyholder. The insurance broker is an independent insurance sales person who may place coverage with any insurance company admitted to sell insurance in the state. Since a broker is not appointed to represent a specific insurer, he must post a $10,000 bond before acting as a broker. In California, all residential homeowner’s insurance agents and brokers must be licensed by the California Department of Insurance.

Home Inventory

It is a good idea for a policyholder to do a regular home inventory of her possessions. A complete household inventory should be up-to-date and contain a record of serial and model numbers of electronic goods and appliances. There are different software apps and print guides for completing a home inventory. A policyholder should check with her insurer as to whether the company requires a breakdown of every single item. Many companies, such as State Farm, recommend grouping items of similar quality, price and age, such as: "clothing — jeans — 20 pair."

When a party has a question about what constitutes a covered loss, he should contact an insurance attorney with experience in residential property losses. There are many attorneys in California who are experienced in dealing with claims regarding wildfire and flood damage. The policyholder should provide his attorney with the home inventory and receipts for his expenses that relate to the damage to his home.

Statute of Limitations

In California, an insurer must accept or deny a claim within 40 days of receipt. If the insurer does not compensate the policyholder to her satisfaction, she can sue the insurer in civil court. The statute of limitations to bring a lawsuit for a written contract like an insurance policy is four years. California allows an insurer to contractually reduce the statute of limitations to one year. The insurer can waive its right to enforce this statute of limitations by its conduct.

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