Home insurance in California insures a homeowner against the risk that something could damage her home or the possessions inside it. But that doesn't mean that every policy is alike or offers the same coverage. In fact, a payout can vary widely depending on the policy's method of calculating the coverage. It is important that a homeowner shop around and understand her choices before purchasing home insurance.
What Is Home Insurance?
For most people in California, a home is the biggest investment they will make in their lifetimes. That makes home insurance, also known as homeowners insurance, a very important purchase. But exactly what does it cover?
There are many different types of homeowners insurance coverage. An average policy in California covers these types of risk:
- Dwelling coverage.
- Personal property coverage.
- Other structure coverage.
- Liability protection.
- Guest medical coverage.
Other types of coverage can be included. A common additional coverage is protection against additional living expenses if the home becomes uninhabitable after a loss. It's important to understand the details of each of these types of coverage.
What Is Dwelling Coverage?
Dwelling coverage protects against damage to the structural elements of a home. This is the coverage that a homeowner looks to when a tree crashes on the house, crushing the roof and walls, or a home is destroyed by fire and must be replaced. This is one of the most critical types of coverage.
A homeowner who purchases insurance needs to understand how the policy covers structural damage or destruction. Three common ways to insure these losses are: replacement cost, extended replacement cost and actual cash value.
How Do the Common Coverage Types Work?
According to the California Department of Insurance, the different ways of calculating coverage can produce very different results for a homeowner. Replacement cost insurance coverage pays the homeowner the cost of replacing the damaged property without deduction for depreciation, but limited to a maximum dollar amount.
Extended replacement cost coverage ups the maximum amount by a certain percentage over the limit to provide protection against risks like a sudden rise in construction costs. The percentage increase can be anywhere from 20 percent to 50 percent, so a homeowner needs to look carefully at this number.
Actual cash value is the final method commonly used. It will insure a home for whatever it costs to repair it, factoring in depreciation for age and use. For example, if a home's roof is 10 years into its 20-year expected life, the actual cash value will be about half of what will be needed to replace it after a fire.
What Is a Cause of Loss Form?
A homeowners insurance policy sets out both the amounts of coverage it provides, and also the types of loss, or causes of loss, it insures against. Most policies cover fire, for example, but don't expect the policy to cover flooding.
A homeowner has two options when it comes to cause of loss forms. One is called "named perils" because the types of losses the insurance covers are all listed, or named, in the insurance policy. The other is termed an "all risk" policy form. Sometimes these are called "broad form" and "special form" policies, respectively.
What Is Named Perils Coverage?
Named perils coverage is cheaper and less expansive than all risks coverage. If a home policy is a broad form named perils policy, the insurer will pay for property damage to a home only when it results from the list of perils included in the agreement. The list will usually include the most common types of losses homes generally suffer.
This can be a trap for the unwary since the insurer does not include a list of exclusions. Since only losses from the listed perils are covered, no exclusions are required. Anything not on the list is simply not covered. What is on the list? Usually the named perils include: wind, hail, aircraft, riots, volcanic action, vehicles, explosions, fire, lightening and smoke. But insurers can add or subtract from this list of perils.
What Is All Risk Coverage?
The more expensive all risk policy provides insurance coverage for a home against everything that might damage it other than things specifically excluded in the policy. A homeowner should read the exclusions list carefully. All insurers generally exclude the same causes of loss: flooding, war, earth movement and pollution.
The real difference between named perils and all risk is the burden of proof. With a named perils coverage form, the homeowner must prove that the damage resulted from a covered peril. Under an all risks policy, the insurer must prove the cause of loss was excluded in order to deny coverage.
What Is Personal Property Coverage?
Personal property coverage insures the items inside a home like furniture and appliances. Damage or loss of these personal property items is covered whether or not the property was in the house when the damage occurred.
Like structural home coverage, personal property coverage may offer different ways of determining the coverage limits. Some calculate the loss based on replacement value of the property without any depreciation deduction. Others are based on actual cash value which deducts for depreciation. Actual cash value is the default coverage and applies if replacement value is not mentioned in the policy.
What Types of Add-On Coverage Are Available?
Personal property coverage has built-in amount limits. If these limits are too low, or there are expensive items a homeowner wants protected, he can buy a special personal property endorsement that adds coverage to a policy. Or he can buy a "floater," insurance that covers valuable items separately from the personal property insurance.
As far as premises coverage, a homeowner can purchase add-on coverage of various kinds. This coverage can extend the replacement cost coverage, cover building code upgrades (required by the current building code), or cover sewer and drain back-ups.
What Is Coverage for Other Buildings?
If a homeowner's property includes a separate garage or a mother-in-law unit, she may need to purchase additional home insurance that covers these structures. This coverage insures the physical structure of these buildings. Like premises coverage for the home, premises coverage for other buildings can be calculated in different ways. Three common ways include the replacement cost, extended replacement cost or actual cash value.
What Is Liability Coverage?
Liability coverage is a central component of a homeowners insurance policy. It is sometimes called personal liability coverage. It protects the homeowner when someone is injured in his home or injured outside the home due to a mistake or accident he caused. The accidents must result in bodily injury or property damage.
The injured person can bring a lawsuit against the homeowner for damages. The homeowners personal liability insurance coverage will step in to pay for his defense and also for any resulting judgment against him, up to the policy limits.
What Is Included in Liability Coverage?
Like other coverage included in a home policy, personal liability insurance comes in several different forms. Bodily injury insurance protects a homeowner when another is injured in or around the home. For example, if a guest slips and falls in the bathroom and breaks a leg, bodily injury coverage is what is needed.
Liability coverage also includes guest medical payment insurance. This helps pay for the medical expenses of the person injured on or around the home. It generally covers these medical services, up to the homeowner policy limit:
- ambulance transportation
- medical expenses
- dental work
- hospital expenses
- nursing services
- prosthetic devices
- funeral services in case of death
Property damage is also a part of liability insurance. This covers damage the homeowner or his family members do to other people's property. For example, if a homeowner accidentally breaks the neighbor's window while trimming his own tree, property damage would pay for the window up to policy limits.
Limits of Personal Liability
Although personal liability is included in every homeowners insurance policy in California, coverage is not uniform. That's because different policies set different policy limits. The insurance company will only pay an amount equal to or below the coverage limit in claims. That's why a homeowner needs to pay attention to the coverage limit under the contract.
Most home insurance policies include $100,000 in personal liability insurance. This sounds like a lot of money but, in fact, it is usually insufficient to fully protect the homeowner. Any kind of serious injury that occurs to a guest may cause far more damage than that in medical bills and legal bills. The legal bills incurred to defend the homeowner from suit are also included in the limit.
How much is enough? Experts generally recommend that a homeowner buy coverage with a liability limit of no less than $300,000. Note that the liability limits do not include the medical payments portion of the coverage. Those limits are set separately and vary among policies. Many experts suggest that a homeowner purchase a policy with a medical payments limit of no less than $5,000.