Regularly Review Your Property Insurance

When you bought your home, you may have simply purchased a homeowners’ insurance policy sufficient to satisfy the requirements of your mortgage lender. But lenders only require policies that protect the house, not its contents.

Those possessions are likely to grow in quantity and value over time and they need to be insured. You may also need optional coverage, called riders, for earthquakes, windstorms and other natural disasters or to increase the amounts paid out on certain items. In addition, remodeling, adding a room, and getting married or divorced are just some of the changes in your life that should prompt you to review your policy’s terms.

Here are some frequently asked questions about property insurance. The answers provide only general information. Consult with your financial advisor about your specific situation.

Q. What types of homeowners’ insurance can I purchase?

A. There are three types of policies:

1. Standard, which protect against several named, or listed, perils that could damage your home and its contents, such as lightning, windstorms, hail, theft and certain types of water damage.
2. Broad, which upgrade coverage on the structure to include all risks, but leaves the contents on a named perils basis. All risks policies generally list what is excluded from coverage, such as faulty workmanship and general wear and tear.
3. Comprehensive, which provide all-risks protection on both the structure and its contents.

When you purchase a policy it’s important that it will cover at least 100 per cent of its replacement cost. This is not the same as market value of your home or the cost you paid for it. The market value of a home is the amount a willing buyer would pay to a willing seller, excluding the land, regardless of how much it would cost to rebuild the home. Replacement cost is what you would have to pay to repair or rebuild the entire home.

It’s impossible to predict what the exact cost will be to replace your home, so it’s critical to have enough coverage to take that into account. An appraiser can help you determine what it would cost to completely replace your dwelling. Also, check to be sure that the policy will automatically adjust to increases or decreases in construction costs in your area.

Q. What should I look for when it comes to water-damage coverage?

A. Generally look for policies that cover damage from plumbing overflows, holes in a roof, burst pipes and windows shattered during a storm that allow rain to blow in. Policies generally don’t cover damage from continuous seepage or sewer backups, but you can purchase that protection as a rider. For the most part, flood insurance isn’t available in Canada because flooding is considered inevitable. You should take whatever steps are necessary to protect your home and belongings from such disasters.

Q. How do deductibles work?

A. Your deductible is the amount you pay for covered damage before the insurance kicks in. Higher deductibles mean lower premiums but additional financial risk. Usually a deductible is a flat rate that can be as low as $500.

Many insurers offer percentage deductibles, particularly for coverage of damage from earthquakes, hurricanes and windstorms. Under these policies, you pay a certain percentage of your home’s insured value before you get reimbursements. For example, if your policy has a two per cent deductible and your home is insured for $250,000, you pay the first $5,000 in damages. Be sure your deductible is an amount you can afford to pay.

Q. Can I get a discount?

A. Many insurers offer discounts to people who own newer homes, have installed such safety features as smoke detectors and burglar alarms or have not filed claims for a specific period of time. Some companies even offer discounts to non-smokers.

Q. What is liability coverage?

A. This covers unintentional injuries to visitors or accidental damage to a neighbour’s house as well as legal costs if you are sued. A minimum of $1 million is recommended.

Q. How are claims paid on personal possessions?

A. Most policies cover personal possessions at a rate of 50 per cent to 70 per cent of the amount of insurance you have on the dwelling. In other words, if your home is insured for $100,000, your policy would cover from $50,000 to $70,000 of the value of the contents. You can purchase two types of coverage:

1. Cash value policies that pay the depreciated value of the item, which is the replacement cost minus a deduction based on the age and condition of the original item.
2. Replacement cost policies that reimburse you for the full amount. If you have this coverage and opt for a cash settlement, you will be paid on a depreciated basis.

Q. Are there monetary limits on the coverage of specific possessions?

A. First, standard and broad policies don’t generally provide coverage for such valuable items as furs and jewellery. But even with comprehensive insurance, the dollar limits may be inadequate not only on those items but also on stolen cash, garden tractors, computer software, bicycles, and collections of coins, stamps and cards. The good news is that you can generally purchase reasonably priced riders for supplementary coverage. When it comes to art and antiques, you need to look for specialty insurance policies.

Q. Will my homeowner policy pick up the extra cost of having to conform to new building codes if I have to rebuild my home?

A. No, most insurance policies do not pay for this. You may be able to purchase a rider, but it may pay only a portion of the increased costs.

Q. I live in a condominium and the condo corporation carries insurance. Do I need my own policy?

A. Yes, because the corporation’s insurance covers only items that are part of the building. You need insurance for upgrades you make to the unit, for your possessions and for personal liability.

Q. What is title insurance?

A. Title insurance compensates you for losses from such factors as unknown title defects, existing liens, encroachment issues, fraud, and other issues that can hinder your ability to sell your property. When considering this insurance, carefully review the exclusions.