Understanding homeowners insurance

In my last column, I explained the importance of adequately insuring your dwelling. I explained the basic forms of home policies and insurance company endorsements – company-created additions that can broaden or limit coverages. This week, I will explain the many coverages and deductibles available in a home insurance policy. I will assume you chose the basic form HO-5 policy with the broadest coverages. I also stress the importance of being a named insured.

Liability insurance is a coverage in a home insurance policy. It is designed to protect you and your family if you were to injure or cause property damage to another person, regardless if the accident was in your home or not. Like all liability policies, it is designed to protect your assets. Most people don't know that it provides protection outside and away from your home. For example, did you ever wonder what happens if you hit someone with a golf ball? Most policies start liability coverage at $100,000. However, choosing $300,000 or $500,000 may be more adequate to protect your assets and may not cost that much.

Coverage for medical payments to others is included in your home policy. This coverage is designed to make you a good neighbor. If someone gets hurt on your property, then the policy will pay their medical bills (up to a limit), regardless of the cause. If this limit is not adequate to cover the medical bills, then your liability coverage steps in.

Coverage for damage to property of others, like medical payments, is designed to quickly settle a claim without determining liability when you damage another's property. My insurance company has paid for broken glassware, screen doors, and even a toilet.

Contents coverage protects your personal items. Contents coverage protects your property anywhere in the world. The amount of coverage is usually 75% of the dwelling coverage. For example, if your dwelling is insured for $250,000, then the contents are insured for $187,500. This amount seems like a large number for a couple just starting out, but 20 years of accumulating personal items may require you to adjust this number. There are also limitations on certain items like jewelry, guns, currency, and silverware.

If you have any concern for items of value, ask your agent to explain the limits in the policy. There are endorsements that can broaden the limits of coverage on certain items. There are also policies designed specifically to provide coverage for items of value. What's more, contents coverage has limits on motorized vehicles. Do not assume your home policy will cover a vehicle, such as an ATV, dirt bike, or boat.

So, who has a she-shed or a bachelor pad in the backyard? Dwelling extension coverage protects your fortress of solitude. HO-5 policies allot 10% of the dwelling amount to dwelling extension coverage. So, a $250,000 home with an HO-5 policy has $25,000 of coverage for all structures not attached to the home. Review this coverage with your agent.

Now, suppose your house catches on fire, and you can't live in it. Where are you going to stay and are you going to pay for it? In most policies, loss of use coverage provides additional living expenses for up to two years. This coverage pays for additional costs you incurred for having to live elsewhere while your home was being repaired or replaced.

Next, let's talk deductibles. Like car insurance, you can choose the amount of loss you are willing to assume. This is called a deductible and applies to a dwelling or contents loss. Deductibles originally were fixed dollar amounts like $250, $500, etc. Over time inflation increased the value of our homes, while deductibles did not increase proportionately. Insurance companies add deductibles based on a percentage of the dwelling amount. Now common are deductibles of 0.5% up to 5%. Percentage deductibles reflect the effects of inflation and help keep premiums lower. Like all deductibles, the higher your deductible, the lower your premium and vice-versa.

Lastly, home insurance policies require the owner of the property to reside in the property. Insurance companies assume the named insured owns and resides in the property. If you own a single-family home, town home, or condominium and do not live in it, then you should not have a home insurance policy. Talk to your agent to make sure you have the correct policy for your situation.

Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Friday in the Observer-Reporter.