Money & Policy

7 Things You Should Know About Your Homeowner’s Policy

Don't be blindsided by unreimbursed losses for items that aren't covered

Here's a great read to take with you on your next vacation: Your homeowner's insurance policy.

Well, maybe not. But I do wish you would read it — and a boring airplane ride is just the place!

As a result of disasters like last year's Superstorm Sandy, along with more frequent tornadoes, wildfires and floods, insurance companies are shifting more risk and costs to you, so it's more important than ever that you understand what your policy covers — and what it doesn't.

(MORE: 4 Costly Homeowner's Insurance Mistakes to Avoid)

To help homeowners better understand their policies, the Consumer Federation of America and United Policyholders released a list of the top seven facts you need to know about your policy:

1. Most policies do not pay for damage due to floods, earthquakes or landslides. You should determine if you're in a high-risk zone by checking official local flood and earthquake maps'.out-of-pocket costs.

2. Different deductibles can result in unexpected out-of-pocket costs. Most policies have at least two deductibles: one that applies a flat-dollar amount for most losses and another, higher deductible that applies if the loss is related to wind.

Read your policy so you know your exposure in the event of wind damage.

(MORE: Car Insurance and Homeowner's Discounts)

3. Hidden clauses can result in reduced or denied claims. For example, say during a storm, your home sustains both wind damage (covered by your policy) and flood damage (not covered). If your policy has an ACC clause for "anti-concurrent causation," coverage could be eliminated or reduced even if the damage was caused by the covered peril.

4. Coverage may be limited to your home's original costs rather than replacement cost. Many policies reimburse you only for the amount you paid to buy the house. But if you bought it many years ago, it might cost you much more to rebuild it today.

Make sure your policy covers replacement cost, not merely reimbursement cost.

5. Your policy might not cover specific high-cost damage. Many policies don't cover damage from mold, non-flood water damage, destruction of computers, loss of business property, damage to artwork or food spoilage. Read your policy to see if it contains exclusions like these.

(MORE: Money Lessons From Hurricane Sandy)

6. Consider additional costs you may incur. After a natural disaster, local governments sometimes require homeowners to upgrade their houses when rebuilding, such as raising the elevation.

Many policies won't cover the additional costs. You might need to buy separate coverage.

7. Prices vary widely. Shop for a new policy every three years or whenever you get a large rate increase. Many insurers raise rates when they believe policyholders aren't paying much attention to costs.

Ric Edel­man is an award-winning TV and radio host, speaker, author and expert on personal finance.  His television show, The Truth About Money with Ric Edelman airs on more than 200 public television stations across the country. His long-running radio program “The Truth About Money”  airs in 50 major radio mar­kets. 

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