Warranties and Homeowner’s Insurance
Judi Connor
California Real Estate
Sept. 2005
In California, where in June 2005 the median price of a home reached $542,720, it’s just common sense that we protect one of our largest investments. But weeding through homeowner’s insurance and home warranty options can get very confusing, especially for first-time homebuyers.
Homeowner’s insurance is mandatory and protects a homeowner against loss from fire and other hazards that may impair the value of a home. Home warranties are not mandatory, and protect owners from repair costs for the inner workings of a home (that aren’t covered by homeowner’s insurance) such as plumbing, air conditioning, major appliances, heating, etc.
Homeowner’s Insurance
Homeowner’s insurance covers the structure and contents of the home, and also protects the owner and anyone else named on the policy. Mortgage lenders won’t allow you to close the purchase of a home until you demonstrate that you have adequate homeowner’s insurance. Also, they’ll typically insist that you pay the first year’s premium on that insurance policy at the time of the closing. Most policies have the following components: structural limit, content coverage, liability coverage and additional living expenses coverage.
Structural limit covers the cost of replacement in case the entire home is destroyed and has to be rebuilt. Homeowners should keep in mind that this is coverage for the entire home, not just the amount remaining on the mortgage or their equity in the building.
The content portion covers personal property within the home and usually varies anywhere from 25 percent to 75 percent of the structural limit. However, individual item limits are typically $2,500. So, if you have total content coverage of $100,000 and your emerald ring is valued at $15,000, you should get an endorsement or floater on that one piece. Homeowners can choose between actual cash value or replacement value for content coverage. Actual cash value pays you an amount equal to the replacement value of the content, less depreciation for the years you owned the item. Replacement value is more expensive, but pays the homeowner the full value of the item today.
Liability insurance helps protect the owner and family from financial disaster if someone files a claim against the homeowner policy or sues the homeowner. The standard liability limit for most policies is $100,000, but it may be advisable to get more, particularly if the homeowner has sizable assets.
Additional living expenses (ALE) cover living expenses such as lodging, clothing and food in the event that the covered premises are damaged to the point of being uninhabitable. You can negotiate how much ALE you want, what the time limit is, etc. Some policies have a time limit of one year, others are for two years, so make sure you check your policy and understand what it covers.
What’s Covered?
Standard homeowner’s insurance policies typically provide coverage for damage to your home caused by:
Theft
Smoke
Fire and lightning
Frozen pipes
Ice and snow
What Isn’t Covered?
You should read your policy carefully, so you won’t be surprised later. Most insurers exclude damages caused by:
Earthquake
Terrorism
Nuclear accident
Flood
Act of war
However, if desired, it may be possible for you to buy endorsements or floaters that will cover these events. Homeowners can also purchase flood and earthquake insurance from the National Flood Insurance Program at (800) 638-6620 and the California Earthquake Authority at (877) 797-4300.
How to Save Money
The average premium for homwowner’s insurance holders nationwide was $608 in 2004, according to the Insurance Information Institute (I.I.I.). California homeowners currently pay an average annual premium of $872, according to the California Department of Insurance. To help minimize cost:
Try to get the most comprehensive policy possible, and take the largest deductible that you can afford. Consider opting for a deductible of $500 to $1,000. In the event of a loss, you’ll have to pay this amount yourself before your homeowner’s insurance kicks in, but you’ll save on premium charges.
You may also qualify for discounts if you have a home security system such as fire, emergency or burglar. Other possible discounts may apply if you:
Live near a fire department or hydrant;
Own a home built from fire-resistant materials;
Own a newer home; or
Get your auto insurance from the same company.
Check the Comprehensive Loss Underwriting Exchange (CLUE) report of the home you’re thinking of buying. These reports contain the insurance claim history of the property and can help you estimate any problems the house may have.
Get a few quotes from various insurance companies and compare the coverage each policy offers. Check with the state’s department of insurance to make sure the companies have good standing in the industry: California Department of Insurance hotline at (800) 927-HELP (4357). You can also check the financial stability of the companies you’re considering with rating companies such as A.M. Best (www.ambest.com) and Standard & Poor’s (www.standardandpoors.com).
Make a Careful Inventory of Your Home’s Contents
If you ever need to make an insurance claim, it will make your life a lot easier if you have a detailed list of your home’s contents and associated value, as you’ll need to provide that along with your claim. You should list everything – from small items such as toothbrushes and cosmetics to lawn mowers and appliances. You’ll also have to provide copies of bills, receipts or other documentation to support your figures. If you forget some items or don’t include an adequate description, you might receive less than full compensation for your losses. Go room by room and list everything – better yet, photograph everything or videotape it, making sure to not the date. Finally, store a copy in a safe place such as a safe-deposit box (including receipts and other documentation) and make sure to update the list/photos/videotape at least annually to accurately reflect your home’s contents.
Review Your Policy Regularly
California’s insurance commissioner estimated that 90 percent of homeowners affected by the recent wildfires were underinsured. In many cases, this was caused by increased construction costs, as well as the cost of complying with new building code requirements.
The I.I.I. web site claims that 41 million homeowners have added to or improved their homes between 2001 and 2002. So if you’ve made housing upgrades, make sure you review your policy regularly to ensure that it covers the cost of rebuilding your home.
Home Warranties
Although it’s not mandatory, more than 90 percent of resold homes in California are sold with home warranties, according to Home Warranty Association of California (HWAC). Basic coverage from a home warranty means the warranty company will repair or replace an existing home’s covered mechanical systems and major built-in appliances that have broken down due to normal wear and tear. The typical warranty contract lasts for one year, but is renewable (about 35 percent are renewed annually).
The average cost of a standard home warranty is $275 for a home with up to 5,000 square feet, according to Mark Lightfoot, president of HWAC. Most policies have a $50 to $100 deductible.
What They Cover:
Heating
Plumbing
Electrical system
Water heater and major appliances (range/oven/cooktop, dishwasher, garbage disposal, etc.)
Optional coverages are available for air conditioners, pool equipment, washer/dryers and refrigerators.
What They Don’t Cover
Consequential damages – if a water heater bursts, the warranty covers just the water heater and not the carpet or floor that may have been damaged.
Preexisting conditions.
Sprinkler systems outside – coverage limited to perimeter of house and garage.
What You Should Know
Homeowners must go through the warranty company for any repairs – the warranty company won’t reimburse work done by other contractors. If you’re receiving a home warranty as part of a transaction, there is typically a paperwork delay before you receive your official contract. Because 20 percent of all claims happen in the first 45 days after moving into a home, don’t forget to ask your seller or broker for a sample contract so you know who to call if anything happens.
The state of California requires that all home warranty companies must be licensed by the Department of Insurance. To ensure a company is licensed and to get further information (such as number of complaints filed), consumers can call the California Department of Insurance hotline at (800) 927-HELP (4357).