Property and Liability Insurance
Property and Liability insurance are the only forms of insurance which people are actually required to purchase. Take homeowners insurance for example. If you (like most people) buy a home on a mortgage, who is protecting the bank which loaned you the money from a fire which destroys the home? Well, the bank is going to require you to buy a homeowner’s policy in order to secure the mortgage. It makes sense. A similar insurance (called title insurance) protects the lending bank from errors which come up over the proper title to the property. Homeowners policies protect against perils such as fire, wind, theft, etc- which cause a loss. Coverage can generally be broken down into three categories: basic form coverage, Broad form coverage, and open peril coverage. Under basic and broad coverage, the peril must be listed in order for it to qualify for a claim. Only in open peril coverage is everything included unless it is specifically excluded.
The next thing people tend to worry about is how much coverage will be enough? The short answer is “replacement cost.” You want to make sure your policy will cover the costs to replace what is currently standing. Generally, a policy will have an 80/20 policy similar to a health insurance plan. This is generally sufficient since a 100% loss of a home’s value is extremely rare. That would literally require a blazing fire, enough hail to wipe out the neighborhood, or a total collapse in the structure of your house to require 100% replacement cost. Sometimes a policy will pay “actual cash value” rather than “replacement cost.” You don’t want actual cash value! ACV would take depreciation into consideration and tell you your $2,000 Italian Leather couch is worth $300 now. Replacement cost will give you the funds necessary to go out and buy that couch new again. An inflation guard (like in many other insurance policies) can be very helpful as well.
It’s good to have additional personal property insurance along with your Homeowners insurance. Standard homeowners generally will provide only limited coverage for valuable personal property. You need to specifically endorse items of value which an insurance company might laugh at. Examples include expensive clothing, good china, collections of any sort, jewelry, furs, electronics etc. If you have a $100,000 collection of stamps, you don’t want the insurance company to tell you the provision for personal property is much, much lower than that.
These are the factors which affect the cost (monthly or annually) to keep a homeowners policy in place.
- Construction – what is your house made of? How old is it? What is the quality of the land it stands on and the landscaping which is maintained?
- Location – self-explanatory. Location is everything.
- Policy Type – There are better and worse types of coverage.
- Deductible – The higher the deductible, the lower the annual (or monthly) premium & vice versa.
- Insurance Company you select – it’s like buying a cheap vs. an expensive shirt. It probably won’t matter in your lifetime, but it feels good to go with a name you trust and a company that has a ton of cash reserves.
Some standard rules apply to most types of insurance. One of them is that companies will never insure against something catastrophic. The reason for this is the insurance company could become insolvent if they protect against an earthquake which wipes out 2,000 homes. How could they possibly pay for that? The answer is they won’t underwrite a policy if they can’t pay the claims. Water damage, power failure, earth movement, war, nuclear hazards, and intentional losses are generally not covered in a homeowner’s policy.
What if I’m not a homeowner? Can I still protect myself from liability?
Of course- what do you think- the insurance companies didn’t think of that? Welcome to Personal Liability insurance. This policy will provide coverage for a variety of liabilities you haven’t even thought of. This may include the people you interact with, their children, your vacation homes, your boat, an apartment which you rent, medical payments to others, damage to property of others, etc. This type of coverage, since not quite as necessary as other types, is less expensive to own. You can take out an extra few hundred thousand dollars of umbrella (cover all) insurance without breaking your wallet. The reason for this is many types of liability are covered by other policies and it’s not very likely that an unusual liability covered in your personal liability policy will pop up and cost your insurer hundreds of thousands of dollars. Note: Certain exclusions generally apply to personal liability insurance. They include: business pursuits, rental of property, professional liability, motor vehicles, watercraft, and communicable disease. The reason for this is most of these liabilities will be covered or require coverage under a policy of their own. Automobile insurance is the best example of this. You are required to have liability insurance when you operate a car so don’t expect to be double-compensated under a personal liability policy.
Please e-mail me at email@example.com with questions or comments about property and liability insurance. You may also call me at (212) 752-4343 x31.