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  • Replacement Value

    Replacement Value Insurance Coverage Gives Homeowners Full Protection

    By Mike Heuer

    While some homeowners insurance plans provide actual cash value coverage for homes and other structures, others will pay claims based on the replacement cost. Replacement cost policies will pay the full amount minus any applicable deductibles to repair or replace a home or other structure damaged by a covered peril up to policy limits.

    There are several ways for a homeowner to determine the correct level of coverage to ensure true replacement cost coverage will apply instead of having policy limits that are less than what might be needed to repair or replace a damaged or destroyed home and other structures. Obtaining estimates on the value of the home helps a great deal. Once obtained, the highest appraisal amount should be used to determine the insured value of a home. Local builders associations also can help a homeowner determine the replacement cost of a new or recently constructed home.

    When using replacement value policies to protect a home with insurance coverage, it is necessary to keep abreast of changes in the home and other structures as well as market costs. If the cost of construction materials and labor rise, so will the replacement cost. In such cases, it pays to boost the policy limits to ensure the replacement cost will be covered in the event of damages or destruction.

    Another situation requiring adjustments to the policy limits is when improvements or additions to a home and other structures are made. Adding a new room, upgrading a kitchen or bathroom, and adding a pool are among ways to boost a home’s value. But doing so also boosts its replacement cost, and that would require an adjustment in the coverage level on the homeowners insurance policy.

    Regular adjustments in the policy limits for replacement cost homeowners insurance plans are critical for maintaining the proper level of coverage. Studies show nearly two-thirds of homes in the United States are undervalued on their insurance policies. That means many homeowners are vulnerable to financial loss even if they have replacement cost insurance policies in effect. If a home is damaged or destroyed, there could be a large deficit to be paid in order to restore damaged property, which also might have a mortgage tied to it. But many homeowners might choose to stay underinsured in order to shave some costs from their homeowners plans.

    Because insurance providing replacement value of a home or other structure is more expensive than actual cash value policies, some homeowners might want to raise the deductible amount to make the monthly premiums paid to insure the home more affordable. In general, replacement value policies cost about 10 percent more than actual cash value policies.

    While many homeowners insurance policies provide replacement cost coverage for the structure and its fixtures, the same might not apply for contents and personal belongings. Many policies instead will pay claims for contents and belongings based on actual cash value unless a replacement cost endorsement has been purchased. So if rare or highly valuable items re damaged or destroyed, such as jewelry, artwork or antiques, a standard homeowners insurance policy might not give full protection. But an insurance endorsement for replacement cost coverage would be an ideal solution.

  • HO8 Older Homes

    HO8 Homeowners Older Homes Insurance Protection

    By Mike Heuer

    An HO8 homeowners insurance plan generally is intended for homes that are older and whose actual cash value is much lower than their replacement cost if they are damaged or destroyed by a covered peril. For the most part, homes that are at least 40 years old do not qualify for HO3 or HO1 homeowners insurance policies. Instead, the HO8 plan was created to provide coverage for them

    The HO8 policy is very similar to the HO1 homeowners insurance plan in that it protects against 11 named perils and insures homes for their market value, which takes into account depreciation. Homes that are not eligible for HO3 policies often will qualify for HO8 insurance coverage since HO1 plans are not sold in most states.

    The 11 named perils for which an HO8 policy provides protection includes damage or destruction from fire and lightning. Fire is the most common peril that strikes such homes. Also named are damages of destruction caused by windstorms or hail, explosion and riot or civil commotion. Other perils include damage caused by aircraft and vehicles, unless the policyholder or other resident is the one to cause the damage with his or her vehicle.

    Losses caused by smoke damage also are covered, and smoke damage often is the greatest source of loss when a fire strikes a home. Vandalism and malicious mischief also are covered for losses, as is theft, but often with a limit of $1,000. Volcanic eruption is the final peril named in an HO8 policy, but that usually does not include losses caused by landslides, which often times accompany volcanic eruptions.

    Among common and potentially very costly perils against which losses are not covered are losses caused by any sort of water damage. While nearly all homeowners policies do not provide coverage for external flooding, all but the HO8 insurance policy do provide coverage for damages and losses caused by internal flooding and other water damage caused by broken water pipes, water heaters and other internal sources. But the HO8 policy does not. Such protection only can be purchased with an endorsement for internal flooding and water damage. External flooding only can be protected with a separate flood insurance policy.

    The HO8 policy also does protect against losses caused by falling objects, such as a tree limb crashing into a home and damaging part of it. Unless the falling object was caused by one of the other names perils, such as a part falling off an aircraft, the loss would not be covered by an HO8 homeowner policy.

    Although the HO8 insurance plan is limited in its initial coverage, endorsements can give older homes a great deal more protection. Endorsements also can be purchased to provide comprehensive protection for contents and personal belongings. Many older homes might have an actual cash value much lower than the cost to replace them, but many also might contain highly valuable antiques and other furnishings that require a great deal more protection than an HO8 policy would provide. The proper endorsement can make homeowners much more secure.

  • HO6 Protects Condominiums

    HO6 Homeowners Insurance Protects Condominiums

    By Mike Heuer

    While living in a condo means paying for homeowner association (HOA) fees, including HOA insurance, those costs do not provide insurance coverage for the condominium, its contents or personal belongings. It only helps cover liability and other insurance coverages for the commons areas and the HOA itself. Buying insurance protection for a condo means buying an HO6 condominium insurance plan.

    Condominium insurance is not sold in every state. In states in which HO6 homeowners insurance plans are sold for condos, it helps to check the master insurance policy for the HOA to avoid buying potentially overlapping coverage with a condo policy. A master condo insurance policy essentially covers all owners of condominiums for their collective liability for commons areas. While the condo owners only own the actual condominiums in which they live, for legal and insurance purposes, they each have a collective responsibility for commons areas, such as the grounds, pool areas and exterior walls.

    There essentially are two kinds of master insurance policies. One is for the bare walls and inward, which covers all real property from the exterior on into the building itself, including entryways, stairs and other commons areas. But countertops, fixtures and other property located within the owned unit is not covered by such a master policy. People whose HOAs have such a plan are most in need of comprehensive property insurance.

    The other type of master policy is an all-in policy, which insures fixtures, additions and installations within the interior of the building’s walls as well as the floors and ceilings of individual condo units. People whose HOAs have such a policy in place are less in need of comprehensive property insurance protection.

    Either type of master policy also likely would have a deductible, and a condo owner would be wise to have additional insurance coverage to protect against potential partial financial liability for paying a deductible. Once a condominium owner knows which type of master insurance plan is in place, he or she can purchase the proper HO6 policy to protect what is not covered by the master insurance policy.

    Choosing the right coverage involves the usual choice between actual cash value protection or replacement cost insurance coverage. Insurance experts suggest learning what other unit owners within a condominium might pay for various upgrades, such as to countertops and fixtures, and use that as a base for what it might cost to fix or replace similar items inside the owned unit.

    Assessing the value of the contents and personal belongings kept within the unit also is an important step and can help determine if replacement cost coverage or actual cash value would be needed. As always, replacement cost coverage is the more expensive option but could be important for ensuring the value of rare items, such as antiques and artwork, will be fully protected.

    Various property and casualty insurers will offer different types of HO6 insurance policies to ensure condominium owners and the units themselves have sufficient protection as determined by the policyholder. When properly protected, a condo owner can be certain he or she won’t suffer a great financial loss if the unit or building is damaged or destroyed by covered perils.

  • HO5 Premier Comprehensive Protection

    HO5 Premier Policy Offers Comprehensive Protection

    By Mike Heuer

    While the HO3 insurance policy is the most popular type of homeowners insurance sold, the HO5 homeowners insurance plan offers more comprehensive protection. An HO3 policy will protect against all cited risks, but the HO5 homeowners insurance policy is an open-perils insurance plan that protects against all but excluded perils. The HO3 form only insured against those perils cited.

    An HO5 policy costs more than an HO3 plan and is more exclusive in that homes must be newer and qualify for coverage. Because many homeowners do not need the additional protection provided by HO5 plans, they often choose the more affordable HO3 policies.

    Like an HO3 plan, and HO5 policy will protect a home against all risks. Specifically, both policies will protect the structure against losses caused by theft, fire, lightning, explosion, smoke damage and freezing. Both homeowners insurance policies also protect against losses caused by vehicles, falling objects, volcanic eruption, windstorm, hail, riot or other civil commotion and vandalism or malicious mischief. Also protected are losses caused by aircraft, the weight of ice, sleet or snow, sudden and accidental tearing apart cracking, bulging or burning, a power surge or an accidental overflow or discharge of water from air conditioning, water heaters, plumbing or other internal source.

    Both policy types provide a great deal of protection for a home’s structure, which is why most homeowners settle for the more affordable HO3 policy. But when qualifying for an HO5 insurance plan and able to afford one, many insurance experts agree it is the better option, particularly for new homes that cost a great deal and might contain high-dollar items, such as antiques, artwork and other valuables. The primary difference between an HO3 and an HO5 insurance plan is the HO5 policy provides open perils risk not only for the structure but also its contents and the personal belongings of those living in it.

    When choosing between an HO3 and an HO5 policy, it is best to assess the value of personal belongings and household contents to determine which plan is the best option. When the contents and personal belongings cost a great deal and might be rare or otherwise difficult to replace, the additional cost of an HO5 insurance policy makes it a wise choice for homeowners. Options are available for replacement cost coverage or actual cash value with the actual cash value option being more affordable but possibly leaving some items more at risk. And adjusting the deductible amount can make the HO5 policies more affordable.

    Another way to make HO5 policies more affordable is to make the deductible higher. Deductibles help insurers by reducing the need to handle claims for small losses while also limiting the potential for lawsuits arising from small claims. And the higher the deductible amount, the more affordable a homeowners insurance plan will be.

    An HO5 form of homeowners insurance will provide many coverages that must be added through endorsements on HO3 policies, such as replacement cost coverage. While the policyholder can opt for the lesser coverage provided by actual cash value, the comprehensive insurance provided by an HO5 plan makes it more expensive but well worth the additional cost for many homeowners.

  • HO4 Renter Insurance Plans Are Very Affordable

    HO4 Renter Insurance Plans Are Very Affordable

    By Mike Heuer

    An HO4 homeowners insurance plan does not insure homes or their contents. Instead, it covers renters and their possessions up to policy limits, but most renters go without the inexpensive coverage, which typically costs between $10 and $20 per month.

    A renter insurance plan will provide liability insurance as well as coverage for personal belongings on the premises and even away from it in some instances. If a vehicle is stolen, for instance, and a personal belonging were stolen along with is, such as a cell phone or laptop computer, the renter insurance plan would cover the loss.

    Many people do not get renter insurance provided by HO4 homeowners insurance policies for many mistaken reasons. The most common mistake people make when deciding against buying renter insurance is thinking the landlord’s policy will cover their loss, and that just isn’t the case. The landlord’s property insurance only covers the actual building and its components, such as water heaters, heating and cooling systems and appliances. The personal belongings of the renters are not covered and never will be. Nor would the cost of relocating even temporarily.

    Many people also forego renter insurance coverage under the assumption they either cannot afford it or because they don’t think they have enough things to insure. But even common furnishings can cost a great deal to replace, particularly on short notice is a sudden tragedy strikes and the apartment and possibly the building containing it suddenly are damaged or destroyed.

    And some people think the apartment building in which they live is top-notch and immune to common perils. But even the best-built apartment building can be impacted by a wide variety of dangers, such as an overturned truck or locomotive carrying dangerous chemicals or other possible environmental hazards that result in the building being evacuated.

    In such cases, a renter insurance plan would help pay for the costs of temporarily relocating, such as to a hotel while the matter is handled. Power outages also can cause damages, such as to food supplies or even pet fish, some of which can cost a great deal. While many people don’t have aquariums, it is just one example of many potential losses that could be suffered.

    While most people understand a renters insurance policy will protect their belongings, many do not realize the extent to which liability coverage might help. The liability portion of renters insurance policies will protect not just against liability for injuries or deaths caused to visitors inside the apartment but also can pay for damages to the apartment for which a landlord attempts to hold the renter financially responsible.

    Renter insurance policies generally come in two varieties. One provides actual cash value for items that are damaged, destroyed or stolen from an apartment or while away from the premises. Actual cash value policies take into account depreciation and market value of items when paying claims. Such policies generally are very affordable, and the rates can be lowered by increasing the deductible amount.

    The second type of renter insurance plan is a replacement cost policy, which will pay up to policy limits to repair or replace damaged, destroyed or stolen items. Such policies cost more than their counterparts but can be well worth it for many people.

  • HO3 Special Form Give All-Risk Protection

    HO3 Special Form Policies Give ‘All-Risk’ Protection

    By Mike Heuer

    While the HO1 and HO2 homeowners insurance forms provide coverage for named perils, the HO3 “Special form” insurance plan gives protection for all risks cited except for those specifically excluded. Because it provides a comprehensive level of coverage foe single-family homes, the HO 3 special form is the most used type of homeowners insurance sold in the United States.

    A typical HO3 special form policy will coverage damages or destruction caused by covered perils to the primary home, attached structures and other structures connected by utility lines, fence lines and walkways. Personal belongings also are protected up to policy limits as if liability if anyone is injured or killed on the premises. The grounds themselves are not covered, so if a tree is felled during a storm, no coverage would apply that would replace it.

    While the special form provides all-risk coverage, several perils specifically are excluded, although some could be insured against with either an endorsement, which is an additional level of protection purchased for a fee, or by purchasing a separate policy.

    The most common peril not protected against but many homeowners mistakenly think is covered would be external flooding. Most homeowners insurance plans offer automatic protection against water damage caused by internal flooding. But in many areas, few if any property and casualty insurers will cover damages caused by external flooding, such as a rising river, a tidal surge during a storm or similar catastrophe.

    Because external flooding is highly common in many areas, such as along the Gulf Coast, many property and casualty insurers will not provide flood insurance due to the high risk of flood occurrence. Even when not located in such areas, flash flooding and similar causes can be common, and many local governments as well as the federal government has been upgrading floodplain maps and requiring flood insurance for homes and other properties located within them. The federally run National Flood Insurance Program is the most common source of flood insurance in many areas, but policies typically are limited to no more than $250,000 in coverage.

    Other common exclusions include earthquakes, power failure and neglect. Endorsements can be purchased for damages caused by earthquakes and power failure, but neglect never will be covered. When a property owner is aware of a potential problem, such as a bad roof, and fails to address it in a timely manner, the insurer will declare the person to be a “moral hazard” and will not provide insurance protection for any damages or liability arising from the condition.

    Yet more common exclusions are acts of war, damages caused by government actions, nuclear hazards and intentional acts, such as arson. Vacant buildings damages by freezing pipes and other systems also are not covered. Nor is damage to foundations or pavement from ice or water weight.

    Also excluded is theft from a home or dwelling while under construction or damage to vacant homes or structures. Losses caused by latent defects, corrosion, industrial smoke or pollution also are not protected, nor is damage or loss caused by settling or wear and tear. Losses caused by pets, pests or other animals, weather conditions that further losses caused by excluded perils, such as and earthquake, or defective design, construction or faulty maintenance also are not covered by HO3 policies.

  • HO2 Broad Form Coverage

    HO2 Provides Broad Form Homeowners Insurance Coverage

    By Mike Heuer

    In most states, the broad form coverage provided by an HO2 homeowners insurance policy is the most basic level of insurance protection available for a home or other property. The policy provides the same protection against the 11 perils outlined in HO1 policies, but with up to several additional perils protected against. As always, a deductible will apply and will be chosen by the policyholder.

    Additional protection is provided up to policy limits for possible damages if the building collapses. That most likely might occur with while a home is being built or if a contractor or construction firm did not properly build the structure. Among other potential causes would be a foundation shifting or perhaps even termite damage undermining a structure.

    For those living in cold climes and other areas, insurance is provided for damages caused by the weight of ice, snow and sleet. If enough accumulation piles up on a home, it could cause damage to eaves, overhangs, a rooftop or other part of the home. If a hole should open up in a rooftop, a massive amount of damage could be inflicted, particularly when the warmth from inside the home begins to melt the ice, snow or sleet and causes water damage or possibly damages electrical components. Similar damage could be caused by ice dams, which tend to work their way beneath shingles and can damage rooftops.

    Another peril that is protected by a broad form policy would be damages caused by frozen pipes, heating and air conditioning systems and domestic appliances. If a water pipe were to freeze during a cold spell, it could burst can cause a great deal of damage, including internal flooding. The same is true if a water heater were to rupture and result in a great deal of water flooding a home. An air conditioning system also could leak from a bad condenser, and a heating system might spring a gas leak or cause other problems that potentially could destroy a home. The same is possible with a gas-burning oven or stovetop or any kind of electrical appliance that might cause an electrical fire.

    Among other perils that are insured are falling objects, such as a tree limb that falls and damages a home up to a meteorite that might crash through a rooftop. If a power surge or other accidental cause were to strike in-home appliances, devices, fixtures or wiring and results in damage, the broad form homeowners policy offers insurance protection.

    There is some basic level of coverage provided for personal belongings on a very limited basis, as is the case with an HO1 policy. That coverage has some portability, such as insuring a bicycle that is stolen while in use away from the home. And liability coverage also is provided up to policy limits with the HO2 policies.

    For those wanting to have additional protection for specific personal items that greatly exceed what is provided with the broad form coverage, an endorsement could purchased that either insures valuables up to policy limits or for cash value, replacement cost or an agreed upon value. An endorsement can be added to any homeowners insurance plan and helps tailor coverage to specific needs.

  • HO1 Basic Form Policy

    HO1 Basic Form

    By Mike Heuer

    An HO1 homeowners insurance plan is known as a “basic” coverage insurance plan to protect homes and other properties against several named perils. A peril is a potential loss-causing agent, such as fire, that can result in a partial or total loss. As with other property and casualty insurance plans, a deductible would apply as chosen by the policyholder and acts to keep rates down as well as reduce the potential for small claims being filed. Liability coverage also is provided.

    Because most homeowners need more than basic coverage for their homes and properties, many states no longer allow property and casualty insurers to underwriting only HO1 homeowners insurance plans. But in those states that do allow the insurance plans to be underwritten and sold to consumers, there are 11 standard perils the basic policy will protect against.

    The first peril is fire or lightning, which could result in a partial or total loss of the insured home. As should be expected, arson is not covered by the fire portion of the HO1 basic homeowners insurance plan. But fires caused by unintentional acts are covered by home insurance policies up to their coverage limits.

    In the case of fire, homes rarely are struck by lightning, but indirect lightning that strikes a utility pole or line, for example, can travel into a home and cause significant damage. Direct lightning strikes on houses occurred about 186,000 times during 2008 with Florida ranking at the state in which a home is most likely to suffer a direct lightning strike, according to the Insurance Information Institute. A lightning bolt can reach a 50,000 degrees and ignite a home in an instant if it is not protected.

    Other perils covered by basic homeowners insurance include smoke damage, losses caused by windstorms or hail, and an explosion. Sometimes, a gas line might become ruptured, whether inside the home or outside if a construction crew is working nearby and not all gas lines have been identified and marked, for example. A resulting explosion could prove disastrous.

    Although rare, damages or destruction caused by a riot or civil commotion also would be a covered peril, as would damage caused by an aircraft crashing into a home of losing a part or cargo that lands on a home. If a vehicle were to crash into home or cause some sort of damage, that also would be covered by a basic homeowners insurance plan.

    Glass breakage can be a common and costly repair as could damages or destruction caused by vandals or people acting in a mischievous manner. Whether the damage occurs inside the home or to other parts or the insured property, such as trees, a basic homeowners plan would replace or reimburse the policyholder up to coverage limits.

    Theft also is a standard peril for which coverage is provided in basic homeowners insurance plans. Many homeowners have the misfortune to suffer a home invasion or lose things due to some other form of theft, and a policy will repair or replace damages arising from such incidents.

    Although rare, volcanic eruption is another peril named in basic homeowners insurance plans and do come in handy when living near even a dormant volcano, as unfortunate homeowners near Mt. St. Helens in the state of Washington learned 1980. And homeowners in Hawaii already are familiar with the benefits of having protection against volcanic eruption.

    The 11 standard perils often are not enough to completely protect homes in most states, which is why many do not allow HO1 policies to be sold there. In such states, an HO2 homeowners plan is the most basic policy approved by state insurance officials.

  • Cash Value

    Actual Cash Value Policies Cost Less, Protect Less

    By Mike Heuer

    There essentially are two types of homeowners insurance protection when it comes to indemnifying policyholders for their financial losses – actual cash value and replacement cost. Actual cash value is the more affordable alternative to replacement cost as it costs insurers less to pay claims. But actual cash value also can leave homeowners vulnerable to financial loss beyond what insurance claims might pay.

    Actual cash value takes into account several factors, the primary factor being depreciation. Depreciation is defined as the cost to repair or replace a damaged or destroyed home minus depreciation costs due to wear and tear and other factors. Among those factors are numerous court judgments that essentially break down depreciation and actual cash value among three key elements.

    The first of those three elements is the replacement cost minus depreciation. As stated, depreciation takes into account wear and tear of a home or structure. But it also takes into account the demand for something of value. Because new homes can be built, the older a home is, the lower its value generally becomes over time due to depreciation. But the land on which that home is built typically will appreciate in value due to the fact land is a finite source that cannot be added aside from land reclamation along waterways and coasts.

    So when a home is built, over time, the structure will lose its value while the land on which it is built likely will appreciate. But for insurance purposes, only the value of the home determines the amount to be paid if a claim is filed due to a loss caused by a covered peril. Most insurers will use the replacement cost minus depreciation formula to determine the actual cash value, and many court cases have upheld that measure of actual cash value.

    Actual cash value also can be determined by the fair market value of a home. Insurers can assess the fair market value by the amount for which similar homes are sold and base claims accordingly. The price of homes can vary based on several factors, such as location in a neighborhood, quality of local schools and future development. Depending on the type of development, the value of a home or the land on which it is built might appreciate or depreciate.

    The third element sometimes used for determining the actual cash value of a home is the “broad evidence” rule that takes into account the fair market value of a home as well as its replacement cost minus depreciation. Some jurisdictions will favor one definition over the other, but both essentially are used to determine the actual cash value of a home. Both also have several court decisions in their favor, so the primary method used might vary by state.

    If unsure of the actual cash value of a home or other structure, it can pay to do legal research or hire someone to do legal research to learn how the state in which it is located bases actual cash value determinations.