Home insurance coverage
Home insurance policies involve insurance coverage for your home and the contents of your home. Personal liability coverage is commonly included as an integral part of a homeowners policy. The purchase of home insurance is not compulsory and there are families who have no insurance or are substantially underinsured given the potential risks.It is not uncommon to hear that trust funds have been established for families who have lost all of their belongings and perhaps their home because of a fire and they have no insurance coverage. The risk evaluation matrix will help in evaluating the risks and tradeoffs associated with the purchase or non-purchase of home insurance.
There can be tremendous variation in the content and wording of home insurance policies, with some companies utilizing their own versions of specific terms. This section focuses on common principles associated with home insurance policies.
Home insurance is generally bundled into packages that are predefined based on what is or is not covered under the policy.
A policy that is termed as comprehensive provides insurance coverage for both a building and its contents for all risks except those risks that are specifically excluded in the policy. As this policy provides the broadest coverage, this form of policy is the most expensive type.
A policy that is termed as basic or named perils provides insurance coverage for perils that are specifically named within the insurance policy. The named peril policy is generally much less expensive than comprehensive coverage.
A policy that is termed as a broad policy provides all peril insurance coverage for the building and named-peril coverage for the contents covered by the policy. The cost of a broad policy is somewhere in between a comprehensive policy and a named-perils policy.
A less common form of insurance coverage is a no-frills policy. This is a bare bones, minimal insurance plan offered by some insurers for properties that do not meet normal underwriting standards.
All home insurance policies protect against fire, lightning and certain types of explosions as established by provincial law. While no one is required by law to purchase fire insurance, provincial regulations establish the minimum standards that must be covered by any fire policy that is sold. With basic fire insurance, the insurance carrier can extend the coverage to include additional perils although how these perils are actually incorporated into the policy is dependent upon the type of policy purchased. In a broad policy, all perils are covered except those excluded, whereas in a named-perils policy, as the name implies, only named perils are covered.
Examples of perils that are generally available for inclusion in a homeowners policy are:
- Explosion
- Theft
- Aircraft and falling objects
- Riot, vandalism and malicious mischief
- Electrical current
- Smoke
- Wind and hail
- Window glass breakage; and
- Water escape, freezing, and rupture
It is important to note that specifies for coverage of each insured peril is likely to vary between policies and is subject to conditions, exclusions, clauses and endorsements. Each item of a policy should be carefully examined relative to the insureds risks and needs. It is important to read and understand the insurance policy.
When purchasing home insurance, the policy owner usually has the opportunity to select the basis upon which reimbursement of a loss is made.
If the policy is designed to provide reimbursement for losses on an actual cash value basis, the insurance carrier will value the loss based on the actual value. Actual cash value takes into account depreciation, age, wear and tear and obsolescence, as it relates to the insured item that has been lost or damaged. When settlement of a claim is on an actual cash value basis, the insured can use funds from the settlement in any way he or she wishes with no obligation to replace the actual item lost or damaged.
Alternatively, an insured may opt to design the insurance policy to cover any losses to personal property based on the replacement cost of the property.In this case, the claim settlement amount does not take into account any deduction for depreciation, age, wear and tear or obsolescence. The carrier provides reimbursement based on the cost of a replacement item. Under this option, most carriers require that the lost or damaged item be repaired or replaced with an item of similar kind and quality.
The replacement value is a more costly feature than the actual cash value and is reflected in a higher premium charge for the policy. Utilizing the replacement value feature allows an insured to minimize the potential financial risk in case of a loss.
Replacement cost is a standard feature for building losses in home insurance policies.The settlement is based on the replacement cost up to a maximum of the coverage amount of the policy. An exception to this relates to roofs where some carriers incorporate depreciation. To avoid the situation where the replacement cost exceeds the maximum amount of coverage available in the policy, some policies allow for the purchase of guaranteed replacement cost.
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