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HOMEOWNER'S INSURANCE FAQs

What is the difference between "actual cash value" and "replacement cost"?

What are the limits in the standard homeowners policy?

Where and when is my personal property covered?

What should I consider when buying homeowners insurance?

What is the difference between an "all risks" policy and a "named perils" policy?

What can I do to lower the cost of my homeowners insurance?

If I have an accident I think is covered under my homeowner's policy, what should I do?

What is homeowners insurance and who should buy it?
Homeowners Insurance is one of the most popular forms of personal insurance on the market. The typical homeowners policy has two main sections: Section I covers your property, and Section II provides personal liability coverage (to cover you in case of lawsuits arising from things that happen on and off your property). Almost anyone who owns or rents property should have this type of insurance. Often, homeowners insurance is required by lenders as a requirement to obtain a mortgage.

What is the difference between "actual cash value" and "replacement cost"?
Covered losses under a homeowner's policy can be paid on either an actual cash value basis or on a replacement cost basis. When "actual cash value" is used, the policy owner is entitled to the depreciated value of the damaged property - so the older the item is, the less money you may receive for it. Under the "replacement cost" coverage, the policy owner is reimbursed the amount it costs to replace the property with something of a similar type and quality at current prices.

What are the limits in the standard homeowners policy?
[Note: this answer is based on the Insurance Services Office's HO-3 policy.] Coverage A and B cover your dwelling and other structures on the premises on an "all risks" basis up to the policy limits.

You set the limit for Coverage A when you buy the policy. The Coverage B limit is usually equal to 10% of the policy limit on Coverage A. Coverage C covers losses to your personal property on a "named perils" basis, which means you're covered for all the perils specifically named on your policy. The policy limit on Coverage C is equal to 50% of the policy limit on Coverage A. Coverage D covers extra expenses you may incur when the residence can't be used because of an insured loss. The policy limit for Coverage D is equal to 20% of the policy limit on Coverage A. You choose the Coverage E - personal liability -limit when you buy the policy. The limit on Coverage F - medical payments to others - is usually set at $1000 per injured person. Individual companies may vary. Additional amounts of coverage can be purchased as needed.

Where and when is my personal property covered?
Coverage C, the named perils coverage, applies to all your personal property (except property specifically excluded) anywhere in the world. For example, suppose that while traveling, you purchased a dresser and you wanted to ship it home. Your homeowner's policy would provide coverage while the dresser is in transit - even though the dresser has never been in your home before.

What should I consider when buying homeowners insurance?
First and foremost, buy the amount and type of insurance you need. Remember: if your policy limit is less than 80% of the replacement cost of your home, you will face a ''coinsurance penalty,'' which means you'll have out-of-pocket expenses to cover costs beyond your policy's deductible. For example: Your home's estimated replacement value (RCV) is $100,000. The coinsurance clause requires you carry at least $80,000 (80% of your RCV), so you would be underinsured by half if you bought a $40,000 policy. In such a scenario, the company would pay half of a loss less the policy deductible - so if you had a $500 deductible and suffered a $10,000 covered loss, your policy would only pay $4,500.

Also, figure out how much personal property insurance and personal liability coverage you need. Personal property, like a home, should be insured for its replacement value. Personal liability is a bit more subjective, but limits should not be less than those on other liability insurance such as auto.

What is the difference between an "all risks" policy and a "named perils" policy?
A named perils policy covers losses that are due to only those perils listed in the policy. Those typically include fire, windstorm, hail, and other physical losses. An all risks policy covers losses that are due to any peril except those specifically excluded in the policy. An all risks policy provides broader protection than a named perils policy.

What can I do to lower the cost of my homeowners insurance?
The best thing to do is to shop around. You could find quotes on homeowners insurance that vary by hundreds of dollars for the same coverage on the same home. When you shop, make sure each insurer is offering the same coverage. Many insurers use the ISO policy forms, but this is not always the case. Another way to cut costs is to look for discounts that apply to you. For example, many insurers will offer a discount when you buy both your automobile and homeowners insurance from them. Some insurers offer discounts if you have deadbolt exterior locks on all your doors, or if your home has a security system. Another easy way to save is to raise your deductible. Increasing your deductible from $250 to $500 will lower your premium, sometimes by as much as five or ten percent. However, you should be sure you have enough cash on hand to cover the larger deductible in case of emergency.

If I have an accident I think is covered under my homeowner's policy, what should I do?
Insurance contracts are conditional contracts, which means policy owners have certain responsibilities to meet if a covered loss occurs. Not completing these can result in nonpayment by the insurance company for losses that otherwise would have been covered. These include:

  1. notifying the insurance company or the agent that a loss has occurred --this should be done as soon as you discover the loss;
  2. protecting the property from further damage and/or making any repairs necessary to prevent further damage;
  3. preparing a detailed list of the personal items damaged that contains descriptions, the items' actual cash value, or their replacement cost if you have added the replacement cost endorsement to your policy;
  4. being prepared to show the company and/or the insurance agent the damaged items;
  5. completing a statement for the insurance company that explains how the loss occurred -- for example, the time the damage occurred, the cause, etc.

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