Nov 01, 2007

California Wildfires Remind Buyers to Carefully Choose an Insurance Policy

The recent fires that have plagued Southern California remind us of one of the more mundane aspects of shopping for a home: buying homeowners insurance. It's hard, before you even have keys to your new home, to think about what will happen if it's destroyed or damaged. It's especially difficult when you're already about to spend a huge sum of money on the purchase itself. You may be tempted to cut corners when it comes to buying insurance, but don't.

The most important policy you'll buy will be hazard insurance, which will cover you for major disasters and theft, but will have major exclusions too (including flood and earthquake damage). At very least your policy should have "replacement cost coverage," which will be based on the cost of replacing your home and its contents, not "actual cash value" coverage, which only covers the current, depreciated value of your home and its contents. You'll also need loss of use coverage, paying you for extraordinary expenses you incur as a result of not being able to use your home. You'll want to know the overall dollar and time limits for receiving loss of use payments.

You'll also need liability coverage, which will cover the medical costs of guests who sustain injuries in you home, as well as related court costs you may incur. Policy limits may be too low given the cost of medical expenses today; you may want to purchase additional coverage.

Depending on your situation, you may also purchase flood or earthquake insurance, which is well worth it if you live with risk of either. (Check your flood danger and earthquake risk yourself.) And many homeowners need personal property floater policies, covering specific high-value items like jewelry.

To find the best policy for you, consider working with an insurance broker. The broker will have access to many different companies' policies and can answer questions you have about what each policy offers (of course, that's no substitute for reading it yourself). Compare at least three or four separate policies before making a decision. Don't base your decision solely on lowest price--instead, look for quality of coverage. You can use a handy form like the one here.

These careful decisions will make it easier to deal with your insurance company when it comes to a fire or other qualifying incident. (For tips on what to do after a fire, see the article in Nolopedia entitled After the Fire: Dealing with Your Insurance Company.) Hopefully, you'll never have to deal with these problems at all.

If you want to learn more about the types of insurance that are available to homeowners, check out Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, & Marcia Stewart (Nolo).

Alayna Schroeder