Financial
Do You Know What Is And Isn't Covered By Your Homeowners Insurance?

Jun 14, 2007

A large percentage of U.S. homeowners mistakenly believe that standard homeowners insurance protects them from a wide array of perils—such as floods, earthquakes, water line breaks, termites and mold—according to new research by the National Association of Insurance Commissioners (NAIC).

For example, the survey found that 33 percent of U.S. heads of household who own a home and have homeowners insurance incorrectly believe flood damages would be covered by a standard homeowners or property and liability policy, despite extensive media coverage on Hurricane Katrina victims whose claims were denied because they lacked flood insurance.

"Many homeowners learned the hard way that their insurance policies did not provide flood protection," Walter Bell, NAIC president and Alabama Insurance Commissioner, said in a release. "As we enter the 2007 hurricane season, we strongly encourage consumers in flood-prone areas to check whether they are properly covered."

According to the NAIC, flood insurance polices are available from the federal government's National Flood Insurance Program (NFIP) and are often sold by agents that sell homeowners policies.

"There are some limitations in flood insurance polices that differ from standard homeowners policies," Bell said. "Excess flood insurance is often available from private insurers when people seek to insure high-value homes that exceed the limits offered by the NFIP."

The NAIC survey also revealed other homeowner misunderstandings when it comes to common loss situations—none of which are covered by standard homeowners insurance policies—such as: 

• 68 percent think vehicles such as cars, boats and motorcycles stolen from or damaged on their property are covered.
 
• 51 percent think damages from a break in the water line on their property supplying water to their home are covered.
 
• 37 percent think damages due to a break in the sewer line on their property that connects to their municipal sewer system are covered.
 
• 35 percent think damages from earthquakes are covered.
 
• 34 percent think damages from mold are covered.
 
• 31 percent think damages from termites or other infestation are covered.
 
• 22 percent think pets stolen from or injured on their property are covered.

"Many homeowners could be seriously harmed financially by misunderstandings about their insurance," Bell said. "It's critical that consumers look closely at their policies and ask their insurance agents detailed questions to become fully aware of what is, and what is not, covered."

The NAIC survey revealed another type of potential consumer misunderstanding. Twenty-four percent of respondents indicated their policies insured their homes for the actual cash value, while 64 percent said their policies covered the replacement cost. Another 12 percent said they did not know which type of coverage—actual cash value or replacement cost—they purchased.

Actual cash value is the amount it would take to repair or replace damage to a home and its contents after depreciation. Replacement cost is the amount it would take to replace or rebuild a home or repair damages with materials of similar kind and quality, without deducting for depreciation.

"It's important that consumers understand this distinction," Bell said. "In the event of a covered loss, an actual cash value payout could be thousands of dollars lower than a benefit calculated at the replacement cost."

The NAIC provides extensive information, tips and considerations regarding homeowners insurance on its consumer education website, www.InsureUonline.org.