Insure Your Home Like it is Your Largest Single Asset - Because It Probably Is!

For many Americans, their home is the cornerstone to their financial well-being. Home-ownership often provides housing expense stability and the opportunity to build equity as home values hopefully rise and mortgage principal is paid down. And of course there are millions of stories of real estate investors using leverage to grow wealth. It has often been said that for most Americans, their home is their largest single asset. They might have more invested in a retirement account or stocks than the value of their home, but those investments are typically well diversified, spreading risk across many investments.

While many homeowners might not consider their primary residence to be an investment, over time, given typical market conditions, it is undeniable that home-ownership can be a form of financial growth. But unlike securities and many other investments, this asset (your home!) is insured against MOST bad things that can hurt its value. That's exactly what homeowners insurance does - protects the condition of the home and the condition will most certainly impact the market value. You can't protect your stock portfolio from direct risk, but that's exactly what insurance does for your home.

However, not all insurance policies are the same. At the end of the day, a policy is a legal document that outlines what the carrier will do (as well as what the homeowner needs to do to remain in good standing). Understanding what's in these legal documents and comparing them with other policies is a daunting task! Much of the insurance industry has adopted ISO forms (International Standards Organization) which helps create some baselines but it is still written legalize and not easily understood. Please allow me to lend my expertise as a Personal Lines Coverage Specialist designee for your knowledge.

The differences in coverage from one policy to another can be immense. Marketing done by the insurance industry does very little to discuss these differences: most of it follows the mantra of "Get a Quote and Save Money." Unfortunately, the consumer chasing a lower price typically assumes that all policies have the same coverage and therefore makes a decision on price. The vast majority of people that I speak to about the difference in coverage would pay more for better protection of their largest single asset - once they understand that difference.

Here is a primer on those differences:

For a single family home, there are essentially four ISO forms: HO-1; HO-2; HO-3 & HO-5. The major difference between these forms is what Perils are covered with HO-1 being the least and HO-5 being the most coverage.

HO-1 is such a limited policy that most carriers no longer offer them. The HO-2 form only covers the dwelling for following NAMED PERILS:

• Lightning or fire
• Hail or windstorm
• Damage caused by aircraft
• Explosions
• Riots or civil disturbances
• Smoke damage
• Damage caused by vehicles
• Theft
• Vandalism
• Falling objects
• Volcanic eruption
• Damage from the weight of snow, ice, or sleet
• Water damage from plumbing, heating, or air conditioning overflow
• Water heater cracking, tearing, and burning
• Damage from electrical current
• Pipe freezing

And that's it. If it isn't perfectly obvious that damage was done by one of these Perils, you're not covered. These policies are readily available in the market today. Check your insuring documents to see if they mention HO-0002. If your policy mentions this, you're only covered for these 16 things. (and if you're unlucky enough to have an HO-1, you're only covered for 10 of them!)

HO-3 is the most common form today. It is an ALL PERIL policy which means that everything is covered EXCEPT the list of exclusions provided. Below is a list of the excluded perils and what you might be able to do to mitigate the risk:

Excluded Peril - What You Can Do to Mitigate the Risk

Earth Movement - Endorse Home Policy for Earthquake

Collapse / Sinkhole - Endorse Home Policy for Sinkhole

Water or sewage that backs up through sewers or drains - Endorse Home Policy for Water Backup

Freezing in vacant / unoccupied home (unless reasonable effort made to prevent damage such as water off & heat on) - Use Common Sense - turn the heat on and water off if you are going on vacation

Water damage - ie flood, surface water, waves, storm surge, overflow, ect - Buy a Flood Insurance policy

Water below the surface - Buy a Flood Insurance policy

Radon gas - Have a Radon Test performed with home inspection (even for new construction)

Neglect - Make repairs as needed

Vermin - Have a Termite inspection & Hire a Pest Control Company

Wear & Tear - Buy a Home Warranty

Intentional Loss ie Arson - Not Covered

War / Nuclear or Radioactive contamination - Not Covered

The HO-5 builds on the HO-3 by expanding the Contents coverage from the 16 Named Perils of the HO-2 to ALL PERILS with the same exclusion as the dwelling.

It isn't hard to see that having an ALL PERIL policy with 12 named exclusion (three of which can be covered via endorsement and six others can be reasonably mitigated) is far better than a NAMED PERIL policy with only 16 covered perils. But when consumers shop on price, they can easily be confused these nuanced differences and find themselves under-insured.

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If you'd like a review of your policies to make sure your assets and financial well-being are optimally protected, I'd be honored to help you.

Kevin Michelson, PLCS, CPRIA | Goosehead Insurance - Michelson Agency

615.224.7608 Direct | 615.430.9140 Cell | [email protected]

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