Homeowner's insurance is one of the most common types of insurance and one of the least understood. Many homeowners believe that their policies will cover them for practically any damage sustained to the house or contents. The reality is that homeowner's policies contain many exclusions and restrictions on coverage that can leave you with a coverage gap. Here are five common myths about homeowner's insurance. (For related reading, also take a look at The Beginner's Guide To Homeowners' Insurance.)

TUTORIAL: Intro To Insurance

1. Loss-of-Use Coverage
If you have damage to your home severe enough that you cannot live in it while it is repaired, you likely expect that the insurance company will put you up in a hotel while the work is being done. However, that is not necessarily true. Not all policies include a loss-of-use provision. If you have to pay for a hotel, meals and other services out of pocket, it can add up quickly and put you at financial risk. If loss-of-use is covered, it will be stated explicitly in your policy, along with any limits of coverage. For example, your policy may state a maximum per diem amount or restrict the length of time the expenses will be paid for.

2. Replacement Cost
Replacement cost in a homeowner's policy refers to valuing the loss at the amount it will cost to replace the item. For example, if your four-year-old computer is lost in a fire, replacement cost coverage would allow you to purchase a new one with similar features. Most homeowners believe that is what will happen if they have a claim, however, the bulk of policies do not carry this clause. If not included, losses will be valued at what they were worth in their condition before the calamity. The four-year-old computer might be valued at $250 - not enough to purchase a new one. Replacement cost clauses are a valuable inclusion in a homeowner's policy.

3. Flood Coverage
Almost all homeowner's policies exclude flood coverage, along with earthquakes and other natural disasters. Floods can occur from a number of causes, such as a hurricane, burst pipes or sewer backup. A flood is one of the most common causes of home damage and the destruction of contents. There are companies that specialize in flood coverage, and, if you live in a susceptible area, look into having a separate flood policy. Your mortgage company may require this additional coverage as well. (For more information, see Understanding Lender-Required Flood Insurance.)

4. Termites
Termites live all over North America but are most destructive in Southern climates where their lifecycles are not impacted by cold weather. Termites eat wood - lots of it - and can eat the supports in your house as easily as fallen leaves in the forest. They live in large colonies and, collectively, can destroy the structure of your home. Repairing termite damage and eradicating them can cost thousands of dollars. Most policies exclude termites and other pest damage. If you live in a susceptible area, the best insurance is to have the house regularly checked and sprayed by a professional.

5. Valuation of Loss
When you have a house insurance claim, the insurance company will send out an appraiser to determine the extent of the damage and the best way to fix it. The appraiser will assess a value to the loss which will be the minimum the insurance company can pay in order to meet their contractual obligations. However, you do not have to take that value as final. If you can prove your loss should be valued higher, you can negotiate the settlement with the company. Keeping receipts and pictures of valuable items will help you back up your claim.

The Bottom Line
To really know what is in your homeowner's policy, you should read it thoroughly. Look for exclusions to coverage and decide how you will cover those risks. In some cases, your insurance company will have separate add-ons that they can attach to your policy or you can get specialized insurance from another company. For those risks that cannot be insured, analyze how you will financially cover those risks if they should happen. (For additional reading, also see Insurance Tips For Homeowners.)

Related Articles
  1. Home & Auto

    9 Things You Need To Know About Homeowners' Associations

    Restrictive rules and high fees are just some of the things to watch out for before joining an HOA.
  2. Entrepreneurship

    Top 10 Features Of a Profitable Rental Property

    Find out which factors you should weigh when searching for income-producing real estate.
  3. Options & Futures

    Understanding The Escrow Process

    Learn the 10 steps that lead up to closing the deal on your new home and taking possession.
  4. Insurance

    Understanding Insurance Claims

    An insurance claim is a formal request made to an insurance company that asks for a payment based on the terms of the policy.
  5. Budgeting

    Teaching Your Teen Financial Responsibility

    Here's how to talk to your teen about managing their money.
  6. Home & Auto

    5 Ways Overvaluing Your Home Can Hurt You

    Getting top dollar for your home is everyone's goal, but overvaluing your home can hurt its chances of being sold.
  7. Home & Auto

    Why the Holidays Are a Good Time to Sell  Your House

    People sell their homes during the spring, but there are benefits to selling during the holidays. Buyers are serious, and there's less inventory to compete with.
  8. Savings

    7 Millionaire Myths

    Here are seven millionaire myths and realities that reveal they don’t quite have it all.
  9. Personal Finance

    Choosing An In-Home Safe: Features To Look For

    What to look for in a box to protect your irreplaceable belongings.
  10. Home & Auto

    Top-Tier Home Security Systems: Which Are Best?

    Here's help sorting out the different types of home security systems, which features will work best for you and the costs.
  1. Does homeowners insurance cover vandalism?

    Vandalism is covered under an all-perils home insurance policy unless it is specifically excluded. Vandalism coverage applies ... Read Full Answer >>
  2. Does homeowners insurance cover tree damage?

    An all-perils homeowners insurance policy covers damage from trees in the event that it happens suddenly and by accident. ... Read Full Answer >>
  3. Does homeowners insurance cover roof replacement?

    A typical all-perils homeowners insurance policy covers the replacement of a roof, regardless of age, only if it is the result ... Read Full Answer >>
  4. Does homeowners insurance cover fires?

    House fires are one of the most common causes of damage to homes, and almost every homeowners insurance policy covers against ... Read Full Answer >>
  5. Does homeowners insurance cover broken pipes?

    An all-perils homeowners insurance policy does not usually provide coverage for an actual broken pipe. However, the water ... Read Full Answer >>
  6. Does homeowners insurance cover roof leaks?

    Roof leaks are covered under all perils homeowners insurance policies if the leak was caused by an act of nature. Acts of ... Read Full Answer >>

You May Also Like

Trading Center