Understanding homeowners insurance

There’s no law that says you must purchase insurance on your house. But it’s a smart idea and you won’t be able to get a mortgage without coverage since lenders insist that their collateral (your home) be protected against fire and major damage.

Because of this, most people have some form of homeowner’s insurance. Often, however, they only have a vague idea of what their policy covers and only discover too late that it contains some expensive exclusions.

For example, some friends recently went off on a two-week winter holiday. While they were gone, there was a lengthy power failure in their area. The pipes in their home froze, then burst. When they returned, they discovered damage in the tens of thousands of dollars. The insurance company refused to pay a cent. The reason? There was a clause in the contract requiring that the house be checked at least once every three days when the owners were absent. They had made no such arrangements.

Every home insurance policy is different. They all provide the same basic coverage (fire and theft), but that’s about all they have in common. You need to be very thorough in reviewinyour coverage, whether it’s a new policy or a renewal. Here are some of the main points to look for.

Replacement value

. Your house should be insured for its full replacement value. That means if you suffer a total loss, for example as a result of fire, the insurance company will pay the full cost of rebuilding.

Inflation protection

. Some policies have an automatic inflation protector built in. This increases the amount of coverage on the house to keep pace with cost of living increases. It will add to your premium, but the difference is usually not much.

Water damage

. A basic policy will probably provide some coverage, but it may be limited and hedged with exclusions. For example, sewer back-up may only be available as an option. If you live in a flood area, that risk is probably excluded completely and you’ll need to buy additional coverage.

Windstorm protection

. Be sure to see what’s covered and what is not. Specifically, check the policy’s position on severe storms, such as hurricanes (unlikely in Canada but a possibility in the Atlantic provinces) and tornados.

Earthquake coverage

. Most policies specifically exclude earthquake protection. In most of Canada, this is not a major risk but if you live in the St. Lawrence River valley or on the British Columbia coast, you may want to consider adding this coverage.

Expensive items

. There are usually limits on how much the insurer will pay for jewelry, computers, furs, artwork, etc. If you have expensive things in your home, ask about adding them to the policy as “scheduled items”. Be prepared to pay a hefty premium for them.

Off-premises coverage

. Most policies offer some protection for property away from the main dwelling. This can be especially useful if you have a student who is living in residence.

Out buildings

. If you have any additional buildings on your property, such as a shed, see if the policy covers it. Often out buildings are insured for up to 10 percent of the value of the principal residence.