What is a Covered Property?

Generally, covered properties are divided into four categories. The definitions of the property and the extent of coverage vary by state, company, and product so it is important to understand the definitions. Insurance companies define four coverage categories for your home, and they are:

1. Dwelling – The structure of the house is considered a covered property and is referred to in the policy as the “dwelling.”

2. Other Structures – Other structures that are separate from the house or linked by a fence, wire, or other forms of connection, are referred to in the policy as “other structures.” Examples include tool sheds or detached garages.

3. Personal Property – Your belongings and the contents of your home are referred to in the policy as “personal property”. Personal property includes, but is not limited to, appliances, clothing, electronics, and furniture. As not all personal property is covered or may have coverage limits, some items will be covered under different forms of insurance. Some examples of these items include, but are not limited to, money, jewelry, and firearms.

4. Loss of Use – When a loss occurs due to a covered peril and a dwelling becomes uninhabitable, the cost of additional living expenses are covered and defined as “Loss of Use”. Loss of Use coverage reimburses additional living expenses, up to a stated limit, that the insured incurs to maintain a normal standard of living after a covered loss.

“Open Perils” and “Named Perils” Coverage

A peril, as referred to in an insurance policy, is a cause of damage that results in an insured loss of property such as fire or theft. Coverage can be provided on an “all perils” basis, or a “named perils” basis. Named Perils policies list exactly what is covered by the policy, while Open Perils (or All Perils) policies will list what is excluded from coverage. Named Perils policies are generally more restrictive. A dwelling policy usually provides coverage for both the dwelling and contents on a named perils basis, while a homeowners policy usually provides coverage for the dwelling on an all perils basis, and for the contents on a named perils basis.

Package versus Peril-Specific Coverage

A package policy provides coverage for multiple, but usually not all, perils. A homeowners policy, for example, is a package policy typically providing coverage for the perils of fire, lightning, extended coverages, and personal liability. Extended coverage include coverage for the perils of windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, smoke, vandalism, malicious mischief, theft, and breakage of glass. Some policies, such as earthquake or flood policies, provide coverage for specific perils that are often excluded in package policies. Fire and sprinkler leakage damage as a result of an earthquake may be covered by a standard homeowners policy. To purchase the most appropriate insurance, it is important for you to consider what additional perils you may face, and always verify what is covered in your specific policy. Consult with your insurance agent when in doubt about perils you may be exposed to, and what perils are covered by a policy.

Does My Policy Cover That?

1. Earthquakes – Most property insurance policies exclude coverage for losses resulting from earthquakes (although they often cover losses related to fires following earthquakes), so separate policies are typically required to ensure earthquake coverage. Some states with risk of loss from earthquakes have government mandated insurance plans that provide earthquake coverage to property owners who are unable to obtain insurance through the voluntary market. (See page 9 for an explanation of voluntary and involuntary markets.)

2. Flood – Most property insurance policies exclude coverage for losses resulting from flood. Unless you purchase a flood policy, you do not have coverage for flood losses. (For a more comprehensive discussion of flood insurance, please see Preparing for a Flood, page 26.)

3. Hail – Most property insurance policies provide coverage for losses resulting from hail. Hail is a named peril, meaning for coverage to apply under a “Named Perils” policy, hail must be listed as a covered peril, but it is generally included under the broader peril of windstorm. Windstorm cover- age includes hail, hurricanes, tornadoes, and straight-line winds. However, there may be instances where coverages and deductibles apply specifically to one of these perils, for example, hurricanes, and not to all windstorms.

4. Hurricanes – Most property insurance policies provide coverage for losses resulting from hurricane under the windstorm coverage, although flood loss associated with hurricanes is excluded. (See Preparing for a Flood, page 26, for more information.) Most states with risk of loss from hurricanes have government-mandated insurance plans that provide windstorm coverage to property owners who are unable to obtain insurance through the voluntary market. (See page 9 for an explanation of voluntary and involuntary markets.)

5. Tornadoes – Most property insurance policies consider tornadoes a covered peril (although they do not cover losses resulting from the peril of flood; see Preparing for a Flood, page 26, for insurance availability). While tornadoes may not be specifically mentioned as a covered form of loss, tornado losses are one event covered under the windstorm peril.

6. Wildfires – All property insurance policies provide coverage for losses resulting from fires. Depending on the level of exposure, you may need to consider a higher deductible to obtain coverage, or to keep it affordable. Most states have coverage available via the FAIR plan, or a JUA, if the voluntary market is not willing to provide coverage.



Package versus Peril-Specific Coverage

A package policy provides coverage for multiple, but usually not all, perils. A homeowners policy, for example, is a package policy typically providing coverage for the perils of fire, lightning, extended coverages, and personal liability. Extended coverage include coverage for the perils of windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, smoke, vandalism, malicious mischief, theft, and breakage of glass. Some policies, such as earthquake or flood policies, provide coverage for specific perils that are often excluded in package policies. Fire and sprinkler leakage damage as a result of an earthquake may be covered by a standard homeowners policy. To purchase the most appropriate insurance, it is important for you to consider what additional perils you may face, and always verify what is covered in your specific policy. Consult with your insurance agent when in doubt about perils you may be exposed to, and what perils are covered by a policy.

How Much Insurance Is Enough?

Depending on the type of policy, the different dwelling coverage options could be: replacement cost coverage, actual cash value, special payment, functional replacement cost or market value coverage, or stated value.

The settlement of a loss will vary depending on the coverage you select at the time of purchase of your policy.

1. Replacement Cost Coverage – Replacement cost is not the market value of your home, nor is it the tax-assessed value. It is the current cost to replace the damaged property, with no reduction for depreciation of the damaged property.

2. Actual Cash Value – Actual cash value is the cost to replace the damaged property reduced by an allowance for depreciation.

3. Special Payment – Loss is paid before dwelling is repaired, rebuilt, or replaced.

4. Functional Replacement Cost or Market Value Coverage – Functional replacement cost or market value (also known as repair cost) is the cost to repair or replace the damaged property with equivalent construction for similar use, without deduction for depreciation. An example of functional replacement would be to replace a plaster wall with drywall. If it is a total loss and repairs are not made the payment amount will be the market value of the home.

5. Stated Value – If stated value coverage is selected, the maximum amount paid at the time of loss is the value of the policy, even if the loss amount is larger than the value of the policy. In other words, a selected value is established by the insured, and this value is the limit of liability.

Personal Property Coverage Choices

Depending on the type of policy, the different personal property coverage options could be: replacement cost coverage or actual cash coverage, as those terms are discussed above.

What Does Insurance-to-Value Ratio Mean?

Insurance-to-Value ratio is the relationship of the amount of insurance purchased to the replacement value of the property. It is important to have an accurate assessment of the replacement cost value of your home. If you do not, and then have a loss, the cost to replace your home may be more than your insurance policy will provide. This means you would be responsible for covering the difference. Major catastrophes, such as earthquakes, hurricanes, and wildfires can often create a demand surge for materials and labor, resulting in increased costs to replace damaged property. This must be considered when establishing the appropriate replacement cost for your property.

Most property policies require that the property be insured to at least 80% of the replacement cost, or loss payments will be reduced by a proportion of the insured value to 80% of replacement value. This is referred to as the coinsurance penalty.. It is also important to realize that other coverage limits within your policy are set as a percentage of the dwelling coverage amount. For example, the limit of coverage for your personal property will usually be at 50% of the dwelling limit. Additional coverage is available via endorsement, and is typically increased if you purchase replacement cost coverage for your contents.



Replacement Cost Coverage

In order to qualify for replacement cost coverage, you will most likely be required to insure your property to at least 80% of the replacement cost. As long as this requirement is met and if you have a total loss, your insurance policy will cover the total cost of replacing your home.

Further, if the property is not insured to at least the 80% value, then the payment for partial losses may be reduced. It is important to note that if the house is insured to at least the 80% value, your policy will cover the loss at replacement cost, although for a total loss to be paid, the property should be insured at 100% of the replacement cost.

Additional Limits in Case of Total Loss

Many insurance companies offer an endorsement that will provide the full coverage to replace the property in the event of a total loss. Usually, the company requires that the property be insured to at least 100% of the replacement cost of the property in order to qualify for this additional coverage. As long as this requirement is met, if you have a total loss and it costs more to replace than your limit (from a misestimate or demand surge), the coverage under your insurance policy will be accordingly increased. The amount of the increase depends on the endorsement purchased, and can range from 25% to 100%.

Additional and Optional Coverages

Additional coverages may be included in your policy. One example includes building code upgrade coverage which provides 10% coverage for upgrades required by the community to meet building codes when a home is being repaired or rebuilt as a result of a covered loss. Optional coverage for perils, such as earthquake insurance, may be available to purchase separately and can often supplement a homeowners policy.



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The nonprofit Federal Alliance for Safe Homes, Inc. (FLASH®) is an award-winning coalition of government agencies, professional associations, and private industry committed to strengthening homes, safeguarding families, and protecting economic well-being by promoting disaster preparedness.

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