Nolo's Essential Guide to Buying Your First Home (62 page)

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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart

Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate

BOOK: Nolo's Essential Guide to Buying Your First Home
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Damage Protection: Hazard Insurance
 
Hazard insurance compensates both you and your lender for physical damage to your property and its contents caused by fire and smoke, wind, hail, lightning, explosions, volcanoes, riots and vandalism, theft, water damage, and similar events. For example, it will cover roof repairs after a tree falls during a windstorm, replacing your stereo after a break-in, and fixing ceiling damage from your leaking tub.
Personal property that you’ve temporarily taken outside your home may also be covered under the standard policy—for example, items stolen from your car or even your child’s dorm room.
Beyond the House: Property That’s Separately Itemized
 
The core of your homeowners’ insurance covers hazards to your house and everything attached to it. That’s not enough! The insurance company will tell you exactly how much more you’ll need to pay for coverage of:
• Structures on your property other than your house, such as a garage, shed, pool, or cottage, as well as fixtures attached to the land such as fences, driveways, sidewalks, and retaining walls.
• Personal items such as jewelry, clothing, artwork, and computers, up to a certain dollar limit.
• Property and inventory used for a home business.
• Loss of use. Your daily necessities such as motels or rent and meals, minus the amount you’d normally spend on necessities each day, while your house is undergoing major repairs after a loss.
• Your trees, plants, shrubs, and landscaping.
 
You can decline coverage of a few of the above items, but in most cases you’ll need to include them in the package of what you pay to insure.
Damage Your Hazard Insurance Won’t Cover
 
Between the hail storms and volcanoes, you’d think every type of physical damage to your house and property would be covered—but it isn’t. Take a close look at the mostly boilerplate section of the draft policies called “exclusions.” Flooding, earthquakes, mudslides, police activity, power outages, sewer backups, dry rot, vermin, war, nuclear perils, losses if your house is vacant for 60 days or more, or losses caused by your own poor maintenance or your failure to preserve or protect the property after it’s been damaged are all likely excluded.
Insurance companies usually don’t want to sell you coverage for these high-risk, high-expense types of damage at any price. But there are exceptions, where you can buy extra coverage from the insurance company or another source (like flood and earthquake insurance, which we’ll talk about shortly).
Most Dangerous
U.S. Town
 
Hogan’s Alley, Virginia, averages two bank robberies a week and is a hotbed of criminal, terrorist, and mob activity. Don’t worry, you can’t buy a house there—it’s owned by the FBI, for use as a training ground. Built by Hollywood set designers, it has all the classic small town features: a bank, a post office, a laundromat, houses, and more. See
www.fbi.gov
.
 
The key is to buy added coverage for hazards that can cause huge damage (like sewer backups) or are big risks in the area where you live—like earthquakes in parts of California, hurricanes along the Gulf Coast and Eastern Seaboard, or local concerns such as sinkholes in parts of Florida.
Who Should Buy Flood Insurance
 
Standard homeowners’ policies don’t cover damage from flooding, though your lender will require you to get it if you’re in a designated flood zone. But more than half the people whose homes were damaged by Hurricanes Katrina and Rita weren’t in a flood zone and had no flood insurance. Unfortunately, flooding is the United States’ most common natural disaster, affecting people who live nowhere near water. Melting snow, overflowing creeks or ponds, a weak levee, or water running down a steep hill can all cause flooding. The good news is, flood insurance is cheaper if you’re not in a flood zone.
Flood insurance is available from the National Flood Insurance Program (
www.floodsmart.gov
), but many consider the coverage limits too low—currently a maximum of $250,000 for a one-to-four-family structure, and $100,000 for personal property. You can buy additional coverage, called “excess” flood insurance, from specialized companies (some available through your insurer).
 
CHECK IT OUT
 
Could your house be flooded?
After checking the seller’s disclosures, get more information from
www.floodsmart.gov
(click “Your Flood Risk”). Also check with your local flood control board or city building department.
 
Who Should Buy Earthquake Insurance
 
Standard policies also don’t cover earthquake damage—and you don’t have to live in San Francisco to experience one. The U.S. Geological Survey estimates that earthquakes pose a hazard to 75 million Americans in 39 states. The top five earthquake-prone states include Alaska, California, Hawaii, Nevada, and Washington. And scientists think the Midwest may be overdue for some major quaking, in Arkansas, Illinois, Kentucky, Missouri, and Tennessee.
To cover earthquake damage, either add an endorsement to your homeowners’ coverage or buy a separate policy. Expect high costs—but given the level of potential damage, it’s worth it.
 
CHECK IT OUT
 
Is your house in earthquake territory?
After checking any disclosures from your seller, go to the U.S. Geological Survey website at
http://earthquake.usgs
. gov (Click “Regional Information”).
 
How Much You’ll Receive
 
Most insurance doesn’t give you a blank check but sets a dollar maximum on your coverage. And the limit isn’t your only concern: How your house or property is valued before you reach the limit can be just as important. For example, a $100,000 personal property limit might sound okay—but you’ll never reach it if the policy treats all your old property as nearly worthless. Keep reading to pick up crucial tips for making sure you get enough back.
 
Is Your Hazard Coverage Enough to Rebuild Your House With?
 
Let’s take the most unlikely (but scary) scenario: A fire or other hazard decimates your house. You might then expect your insurance company to pay for it to be rebuilt, just as it was. But that’s not usually how it works.
The Norm: Replacement Cost Coverage
 
The amount you receive to rebuild under a standard policy will be a set dollar figure—calculated in advance. It’s called “replacement cost” coverage, but it’s only indirectly connected to your actual rebuilding costs. Replacement cost coverage literally means the insurance company’s representative will, when you’re arranging to buy the policy, ask you about the house’s size, location, number and type of rooms, building materials, amenities, and more. Then the rep will estimate your house’s replacement value, often using industry software called a “costimator.” You’ll either be covered for the exact “costimated” amount or, if you buy extended replacement cost coverage, 125% of that amount.
Many homeowners just accept the replacement cost figure without question. But it can be off the mark, particularly if building costs go up, a widespread natural disaster increases demand for contractors, or your house has historical features that will be hard to recreate. Ask a local contractor or builder’s association how much a house of a similar size, with similar features, would cost to build. If the insurance will be low, either talk up your house’s value (for example, making sure the rep factors in any special features) or buy an “inflation guard,” which raises the stated value of your house by a set percentage annually.
 
TIP
 
Buying a house built more than 20 years ago?
Consider adding an endorsement called “ordinance or law—increased amount of coverage.” This covers your extra repairs to meet modern building codes.
 
The Ideal: Guaranteed Replacement Coverage
 
If you look hard, you may find a policy that guarantees payment of 100% of your repair or rebuilding costs, without any limits. This rare creature is called a “guaranteed replacement cost” policy. But if your house has historical features that are hard to reproduce, finding such a policy will be especially difficult.
 
Get 100% guaranteed replacement coverage.
Ellie knew she’d used a good insurance agent—but until her home was destroyed in a fire, she didn’t realize how lucky she’d been. Ellie says, “You can’t tell by looking that the house is a total loss—its construction was partially brick, and it’s still standing. But everything inside was either burnt or destroyed by smoke damage. With the 100% replacement cost coverage, we can tear down what’s left and rebuild the whole thing just like it was.”
To Be Avoided: Actual Cash Value Coverage
 
Don’t buy an insurance policy that pays the “actual cash value” of your house. These are sometimes pushed on people with older houses or ones with an inadequate water supply (a fire danger). You’ll get the house’s replacement cost
minus
any depreciation or wear and tear that it’s suffered since being built.

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