1.1. Purpose of Home Insurance

Although insurance contracts are often perceived to be complex, individuals can usually be expected to possess much of the private information that is necessary to make home insurance contracts cost-effective. The purpose of this study is to help reduce some of that information asymmetry. In what follows, we look at the factors that stimulate the decision to buy (or not) a level of coverage that is more commensurate with societal preferences, especially in the aftermath of a catastrophic event. Regulatory and private sector entities can help to promote insurance coverage for catastrophic events by increasing insurance-specific knowledge. This study adds to the scanty literature on home insurance choices, where the only previous study of this particular region of the world finds that homeowners’ decisions about insurance coverage are typically uninformed and the coverage levels are usually inadequate. We interpret our results in the broader context of home insurance as a societal tool that helps facilitate community recovery and fosters economic resilience.

The Europe and Central Asia region is vulnerable to an assortment of natural disasters, including floods, earthquakes, and wildfires. More investment is required to reduce these vulnerabilities, but insurance can provide the financial resources to assist beneficiaries while the longer-term improvements are implemented. Home insurance products are generally designed to help satisfy binding loan agreements. Such insurance typically requires not only that the material structure be insured, but also that the total amount of insurance be sufficient to reconstruct the structure if it is damaged or destroyed. However, because the property owner typically weighs the costs and benefits of obtaining insurance, and because the willingness to pay for sufficient insurance coverage often varies with the degree of natural disaster risk, the reliability of home insurance as a risk management tool is a function of that variation and homeowner choices.

2. Understanding Home Insurance Policies

Homeowners and tenants who have taken and properly pay for home insurance need to be able to look to their insurance policies as they need them. Home insurance claims make up a significant portion of all indemnity claims paid in the insurance industry. When disputes arise and policyholders expect relief that claims are denied, insurance implications provide business for courts, arbitrators, and mediators. Most of these conflicts can be traced to issues about the factors of the policy. Part of the problem comes from the effects of getting home insurance from applications that do not correctly or fully disclose the terms of the risk. Erroneous applications can give buyers insurance to purchase the wrong kind of policy, do not purchase coverage with adequate limits or add the insurance they do not actually want.

The purpose of home insurance is to protect homeowners and tenants from financial losses. They are designed to cover various risks and losses ranging from the contents of your house to the cost of rebuilding the structure, to temporary housing costs while damage repairs are made. The different policies are structured to address specific needs with the property for which coverage is sought. There is no one-size-fits-all approach to ensuring an adequately insured home. The type of policy that is appropriate for the property depends on various factors that pertain individually to the applicant’s circumstances. While the type of home and its cost play a role in determining the best policy, occupancy, use, location, and other factors bear as heavily or more in determining the kind of policy that is best for the individuals.

2.1. Types of Coverage

Homeowners purchase homeowners insurance policies for their dwellings and for various personal property items they desire to protect, as well as for personal liability exposure. The two most common types of homeowners insurance in force are HO-1 and HO-2 policies, which are form agreements developed by the Insurance Service Office (ISO). Specific state insurance departments often regulate the standard form and endorse the types used in their states. Coverage for personal items is usually a percentage of the homeowners coverage limit for the dwelling. This ratio of coverage on the personal items to the coverage limit on the dwelling is usually in the range of 75 to 90 percent. For instance, if there is $75,000 of coverage protection for the personal property of a homeowner with a $100,000 coverage limit for the dwelling, then the percentage of coverage protection is 75 percent. There usually is no dollar amount or list of personal items to be protected in the policy. The policy declares that the personal property must be typical of personal items found in the home. However, with no list or descriptions of items, the homeowner needs to have a current inventory to ensure enough coverage protection.

2.2. Policy Limits and Deductibles

2.2.1. Deductibles The goal of cost sharing via deductibles is to increase insurance affordability and to allocate scarce insurance funds to their highest valued uses during a time of high claims. Two types of deductibles are common in homeowner insurance policies: a flat dollar amount and a percentage of either the insurance limit or the value at risk of the property. With a percentage deductible, the dollar amount increases with the risk; so, it costs less to insure against the smaller loss and more to insure against the maximum loss. Currently, very few homeowner policies include wind mitigation credits as an incentive mechanism for policyholders to reinforce homes. Deductibles are one way to offer a mitigation credit.

Deductibles, limits, and other coverage limits also create problems for homeowners. If limits are too low, a homeowner may be subject to the same financial losses and cash shortfalls that occur when losses not covered by the policy occur. Deductibles restrict access to the insurance protection that the policy promises. Higher deductibles and lower limits for risks such as theft, liability, and additional living expenses need to be studied for their adverse effects on coverage and on homeowner well-being.

3. Assessing Coverage Needs

Insufficient insurance has such a severe effect when a family’s home is totally destroyed that counsel to buy sufficient insurance is well advertised. However, failing to buy enough insurance has that significant an impact only when a home is totally destroyed. Because even in low- or moderate-cost areas, replacing after a major disaster different amounts of a family’s property as well as other living-related expenses would be financially difficult, an individual also should consider purchasing a high amount of insurance for total loss and a lower amount of insurance at a lower cost for other less costly loss possibilities. In general, the most expensive trade-offs between not buying enough insurance and buying more insurance than would be used involve the purchase of insurance for a total property loss and forced living costs. Current valuation and recent inflation rates of property make the purchase of a $25,000-expense policy rather inexpensive – but arguing for an insurance amount of less than the family’s ability to replace should the home be replaced with non-insured funds is more difficult. Individuals thus should consider buying $25,000-expense policies, first for forced living expenses, and second, for their property coverage.

3.1. Property Value Assessment

Home costs can be a quick hack to approximate the reconstruction cost of the property. Home costs are also likely to be more responsive to changes in quality (for example, granite countertop replacement, parquet versus marble flooring, and the like) compared to property value data. Unlike property value data, home costs are readily available to homeowners when using online housing listing platforms. Furthermore, home costs adjust more dynamically compared to property value data, which usually rely on comparables.

Property value assessment can be key to determining the appropriate coverage for a home insurance policy. However, existing property value data is generally insufficient. Property laws dictate that property values can only be shared through willing buyers and sellers. As such, publicly available property value data is not only usually outdated, but also provides limited value for private use. For small- and medium-sized accounts, insurance companies usually do a one-time property value assessment, while a change in property value assessment across policies may result in large businesses of some insurance companies.

3.2. Liability Coverage Needs

However, in the majority of these situations, a homeowner is having friends or relatives make repairs and improvements. With worker classifications being that of the occasional laborer or casual laborer and no employer-employee relationship existing, the worker does not qualify as «insured» under a General Liability policy. Due to the physical requirements placed on the workforce, unlikely the worker will have Worker Accident coverage. If the worker sustains injury, he could look to the homeowner’s policy for coverage. Even if the injured person has health insurance, the health insurance needs. Thus, although there is no employer-employee relationship, when the worker gives consideration in the form of the worker’s agreement to perform the repair or renovations, the worker be insured. It would be prudent for the homeowner to require an occasional or casual laborer to have their own health insurance as a condition of work.

In the example of a ladder and roof repair, there are both liability and medical payment elements. If the worker is paid, he is likely to be considered an employee, and coverage would be under the workers’ compensation of the contractor of the policy. However, with no workers’ compensation to attract or define the worker, the real issue is liability coverage. If the homeowner does not have workers’ compensation but treated other workers as employees and reported them on tax returns, this could be controverted by the insurance company citing employer status. If reporting was not done, it could easily be established that the homeowner was indeed acting in a trade and that the worker’s status was that of an employee. Both of these situations result in coverage being placed under the homeowner’s policy. With an uninsured or underinsured subcontracting uninsured workers, liability exposure is significant especially since a blanket asset of the homeowner has been utilized.

4. Reviewing and Updating Policies

Establishing an annual routine will also make organizing the information you need for a claims process more straightforward. It is difficult enough having to deal with the claims process without having to look up what you own, the date of its purchase, etc. Similarly, premises and policies can change in many ways, including new residents, new additions to your home, and new activities that could affect your coverage.

Review your policy and insurance coverage amounts often. You need to update your policy each year, or more often if shorter periods have been specified in the individual conditions. You will need to adjust the coverage amounts when the values of your items exposed to risk change—one of your children leaves home and the amount of insurance for a student remains the same for transportable personal property. You may need more or less coverage for the trailers that only come off the hardstand in the summer and that have been insured for the winter. Similarly, you may need more or less coverage for the mobile cranes that are only exposed on contract sites during the winter and that have been insured for temporary storage in the summer. You may also have to review and modify the listing of particular items so that you have coverage for seasonal items.

4.1. Regular Policy Reviews

In a constantly evolving world, it is very essential that you review the policy frequently to ensure that you are well covered. Renewal of policy is not the only period an insurance policy needs to be evaluated. This is because of changes that could occur, such as allowing more pets or elderly parents for your home. It is also vital to inform the insurer promptly of changes in your home and living conditions, such as expanding your home or starting a business. When you apply for home insurance, the building and its contents should reflect the actual situation at that time. If there are differences between this and your currently insured area, a claim by you might be affected. We suggest that you review the policy twice per year. To assess milestones relative to innovations and regulatory changes, talk to your insurance advisor and verify the terms of policy coverage. With incremental increases or substitutes for belongings or adjustments in the use of your accommodation such as welcoming visitors with disabilities, upcoming changes such as size, or square footage additions, regulatory reforms, or altered residential environment, an insurance advisor will help avoid complications before they arise.

Because insurance should cover the costs occurring at any time, it is beneficial to review the policy often and make sure that your home is adequately insured. Due to its dynamic nature, the design, features, size, and materials of the house are likely to change over time. Major renovation, upkeep, or architectural changes may lead to a rise or decrease in property value and associated replacement expenses. Changes in policy terms and coverage prerequisites by service providers would also increase or decrease compensation rates for particular damages. For instance, the insurance company may decide to change policy conditions like increasing or reducing policy thresholds for earthquakes, floods, or mold infestations. Failure to update the policy to reflect significant changes might result in underinsured consequences.

4.2. Updating Coverage as Needs Change

The policyholder may wish to upgrade her coverage in the following limited situations: (1) If an individual valuable household item is highly susceptible to special risks or particular losses that the coverage in the household goods policy cannot be broadened or extended to include, an administrator of a home business should approach the insurance company. Examples related to the PA’s home business would be a bicycle or a computer. (2) If, following a fair and reasonable attempt over a maximum search period of six to nine months, the policyholder does not find the ultimate replacement of her home beyond the policy coverage. The dwelling and this PA’s home business represent examples. Then she should return to the real-estate market within the policy-constrained financial limits. In addition to a policy adjusting clause, such housing clauses would offer a dual advantage to a policyholder: purchase at times of low pressure for housing and, if fire were to strike, the certainty of a newfound residence in the homeownership building.

As a basic rule of thumb, the limit on the contents portion of a homeowner’s policy should be set at a minimum equal to the value of the house. The policyholder’s first responsibility is to make a detailed list of all household goods, preferably during an inventorying walk through the house, then check individual values carefully against standard appraisals of such items. Valuable antiques and rare furniture or artifacts may require a professional estimate. Clothing, stereo equipment, and TV sets can usually be covered for their actual cash value, which denotes their present value in yard sales. If such terms are not acceptable, the insurance company should be asked to find a cost schedule for depreciated values of these goods or, if there is no such schedule, to provide quotations for equivalent coverage. When the PA agent does not have an all risks policy for App CU property, the items in the PA’s office and valuable equipment for tending PA outside the home should be examined for possible special coverage.

Source Links

  1. https://www.tdi.texas.gov/tips/home-insurance.html
  2. https://www.iii.org/article/how-much-homeowners-insurance-do-you-need
  3. https://www.bankrate.com/insurance/homeowners-insurance/how-much-homeowners-insurance/
  4. https://www.thehortongroup.com/resources/80-rule-insurance/
  5. https://www.investopedia.com/insurance/homeowners-insurance-guide/

por ronitec

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