Congratulations on your upcoming home purchase!
Purchasing a home is an exciting experience, and one that’s filled with lots of things to do and decisions to make, so we wanted to provide you with some information which you may find helpful as you tackle the very important decisions around protecting your new home purchase.
You should always consult with your licensed professional insurance agent or broker to determine your eligibility, the specifics of available plans and options, and for guidance in making decisions about the insurance protection plan that best suits your needs. But we’ve put together this basic guide to give you some background which will help prepare you to ask good questions when you have that discussion, and to make informed decisions which reflect your specific circumstances and risk tolerance.
Of course, if you need help with your insurance, or if you’d just like a second opinion or advice, we’d be happy to help!
Types of Insurance
- Homeowner’s Insurance — referred to as ”fire insurance” by insurance companies, but generally includes coverage for many more risks than just fire (described in more detail below). This is the primary insurance coverage for your home and other home-related exposures, and the policy that most lenders require.
- Earthquake Insurance — most homeowner‘s insurance policies in California don’t include coverage for earthquakes, so a separate policy is required. Lenders don’t typically require earthquake insurance, but it’s a good idea to carry it to protect your own interests and equity in your home.
- Flood Insurance — most homeowner’s insurance policies also do not include coverage for floods, so a separate policy is Federally backed mortgages on homes within certain FEMA mapped flood zones require flood insurance.
Insurance companies employ a variety of factors in determining whether they will cover a home, and each company may have different criteria or come to different conclusions about the risk and desirability of insuring a particular home. Some of the key determinants typically include:
- Property Location – the physical location of the property relative to maps of various risk factors (e.g. wildfire/brush areas, proximity to earthquake faults, bodies of water, ), as well as the insurer’s level of exposure in the area all play into the decision
- Property Features —type of construction, building materials, property slope, maintenance, age and type of service equipment, utilities and roof, as well as the presence of risk mitigation equipment like smoke detectors, deadbolt locks, burglar alarms, fire sprinklers, also may impact the decision
- Insurance History — your claims history, and that of the property can also play a role in determining eligibility for insurance
Types of Insurance Carriers & Policies
Your insurance agent or broker will be able to help determine your eligibility with different types of carriers and the most appropriate solution for you; but below is a basic outline of the different types of insurance carriers that operate in the market, and the types of policies they write, so you are aware of the differences.
Admitted Carriers (Standard Market)
- Refers to insurance carriers which are licensed by the Department of Insurance in the state where they are doing In California, admitted carriers are required to be members of the California Insurance Guarantee Association (CIGA), which provides backup protection in the event the insurer becomes insolvent
- Standard market policies written by admitted carriers typically include a bundled package of coverages designed to protect your home (and you) from a variety of risk This is usually the preferred option, where available
- While each carrier will have its own unique customizations written into a proprietary policy form, most standard market policies are constructed based on one of two standard policy forms (the foundation):
HO-3— the most common form for the standard home insurance market; covers the home itself, plus many other exposures associated with home ownership, including other structures, personal property, additional living expenses, personal liability and guest medical expenses
HO-5— this is the more comprehensive form of homeowner’s insurance (HO-3 plus some extra perks and breadth – e.g. “open perils” coverage for personal property, meaning most things are covered, unless excluded…versus only being covered if specific things that are listed happen). HO-5 policies also typically automatically include features like replacement cost coverage for your personal property (instead of depreciated value), which you may have to add to an HO-3 policy by endorsement for additional cost, if available
HO-6— also referred to as a “walls-in” policy. An HO-6 policy provides coverage for a condominium or townhome where the Homeowner’s Association maintains insurance for the structure of the building and the owner is only responsible for the interior
- Important Note – it’s important to understand what the HOA’s “master policy” covers to ensure that your HO-6 policy is written correctly to fill in the For example, some HOA master policies provide coverage for certain interior building improvements, in which case, you may not need as much building coverage on your own policy, which can save substantial premium cost for you. The HOA’s coverage information can generally be found in the insurance disclosure documents and/or the HOA’s CC&R document
Surplus Lines Carriers
• Refers to insurance carriers which are not licensed by the Department of Insurance in the state where they are doing business, and therefore, are not generally subject to the same level of regulatory oversight or financial backing requirements as an admitted carrier
• This does not necessarily mean these companies are not financially viable or operationally sound, they just typically cater to the higher risk or specialty markets where admitted carriers will not Increased due diligence is warranted to verify financial and operational strength
• Policies written by surplus lines carriers can vary greatly in their terms and conditions —they may be based on one of the two standard policy forms noted above, or they may be based on a more basic dwelling form (although those would be less common)
- HO-1 & HO-2 — these more basic dwelling policies cover a much more finite list of perils specific to the dwelling only (e.g. fire/lightning, windstorm/hail, explosion, riots/civil commotion, aircraft, vehicles, smoke, vandalism/malicious mischief, theft, volcanic eruption, falling objects, weight of snow, sleet, ice, ), so are very uncommon for regular home protection use in normal markets
CA FAIR Plan
• The California FAIR Plan was established by the California Legislature in 1968 as an insurance placement facility when other options are not available (e.g. the insurer of last resort). It is essentially a syndicated insurance pool comprised of all insurers licensed to conduct property/casualty business in California, and managed by a central administration agency. “FAIR” stands for “Fair Access to Insurance Requirements”
- It’s important to understand that, unlike a package policy that you’re likely to find in the standard or surplus lines market, the CA FAIR Plan policy only covers a very limited scope of perils (risks), similar to a basic dwelling policy, described Most lenders will accept coverage through the CA FAIR Plan to protect their interests; however, a few of the more notable coverage gaps that you will need to purchase separately to protect your interests include coverage for liability, theft and water damage. These can be purchased separately through a “Difference in Conditions” policy (often referred to as a “DIC” or “wrap-around” policy)
The coverage limits that you see on your quote or policy declarations page apply when the loss is one which is covered under the terms of the policy. So it’s important to remember that two policies which appear to have the same coverages based on the quote/declarations page may, in fact, have quite different coverage implications, based on differences in the underlying policy form (as described above). Knowing which policy type you have and the distinctions between the different types of policies will help you make a more informed comparison and coverage decisions
That said, below is a basic description of a few of the key coverages and features on a homeowner’s policy and some considerations to be aware of.
The Most Significant Premium Drivers:
- Dwelling Coverage — this is the main coverage on the policy and the one most people are aware The number expressed on your declarations page is the limit; the insurance company will pay the fair and reasonable cost to rebuild your home, up to this limit, in the case of a covered loss
- Note that insurance companies are required to complete an estimated replacement cost evaluation to assist you in choosing the appropriate amount of It is our opinion that these tools often yield a rebuild value that is quite a bit lower than what we see people actually paying to build in our area, so caution should be used in relying on these reports as the only input into your coverage decision
- Extra Replacement Cost — some insurance policies inclJde additional coverage that the insurer will pay, above and beyond the dwelling coverage, if required to rebuild your This additional coverage is usually expressed as a percentage of the dwelling coverage
- Ordinance and Law (aka Building Code Upgrade) – the dwelling and extra replacement cost coverages are designed to cover the cost to build your home back the way it was prior to the But of course, because building codes change over time, you wouldn’t likely be allowed to build back exactly the same (unless your home is very new). The ordinance and law coverage covers the additional costs associated with building back to current code requirements.
- Important Distinction — most insurers offer an ordinance and law coverage On some policies this is additional coverage, on top of the dwelling and extra replacement cost coverages noted above. However, on some policies this coverage is a “sublimit“ of the dwelling coverage, meaning that you can use up to a certain percentage of the dwelling coverage to apply towards building code upgrade costs. This seemingly small nuance makes a big difference in the total amount you would be entitled to in the case of a loss
- Deductible — this is the amount that you agree to pay first (for most losses), before the insurance company begins to Higher deductibles will drive the premium down, and lower deductibles will drive the premium up
Other Key Coverages:
- Dwelling Extension – also known as other structures coverage, this can apply to a detached garage, pool house, shed, fences, retaining walls, Most policies include 10% of the dwelling coverage for this, by default, and can be increased if needed
- Personal Property – this is for the contents of your Imagine if you picked up your home and shook it out — the things that would fall out would generally be what’s covered under personal property. Homeowner’s insurance policies typically include 50%-75% of the dwelling coverage for personal property (rather than a specific number that you select)
- However, note that certain types of items are subject to sublimits, meaning that they have special limits which are much lower than the full personal property limit (e.g. jewelry & furs, silverware/goldware, firearms, sometimes computers, )
Also note an important distinction – some policies provide replacement cost coverage for personal property, while others provide actual cash value/depreciated cost. For example, the TV you purchased 5 years ago for $1k would be depreciated under an actual cash value policy (to say, $500), versus on a replacement cost policy where you would receive the amount needed to replace it with one of like kind & quality (say, $1,200)
Recommendation – it’s a good idea to document your personal property so you’re able to remember everything when creating a list of what you lost, and also to provide evidence for the claims adjuster. This is a place where people often leave a lot on the table in a claim situation, simply because they don’t remember everything they had. One simple method to solve that is to walk around your home and take a video — slowly pan through closets, cabinets, drawers, the garage, etc., and voice annotate as you go along, paying extra attention to things that are uncommon to a home like yours (this will also help document the layout and finishes of your home itself for reconstruction purposes). And of course, remember to store the video in the cloud or somewhere safe so it will be retrievable after a loss
- Loss of Use — this is for covering your increased cost of living while your home is being repaired or rebuilt after a loss (e.g. the cost of renting another home). On most home insurance policies, the dollar amount that is noted on your declarations page is for a maximum of either 12 or 24 months, and may be extended by law in certain circumstances (e.g. a declared state of emergency following a major wildfire)
- Liability – this is a very important coverage that protects you from many types of lawsuits and claims of negligence made against you, and extends well beyond your property line (e.g. your dog bites someone while at the dog park, or you hit someone with a ball while golfing). Getting this coverage right is critical, so make sure to have a robust discussion with your agent or broker about your assets and your risk factors to make sure you are properly Note that for many homeowners, a personal liability umbrella is also necessary to adequately protect assets
- Medical Expenses – this is a no-fault coverage that pays for medical expenses incurred by your guests when hurt while at your With the soaring costs of medical insurance these days, many people now have higher deductible health plans (or no insurance at all), so may incur significant out-of-pocket expenses that would need to be covered
- Backup of Sewer & Drain Endorsement — most homeowner’s policies do not cover the damage caused by water backing up from sewer or drain lines unless you have this endorsement, which provides a limited amount of dwelling coverage for that type of Note that this is not insurance for the sewer or plumbing lines themselves (there are separate policies available to cover that), just the water damage caused by the backup
There is no exact science to determining precisely how much coverage you may need for an unknown future event, the circumstances and timing can have a significant impact on the exposure.
For instance, the cost to rebuild your home may be significantly more in the event of a broad wildfire, versus a single home fire. Even a wildfire in another area can drive up building costs in your area as the supply of labor and materials are diverted. Add to that, supply chain issues related to Covid or many other variables, and you can see that the variability of rebuilding cost can be significant.
Similarly, there are many other types of exposures that we all face in life that are just simply not perfectly predictable, and it’s not practical (or possible) to insure for everything. Because of that, it’s important to take into consideration your risk tolerance and the extent to which you are capable and comfortable potentially footing costs as you decide on the coverage limits and deductibles on your insurance policies.
These are the things that your insurance agent or broker can help you think through so you’re able to make informed, active decisions about where you’re comfortable self-insuring, versus where you’d prefer having insurance protection.
One final note related to optimizing cost, which of course is an important factor to balance in setting up your insurance protection plan — many insurance companies offer substantial discounts for bundling different types of policies together. Additionally, having most or all of your insurance with one provider (or agent/broker) who you know and trust can add convenience and comfort to your insurance interactions. So it’s always worth looking into this when you’re in the market for home insurance. Typically, the largest discounts come with bundling home, auto and personal liability umbrella policies.
Mark Hoogs State Farm Agency
629 Moraga Rd Moraga, CA 94556