Real-Estate Matters: Homeowners insurance comes with caveats

Q: I read your recent column (Jan. 27) about insurance coverage. In the past, I had three house fires that I had to deal with. None of these fires were my fault. Every time, I had problems with my insurance companies.

In the column you mention that you had friends who had a $1 million homeowners replacement policy, and how the insurance company paid $2 million to replace it. I’m confused. I thought the insurance company only had to replace things up to the value of the policy and nothing more.

A: We’re so sorry to hear that you’ve had to deal with three house fires. It’s hard to deal with one.

When you purchase a homeowners insurance policy, the first thing you should do is make sure you are dealing with a company that has a good reputation in paying its claims. If you talk with attorneys that deal with insurance companies, you frequently hear them complain about some companies that will fight every claim and try to pay out as little as possible.

We had family members in Florida whose house was basically destroyed by a hurricane many years ago. All of the houses in the neighborhood were destroyed. Although all of their neighbors’ insurance companies paid the claims relatively quickly, our relatives had to fight for years to get what they knew should have been covered by the policy. Their insurance company simply didn’t want to pay out.

When looking at your coverage, you have to understand that insurance companies insure a home to a particular coverage limit listed in the policy. For example, if your home burns down completely, the most that the insurance company will pay is the amount listed as the policy limit. So, if you have a policy limit of $300,000, the insurance company will only pay out at most $300,000 to replace your home. You need to be careful, as some policies might cover you up to that amount but will have other limitations that might result in you not getting the full $300,000 to rebuild the home.

A second type of coverage is when the insurance company will pay up to the insurance limit on the policy, but if the costs go over that limit, they will pay a certain amount above that. For example, if your policy limit is $300,000, they might pay 10 percent or 25 percent more than the policy limit. That would mean that you could get $330,000 with the 10 percent cap or $375,000 if you have a 25 percent cap.

And then there is another lesser-used policy limit that guarantees the replacement of your home no matter how much it costs to rebuild it. So, if you have a policy limit of $300,000 and it costs $700,000 to rebuild, the insurance company will pay it.

Finally, insurance companies also limit what they will pay for when they have to pay for the replacement of a home. In some cases, insurance policies won’t pay for newer safety features or improvements to a home. Say your home burns down and the local building code now requires you to rebuild the home with a fire-sprinkler system, earthquake-resistant materials and designs, or hurricane-resistant framing and structures. Because your old home didn’t have those, the insurance company might not pay for those improvements unless your policy specifically states that the company will pay for building-code changes and other changes in building laws.

When you shop for a policy, you should keep these differences in mind. But you should also know that the premium costs will differ with each of the policy types. Try to find a good insurance broker who can help you truly understand the cost and possible outcomes with each policy.