Home & Auto Insurance Traps Can Cost You Big
How to Make Sure You’re Covered
J.D. Howard, Insurance Consumer Advocate Network
Insurance is supposed to protect us from financial disaster—but home-owner’s and automotive insurance policies do not cover some potentially expensive problems and situations. The most common coverage gaps and how to protect yourself…
HOMEOWNER’S POLICIES
You may already know that damage caused by an earthquake, flood or war is not covered by most homeowner’s insurance policies and that typically there are special limits on coverage for jewelry, furs, cash, collectibles and other pricey items. Additional coverage gaps…
• Limits on inflation protection. Replacement-cost coverage with an “inflation guard” feature is supposed to pay the true cost of repairs (less your deductible) when something goes wrong. Unfortunately, insurance companies quietly have begun setting percentage limits—typically 6% to 10% per year—on the inflation protection. If home construction costs rise so rapidly that your coverage falls below 80% of the true cost of rebuilding or repairing the damaged portions of your home, your insurance company might have the right to void your replacement-cost coverage. In such a case, the company would instead calculate the depreciated value of the damaged portions. Then it could further reduce that amount to reflect how far short of the 80% figure your coverage falls.
Example: The cost to rebuild your home has grown to $160,000, but your initial $100,000 coverage has increased to only $119,100 over the past three years. That means you have only 74.4% of the coverage you need. Your replacement-cost coverage is voided because of the shortfall. When your 10-year-old roof is destroyed in a storm, the company pegs the depreciated value at $5,000 (half the original cost), then multiplies that by 74.4%, subtracts your $500 deductible and ends up paying you only $3,220—a small fraction of the actual replacement cost.
Self-defense: Call your insurance agent every two to three years to make sure that your coverage has kept pace with the full replacement value of your home. If he/she says it has, get it in writing. If the agent tells you that your coverage has not kept pace, consider increasing your coverage. If you follow your agent’s advice and your coverage still falls short, the carrier usually will cover the difference.
• Leaks and mold. Water damage caused by slow leaks from pipes, plumbing fixtures or heating/ventilation/air-conditioning (HVAC) components is not typically covered by homeowner’s insurance—though damage from a burst pipe is. The removal of mold, mold spores or mildew from a home also typically is not covered unless it’s the result of a covered event, such as a burst pipe or water sprayed on the house to extinguish a fire. It could cost you tens of thousands of dollars to correct problems caused by slow water leaks.
Self-defense: Be alert for any signs of hidden moisture, such as peeling paint…discolored ceilings or floors…or musty odors. And if you find them, call a contractor to identify the cause and scope of the damage. If it is in its early stages, a simple bleach solution and proper ventilation should solve it.
• Sewer backups and septic problems. Standard homeowner’s policies do not pay for repairs to broken or clogged sewer lines or septic systems…or for cleaning sewage from your home and replacing damaged carpets and furniture if these systems back up.
Self-defense: Ask your agent how much sewer/septic coverage costs. It’s not always available. Call a plumber or septic system specialist at the first sign of sluggishness in your sewer line or septic tank. If a landscaping company, contractor or municipal worker is to blame for the problem, you can try to recover your expenses through the responsible party’s insurance or in court.
• Home offices. Equipment and furniture used for business purposes are not covered by standard homeowner’s insurance policies. Likewise, the liability portion of your homeowner’s insurance will not protect you if someone is injured on your property while visiting for business reasons.
Self-defense: Add a “business pursuits” endorsement to your homeowner’s coverage if you do business from home. Expect this to increase your premiums by approximately 5%.
• College students. Your child’s possessions are not covered by your homeowner’s policy if he/she lives in off-campus housing while attending college. However, a college student’s possessions typically are covered by your policy if he lives in a college dorm, usually up to 10% of the policy limits.
Self-defense: Purchase renter’s insurance for college-age kids who live in noncollege housing. It typically costs a few hundred dollars a year.
AUTO POLICIES
You might already know that most US auto insurance, especially for liability coverage, does not apply south of the Mexican border. That means you have to arrange for temporary “tourist” auto coverage from a Mexican insurance company. Two other potential problem areas…
• Deer and other road obstacles. If you have an accident with something that’s moving (other than a vehicle)—such as a deer running across the road…or a rock rolling down from a hillside—your losses will not be covered by collision insurance. Your losses will be covered only if you have comprehensive insurance, which is often dropped by owners of older vehicles.
On the other hand, if you have an accident with something that’s standing still—such as a deer that is frozen in your headlights in the middle of the road…or a rock that has rolled down a hillside and come to rest in your lane—you are covered by collision insurance.
Self-defense: If you don’t have comprehensive insurance, make sure your insurance agent understands that the deer or rock you hit was standing perfectly still, assuming that was the case. If you have both collision and comprehensive coverage but your comprehensive deductible is lower, make sure your insurance agent understands that the deer or rock was moving.
• Lending a car to a friend or relative. Some auto insurance policies are “family style,” meaning that they cover anyone who drives the car with the owner’s permission. Others are “named-insured only,” meaning that they cover only drivers specifically named on the policy. If a car owner with a named-insured-only policy lends the vehicle to a friend or relative who then causes an accident, the car owner could be personally liable for all damages. If serious injuries are involved, the car owner might lose everything he owns in a lawsuit.
Self-defense: Do not lend out your vehicle unless you are certain that your insurance covers all drivers. Call your insurance company to check if the contract isn’t clear. You also are on relatively safe ground if the person you lend your car to has auto insurance that covers him when he is driving someone else’s vehicle.
Bottom Line/Personal interviewed J.D. Howard, executive director of Insurance Consumer Advocate Network, a nonprofit insurance consumer advocacy organization, Branson West, Missouri.
He has been in the insurance industry since 1965, mainly as an insurance adjuster. www.ican2000.com
(Article originally published August 1, 2007)
Reprinted with the permission of:
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