Deciphering any kind of property insurance policy, such as homeowners or renters insurance, can be tricky. Despite new laws and regulations forcing insurance companies to write more “reader friendly” policies, there are still terms in most policies that are not a part of one’s everyday vocabulary.
Reading and understanding a property insurance policy is especially important since it’s protecting an important, valuable asset. To make sure you’ve got the coverage you need and that you understand your policy, here are a few of the basic insurance terms likely to appear in a property policy.
HO-3/Special Form Policy: This type of policy is the standard insurance policy, and provides coverage for your home for any risks leading to physical loss, with the exception of specific exclusions such as war, flood, and earthquakes, which are perils that can often be provided for by adding endorsements.
Dwelling: Dwelling coverage refers to your home and also any structures attached to your home — a garage, porch, or breezeway, for example. Whenever the term ‘dwelling’ is referred to in a policy, it may also be inclusive of permanent fixtures such as built in cabinetry or appliances.
Other Structures: This refers to detached structures on your property, such as sheds, detached garages, sheds, or other outbuildings.
Personal Property: If you were take your home and dump it upside down, anything that fell out is most likely going to be considered your personal property. Personal property consists of the contents in your home — such as furniture, electronics, clothing, books.
Limit: The specified amount that your policy will pay out in the event of a claim.
Loss: The total costs associated from any physical injury or damage of property.
Deductible: A deductible on any insurance policy essentially has a universal definition: it’s the amount of money you’re responsible for paying out of pocket in the event of a claim. It works just like a deductible on your auto insurance: if you elect a $500 deductible and suffer a $1,000 claim, you would be responsible for paying $500 and the insurance company would pay $500 towards the claim.
Conditions: These are the provisions set forth in your policy that define the duties and responsibilities of the insured. Conditions also explain the responsibilities of both the customer and the insurance company, making this a very important part of your policy.
Perils: Simply defined, perils are the events that cause damage or loss to your property, such as fire, theft, vandalism, flood, and wind. Your homeowners insurance policy will include which perils are covered and which are not.
Actual Cash Value: The amount it would cost to replace damaged property less any depreciation, which is sometimes referred to as market value. For example, if your policy has actual cash value coverage and you file a claim on a destroyed camera, the insurance company would consider the amount it would cost to replace the camera with a like or similar item. The company would use a formula to figure out the actual cash value of the item: the cost of the camera less depreciation and things such as wear and tear. If you paid $1,000 for the camera five years ago, under actual cash value you’re only going to receive what it’s currently worth on the marketplace.
Replacement Cost: If you have replacement cost coverage on your policy, this means any claim payment is made based on what it would actually cost you to replace the damaged property. Compared to actual cash value, this kind of coverage doesn’t factor in depreciation costs, meaning it’s usually the most favorable option for covering personal property, particularly high value items. Using the same scenario from actual cash value, if you were to make the same claim on the camera but had replacement cost coverage, then you’d actually receive whatever amount it would cost to replace the camera with a like or same item. If you paid $1,000 for your camera five years ago, and now it’s $1,200 to buy the same camera, you’d likely receive around $1,200. In essence, this term considers the appreciation of property versus the depreciation.
Endorsement: This refers to any amendment to a standard homeowners or renters policy, and is often used to provide extra coverage for unique or high value items. However, it can also be used to note the removal of a particular coverage.
Exclusions: The exclusions portion of a policy is a particularly important part of a property policy, as it defines what is NOT covered by the policy. Policies explain what perils would not be covered in the event of a loss. For example, homeowners insurance does not cover damage due to natural flood, and flood is a peril, so you would see flood listed as an excluded peril. In addition to those kinds of perils, exclusions are specifically named situations, people, and locations that are not covered by your policy.
Extended Coverage: Extended coverage is often put into place in order to protect against loss that occurs from perils such as smoke, acts of riot, explosions, civil commotions, windstorms, and others as specified by your particular policy.
Loss of Use: If you were to experience a claim that caused you or your household members additional losses of your property or possessions due to the original loss, this coverage would help cover those. For example, say that you experienced smoke damage in your home and you were unable to live in the home while it was being repaired. If you were then forced to stay in a hotel, which perhaps was further away from your job and cost you additional transportation expenses, loss of use is the coverage that would pay for the hotel expenses, extra transportation expenses, and in many cases, the cost of food and other expenses that wouldn’t have otherwise been occurred had the original loss not occurred.
Liability Insurance: Liability coverage is what provides protection for you in the event that you’re liable for a loss or other damages experienced by someone else on your property due to your negligence. If you ordered a pizza, and the pizza delivery driver tripped over a bicycle that was lying in your sidewalk and broke his ankle, he could make a liability claim on your property policy. If you rent your home, the same scenario is possible, so liability on renters insurance is just as important as liability on homeowners: especially if you’re found liable for an apartment fire that burned down ten other people’s homes. They could all end up suing you and you would definitely want the highest liability limits possible.
Medical Payments: Medical payments, just like deductibles, basically work the same on a property policy as they do on an auto policy. They pay for any medical expenses for other people if they’re injured in an accident at your home, regardless of who is at fault. An example would be if you had a friend over helping you prepare dinner and they cut themselves while doing so: you can make a claim on your policy under your medical payments coverage to pay for their medical expenses. However, this coverage would not provide coverage to you as the owner or any relatives or household members that live in the household.
-Desiree Baughman, InsuranceQuotes.org
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