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Disaster Strikes — Am I Covered?

After seeing news reports of fires, floods, earthquakes or hurricanes, people worry that they too could become victims of disasters. They also wonder whether they have the right insurance coverage to enable them to rebuild their homes and lives.

This article explains what is covered in your standard homeowners policy and what is not. Where gaps in coverage may exist, it tells you how to fill them.

The document was designed to answer the most common coverage questions posed by consumers to claims adjusters and the National Insurance Consumer Helpline.

Remember, no amount of information can replace a thorough review of your policy with your agent or company representative.

For ease of explanation, it is assumed that you have a policy known as Homeowners-3 (HO-3), the most common homeowners policy in the United States. Check with your agent to make sure that's what you have. If you have a more restrictive policy, you should review your options under question #15.

Question #1: Are you covered for direct losses due to fire, lightning, tornadoes, wind storms, hail, explosions, smoke, vandalism and theft?

Answer: Yes. The HO-3 provides broad coverage for a large number of perils, including all those listed. There are some limits, however, on the amount of insurance you have.

Action: Check the dollar limits of insurance in your policy. Make sure you are comfortable with the amount of insurance you have for specific items. For example, the standard policy provides only $1,000 for theft of jewelry. If your jewelry is worth a lot more, you should purchase higher limits. You may wish to add a floater to your policy to cover specific possessions, such as expensive paintings or silverware. The floater will provide both higher limits and protect you from additional risks, not covered in your normal policy.

Also, if you live on the Atlantic or Gulf coasts there may be some restrictions on your coverage for wind damage. Check this out with your agent.

Question #2: Your house is totally destroyed in a fire. You have bought $150,000 worth of insurance to cover the structure of your house. Will this be enough to rebuild your home?

Answer: If the cost of rebuilding your home is equal to or less than $150,000 you would have enough coverage. The HO-3 policy pays for structural damage on a replacement cost basis. If the cost of replacing your home is, say, $120,000, then that is all the insurance you need. On the other hand if the cost of rebuilding your home is $180,000, then you will be short $30,000. If you choose not to replace your home, you will receive the replacement cost of your home, less depreciation. This is called actual cash value.

Action: Make sure that the amount of insurance you have will cover the cost of rebuilding your house. You can find out what this cost is by talking to your insurance representative or builders in your area.

Do not use the price of your house as the basis for the amount of insurance you purchase. The market price of your house includes the value of the land on which the house is situated. In almost all cases, the land will be still there after a disaster, so you do not need to insure it. You only need to insure the structure.

Question #3: Are you covered for flood?

Answer: No.

Action: Flood insurance is provided by the federal government, under a program run by the Federal Insurance Administration. If you are in a flood prone area it may be wise to purchase flood insurance. In some parts of the country, homes can be damaged or destroyed by mudslides. This risk is also covered under flood policies. Contact your agent or company representative to get this insurance, or call 1-800-427-4661.

Question #4: A pipe bursts and water flows all over your floors. Are you covered?

Answer: Yes. The HO-3 covers you for accidental discharge of water from a plumbing system.

Action: Check your plumbing and heating systems once a year. While you are covered for damage, who needs the mess and hassle?

Question #5: Water seeps into your basement from the ground. Are you covered?

Answer: No. Water seepage is excluded under the HO-3. And if the water seepage is not due to a flood you will not be covered under a flood policy. Problems like seepage are viewed as maintenance issues and are not covered by insurance.

Action: You should see a contractor about water-proofing your basement.

Question #6: Are you covered for earthquake damage?

Answer: No.

Action: Earthquake coverage is sold as additional coverage to the homeowners policy. To determine whether you should purchase this insurance, talk to your agent or company representative. In earthquake prone areas, the price of this insurance is relatively high. In other areas, it is relatively cheap.

Question #7: A neighbor slips on your sidewalk and threatens to take you to court for damages. Does your policy protect you?

Answer: Yes. The policy will pay for damages, if the accident is the result of your negligence. It will also pay for the legal costs of defending you against a claim. Also, the medical payments part of your homeowners policy will cover medical expenses arising from an injury to a neighbor or guest.

Action: Check to see how much liability protection you have. The standard amount is $100,000. If you feel you need more, consider purchasing higher limits.

Question #8: During a storm, a tree falls and damages your roof. Are you covered?

Answer: Yes. You are covered for the damage to your roof. You are also covered for the removal of the tree, up to a $500 limit.

Action: Cut down dead or dying trees close to your house. Prune branches that are near your house. It's true that your insurance covers damage, but falling trees and branches can also injure your family.

Question #9: During a storm, a tree falls and does no damage to your property. Are you covered for the cost of removing the tree?

Answer: No. Your trees and shrubs are covered for losses due to risks like vandalism, theft and fire, but not wind damage.

Action: Decide if you need extra insurance for the trees, plants and shrubs on your property. You may be able to purchase extra insurance, which will not only cover the cost of removal of fallen trees, but will also cover the cost of replacing trees, and other plants. Talk to your insurance representative about the availability and cost of this extra insurance.

Question #10: During a storm, the power from the electric utility is lost. All the food in your refrigerator is spoiled and must be thrown out. Can you make a claim?

Answer: The general answer is no. However, there are a number of exceptions. In some states, food spoilage is covered under the homeowners policy. In addition, if the power loss is due to a break in a power line on or close to your property, you may be covered.

Action: Check with your agent to determine whether you are covered for food spoilage in your state. If not, you can add food spoilage coverage to your policy for an additional premium.

Question #11: Your golf clubs are stolen from the trunk of your car. Can you recover?

Answer: Yes. The HO-3 covers your personal property while it is anywhere in the world. However, if your golf clubs are old, you will only get their current value. This normally will not be enough to purchase a new set.

Action: Consider purchasing a replacement cost endorsement for your personal property. This way you will get the full cost of replacing the golf clubs, less the applicable deductible.

Question #12: You have a power boat with a 50 horsepower engine. If it is stolen, are you covered? What if there is a boating accident and you get sued? Are you covered?

Answer: If the boat is stolen from your residence, in most cases, you can recover only $1,000. If the boat is stolen elsewhere you are not covered.

You are also not covered for liability arising from an accident with the boat. The homeowners policy provides liability coverage for boats with engines less than 25 horsepower.

Action: See your insurance representative about getting extra coverage for your boat, including theft and liability. Ask about the Boatowners policy.

Question #13: Your house is close to the ocean. You have heard that if your house is destroyed by the wind, the town's new building code requires that you rebuild the house on stilts. This will cost $30,000, in addition to the cost of rebuilding your house. Are you covered for this extra cost?

Answer: No. The HO-3 excludes costs caused by ordinance or laws regulating the construction of buildings.

Action: Purchase the Law and Ordinance endorsement. This will cover the extra costs involved in meeting new building codes.

Question #14: Am I covered for an "Act of God"?

Answer: Yes. Normally, you are covered for "Acts of God". The term "Act of God" usually refers to natural disasters like hurricanes and tornadoes, as opposed to man-made acts, like thefts or auto accidents. Most natural disasters, with the notable exceptions of floods and earthquakes, are covered under normal insurance.

Question #15: Does your policy provide less coverage than the HO-3?

Answer: If the answer is yes, review your coverage with your agent. Some older policies provide less coverage than the HO-3. They may not provide coverage for water damage, theft, or liability. They may also provide coverage for the house on an Actual Cash Value basis, rather than a replacement cost basis. Actual Cash Value means replacement cost less depreciation. For example, if your roof is destroyed in a storm, the insurance will only pay the cost of a new roof less than amount of depreciation of the old roof. If your roof was in great shape, this deduction will not be large. However, if the roof was old and worn out, the deduction for depreciation may be large.

Action: Try to get an HO-3. Community-based groups, like Neighborhood Housing Services, can help you get such insurance. Look up their number in the phone book. You may also call the insurance industry's helpline at 1-800-942-4242.

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