Choosing the Right Homeowner’s Property Coverages

Coverages A, B, C, and D of homeowner’s policies cover property damage to
your dwelling, detached structures and their contents, and any increase in
living expenses related to property damage. That’s how homeowner’s policies
are similar.

How they differ is in the kinds of losses they cover. All homeowner’s policies
cover damage from fire or a windstorm, for example. But only some policies
cover water damage from cracked plumbing or toilet overflows. And none
automatically covers damage from a flood or an earthquake, though both
coverages can be purchased.
To choose the homeowner’s policy best suited to your needs, you need to
know which causes of loss are covered and which are not.

Understanding the causes-of-loss options:
Basic, broad, and special

question is, “Was the cause of the damage covered by the policy?” If “yes,”
your claim is paid. If “no,” your claim is denied. Most insurance companies
offer three choices for the types of losses covered:
✓ Basic form causes of loss: Very limited coverage. Limited to a handful of
covered causes of loss, including fire, wind, vandalism, and very limited
theft. This option is rarely sold or purchased anymore.
✓ Broad form causes of loss: Covers about 15 causes of loss. From my
experience, the vast majority of the kinds of loss that damage a home or
contents are covered. If you have a loss that’s on the list, you’re probably
covered. If the cause of the loss isn’t on the list, you’re probably
not covered.✓ Special form causes of loss: The best. Covers any accidental cause of
loss unless that cause of loss is specifically excluded. (Damage from
floods, groundwater, sewer backup, earthquakes, and a few other causes
of loss aren’t covered.)
Here are some examples, many from my own experience, of losses not
included in the broad form list that are covered by the special form:
✓ Massive interior water damage from roof leaks to a town house: Claim
of $30,000 paid.
✓ Interior damage to ceilings and walls caused by melting ice and snow
that backed up under the shingles: Claims have averaged $4,000 to
✓ Scorched counters or floors from hot pans dropped onto them: Claims
to replace counters and floors run $5,000 or more.
✓ Paint spills on furniture: The average claim runs $2,000.
✓ Spills of any liquids on oriental rugs: Claims to replace rugs range from
$600 to $20,000.
Probably the most unusual example I’ve heard of involved someone who took
a month-long winter vacation in Florida. To keep his pipes from freezing back
home in the cold North, he set his thermostat at 50°F (10°C). Shortly after he
left home, the thermostat malfunctioned and never shut off. The combination
of 90°F (32°C) heat and winter dryness warped all the floorboards in the
house, requiring all the flooring to be torn up and replaced. Most of the floor
coverings — tile, carpet, and so on — which had to be removed to get at the
floor, also had to be replaced. If that loss happened today, the claim could
easily be in excess of $75,000.
Neither “thermostat malfunction” nor “excessive heat” is on the list of covered
losses on the broad form. But the special form covered the loss in full because
“thermostat malfunction” is not on the list of exclusions. The annual extra
insurance cost for the special form over the broad form? Probably $75 a year.
(I’d say the homeowner with the faulty thermostat got his money’s worth!)
I flat out suggest that you not buy the basic form coverage — it’s way too
restrictive. I like broad form coverage because the majority of your losses will
be covered. But my favorite is the special form, because it puts you in the
driver’s seat — no matter how bizarre the cause, from Martian invasions to
some kind of damage from new cybertechnology, your loss is covered (unless
it’s specifically excluded).

Introducing the six most common homeowner’s policies

If you looked at a typical menu of homeowner’s policies available from most
insurance companies, you would see six entrees, ranging from light fare to a
full-course meal. Each of these six options is referred to as a form. One form
is designed specifically for renters, one is specifically for town house or condominium
owners, and the other four are for owners of private residences.
Table 9-1 shows the six homeowner’s forms most commonly used in the
industry, the type of buyer they’re designed for, and the causes of loss covered under each (basic, broad, or special).To choose the homeowner’s form best for you, first determine what type of
buyer you are — homeowner, renter, or town house/condominium owner.
Then determine the causes of loss you want covered — basic, broad, or
special — for the building and again for the contents.
For example, if you rent, you would choose homeowner’s form 4. It comes
automatically with broad form coverage. You can buy the special form for an
extra charge. If you’re a homeowner and you want special form coverage on
your structures but you’re comfortable with broad form coverage on belongings,
you would choose homeowner’s Form 3.
Which form do most insurers sell and 90 percent of homeowner’s buy? Form 3,
covering buildings with the special form and contents with the broad form.
The logic behind this decision is that the structure is the biggest property risk,
and totally exposed to the elements, whereas most contents are more protected
by being inside. It’s a reasonable argument. I think Form 3 is a reasonable
choice for most people.If you have expensive personal belongings, fine arts, expensive rugs, paintings,
or antiques, or if you simply like having the best, special form contents coverage
is the best choice for you. It’s only about 10 percent more expensive than
broad form coverage.
Here’s how to get special form coverage for both your home and contents:
✓ If you own a home, you have two choices: Buy a homeowner’s Form 5, if
available, or buy a Form 3 and add a special perils contents endorsement.
✓ If you own a town house or condo, buy homeowner’s Form 6, add a
special perils endorsement to Coverage A (building coverage), and add
a special perils contents endorsement. (I devote an entire chapter --
Chapter 12 — to the special needs of town house and condominium
✓ If you rent, buy homeowner’s Form 4 and add a special perils contents