Top 10 Things to Consider When Buying a Homeowners Insurance Policy

A mistake made when buying a homeowners policy can prove costly, and for most people the home is the largest asset they own. The ten points below are the ones that most often cost California homeowners money, either at the point of purchase or at the point of claim. They are worth reading before you sign anything, and worth revisiting at renewal. Each one is a question to put to your own home insurance policy rather than a conclusion about it.

Why is the cheapest quote rarely the same product?

The premium is usually the first number a buyer looks at. What the policy actually reaches matters more, and the two are not the same thing.

Homeowners forms are not interchangeable between carriers. Admitted carriers file their forms with the California Department of Insurance, and many depart from the wording people treat as standard. Surplus lines carriers are not subject to that form approval at all, so the variation is widest there.

This is why a true apples to apples comparison between two carriers rarely exists. A quote and a declarations page tell you the limits. They do not tell you the language that decides a claim. If that language is unfamiliar, an agent can walk you through it before you buy rather than after a loss.

2. Buying a policy for the wrong occupancy

People own homes for different reasons: to live in, to raise a family, or to hold as a rental. Who lives in the home determines which policy applies to it.

An owner-occupied home, a tenant-occupied rental, and a property standing empty are three different underwriting propositions, priced for three different sets of risk. A standard homeowners form may stop responding once a home has been unoccupied beyond a stated period, which is why vacancy is written separately.

If the occupancy changes, tell your agent. Occupancy is one of the few facts that can move a policy from responding to not responding, and it changes more often than people report it.

3. Underinsuring the dwelling

Replacement cost and market value are different figures, and confusing them is the most common route to an underinsured home. Market value reflects land, location and demand. Replacement cost reflects what it would take to rebuild the structure at current construction prices, which is why the two move independently.

The dwelling limit is what caps a rebuild. Fire is a covered cause of loss on a standard form. Earthquake and flood are not, and points 6 and 7 below deal with how those are addressed.

Guaranteed replacement cost, which funds a rebuild without reference to the limit, is largely unavailable in California. Extended replacement cost, which adds a stated percentage above the dwelling limit, is generally what is on offer here and remains subject to availability. We can walk you through a replacement cost estimate, and some owners also get a contractor’s opinion of what rebuilding would cost today. The limit you settle on is your decision.

4. Assuming the base form reaches every hazard

It is easy to assume a homeowners policy answers for every way a home can be damaged. It does not. The policy names the causes of loss it covers, or names the ones it excludes, depending on which section you are reading, and the exclusions are where the real information sits.

Flood and earthquake are both excluded. In California those are the two exposures most capable of causing a total loss, which is why each is addressed as a separate policy rather than as an add-on to the homeowners form. Describing them as riders understates what is involved in arranging them.

Mold and sewer backup sit in the same territory. Many forms address them narrowly or not at all, and a standard form commonly excludes water that has seeped continuously over a stated period, which is different from a burst supply line. Sewer and drain backup needs its own endorsement.

Read the exclusions before you sign. That section tells you what the policy will not reach, and it is shorter than the rest of the document.

5. Choosing actual cash value over replacement cost

Actual cash value settles at the depreciated value of the item. An older couch, table or computer may be worth very little on that basis, so the payment reflects very little.

replacement cost settles without a deduction for depreciation. In practice many policies pay the actual cash value first and release the balance once the item has actually been repaired or replaced. Reaching the full amount therefore depends on completing the replacement and documenting it. The deductible and the applicable limit still apply in either case.

Check which basis applies to the dwelling and which applies to your contents. They are not always the same on the same policy, and the contents side is the one more often written on an actual cash value basis.

6. Assuming flood coverage is included

A homeowners policy does not include flood. Flood insurance is a separate policy, written either through the National Flood Insurance Program or by a private flood carrier.

Flood means rising water from outside: surface water, mudflow, and water entering at ground level. That is a different thing from a burst supply line or a failed water heater, which is sudden and accidental discharge and is generally covered by the homeowners form. Sewer and drain backup is excluded again separately and needs its own endorsement.

Coverage through the program generally takes effect 30 days after application and payment. FEMA recognizes limited exceptions, including purchases made in connection with a loan closing, and a one-day wait for property newly mapped into a high-risk zone. There is also a Post-Wildfire Exception, which can apply where flooding originates on federal land and post-wildfire conditions caused or worsened it. The policy must also have been bought on or before containment, or within 60 days of it. That exception is determined case by case at the time of loss rather than confirmed at purchase, so it is not something to plan around. It matters in California because burn scars shed water badly for years after a fire.

Program rules change. This reflects the National Flood Insurance Program as published at the time of writing, and FEMA publishes the current version.

7. Assuming earthquake coverage is included

A homeowners policy does not include earthquake either. Earthquake insurance is arranged separately, either through the California Earthquake Authority by way of a participating carrier, or through carriers writing standalone earthquake coverage outside that program.

The structure of an earthquake policy differs from a homeowners policy in a way that surprises people. The deductible is generally a percentage of the coverage limit rather than a flat sum, so on a substantial dwelling limit it is a large number. Personal property and loss of use are handled on their own terms, and the California Earthquake Authority has revised what its policies include more than once in recent years.

Because of that, what an earthquake policy reaches is worth reading in detail rather than assuming. We can walk you through the differences between what is available, including how the deductible would apply to your own limit.

Coverage terms in this market are revised periodically. The description above reflects the position at the time of writing, and the California Earthquake Authority publishes its current policy terms.

8. Not knowing whether you are being quoted an admitted policy, the FAIR Plan, or surplus lines

In much of California this is now the first question rather than a technicality. In brush-exposed areas the market has narrowed, and what is on offer may not be a standard homeowners policy at all.

An admitted carrier files its rates and forms with the California Department of Insurance and its policyholders have recourse to the California Insurance Guarantee Association if the carrier fails. Surplus lines carriers are not subject to that form approval and carry no guarantee association backing, which is the tradeoff for writing risks the admitted market declines.

The California FAIR Plan and difference in conditions arrangement is different again. The FAIR Plan is a fire policy. It carries no liability coverage, and its scope is narrower than a homeowners form in ways that catch people out. That is why it is usually paired with a difference in conditions policy to fill what it leaves. Two policies, two sets of terms, and the gap between them is yours to understand. It is worth reading how the FAIR Plan works before you accept a quote built on it.

When you compare quotes, establish which of the three each one is. They are not competing versions of the same product.

9. Not knowing what California law adds after a declared disaster

California has written protections into statute that go beyond what a policy says on its face, and they apply after a declared state of emergency. They are worth knowing before you buy, because they change what a given limit is actually worth in a wildfire.

Loss of use runs for a minimum of 24 months after a declared emergency. That extends by a further 12 months where reconstruction is delayed by circumstances outside your control, with six-month extensions beyond that for good cause. The California Department of Insurance sets this out. Note the limit of that protection: it extends the time, not the money. If the dollar limit is exhausted first, the extra months do not help, which is an argument for looking hard at the loss of use limit rather than the period.

On a total loss of a furnished primary dwelling, the insurer must offer a contents payment of at least 30 percent of the dwelling limit, capped at $250,000, without requiring an itemized inventory. You can still claim above that figure by documenting it. There are also advance payment and renewal requirements covering an advance on living expenses and renewal of the policy after a total loss.

Separately, and for the same reason, tell your insurer about material changes to the property as they happen. A renovation, a pool, or an added structure all affect how the policy responds, and the time to correct that is before a loss.

These provisions change. The above reflects the law as written at the time of publication, and the California Department of Insurance publishes the current position.

10. Reducing coverage to lower the premium

People often cut the amount of coverage to bring a premium down. Raising the deductible instead is worth considering, because it lowers the premium while leaving the limits intact.

The tradeoff is real in both directions. A higher deductible means more of a small loss falls to you, and it means the sum you need available at the moment of a claim is larger. A lower dwelling limit, by contrast, is felt only in a total loss, which is exactly when it cannot be fixed.

Which tradeoff suits you depends on what you could comfortably absorb out of pocket and on what a rebuild would cost. We can lay both figures side by side with you. The choice between them is yours.

On all of the above, these are individual decisions and they turn on circumstances an article cannot see. Your broker or agent should walk you through the tradeoffs as clearly as they can, but the choice belongs to the homeowner or renter.

An article cannot read your declarations page. If you want to know what your own policy reaches and where it stops, that takes a review of the actual documents. You can request a quote or a policy review and we will go through it with you.

Disclaimer

This article is provided by Schneiderman Insurance Agency for general informational purposes only. It is not legal, tax, financial, claims, or coverage advice. We are licensed insurance professionals, not attorneys, accountants, or financial advisors, and nothing here should be relied on as a substitute for advice from a qualified professional in those fields. This content is general in nature and is not a review of, or a recommendation for, any individual reader’s specific insurance needs, policies, or circumstances. Insurance coverage depends entirely on the specific terms, conditions, endorsements, exclusions, limits, underwriting eligibility, carrier, and facts of each situation, and the actual policy language always controls. We do not guarantee any coverage, pricing, eligibility, underwriting approval, or claim outcome. Reading this article does not create an agent-client relationship. To understand how these issues apply to your situation, please review your own policy and speak with a licensed insurance professional, and consult legal, tax, or financial advisors where appropriate.