Home Insurance: Know What You're Buying

Bennett Cunningham and his partner own a home in a charming Dallas neighborhood just south of downtown. Shopping for home insurance, he found the cheapest rates with State Farm, the nation's largest insurer. Talk about a deal: Bennett and his partner have three cars. If State Farm covered those in addition to the home, the insurance quote indicated a 40 percent multi-car discount on the whole package.

But State Farm wouldn't give the discount unless the couple was married and the autos were titled in both names.

"I explained that we had been married in Massachusetts," says Cunningham. "But Texas hasn't come around to recognizing gay marriage yet, so I really could not produce a Texas marriage certificate."

Welcome to the world of buying insurance for your home. Not only can your sexual preference influence your rate, so can your credit score and all the claims you've ever made in your life for the last five years. In fact, home insurance is getting like health insurance in that any "pre-existing conditions" may affect your insurance quote and ability to buy. It most certainly affects your insurance rate.

Your Risk Profile

Insurers, you see, have been keeping tabs on consumers with a giant claims database called the CLUE report. CLUE, which stands for Comprehensive Loss Underwriting Exchange, is a tool insurers use to compute your risk profile. They want to know how likely you will be to file a claim against your policy. Whenever an insurer pays a claim, they feed it into the national database. That information makes up your risk profile, much like a credit report, which insurers use to decide whether you can even buy new home insurance. Renewal time? Yes, they pull up CLUE to review your claims history as well as your current insurance score to set your premiums and insurance quotes, and decide if they want to keep you around. If the information is wrong, too bad, you won't be able to buy insurance until you correct it.

Consumer Protection

If this sounds like Big Brother, states are taking notice and trying to protect consumers. In fact, the National Association of Insurance Commissioners is creating a model code for every state, and many states have passed laws to prohibit insurers from reporting mere inquiries that do not result in a home insurance claim.

For example, you have had some water damage in your home but decide to pay for the repair yourself, in order to avoid a negative CLUE report for home insurance. Even if you call your insurer and ask if they could cover the claim, but never file one, that phone call may count against you.

Types of Home Insurance

When you protect your home, there are five basic types of coverage:
  • Dwelling. Covers damage or destruction to your house and any unattached structures and buildings, such as fences, detached garages, and storage sheds.
  • Personal property. Pays for theft, damage, or destruction of the contents of your house, including furniture, clothing, and appliances.
  • Liability. Protects you against financial loss if you are sued and found legally responsible for someone else's injury or property damage. Many people buy an "umbrella" policy to supplement this.
  • Medical payments. Pays medical bills for people hurt on your property. It also pays for some injuries that happen away from your home, such as your dog biting someone.
  • Loss of use. Pays your additional living expenses (temporary housing, food and other essential expenses) if you must temporarily move while repairs are made, such as if your home burned. Most policies pay 10 to 20 percent of the amount of your dwelling coverage.

Types of Home Insurance Companies

And you'll find two types of companies: no-frills and Cadillac carriers. No-frill companies include State Farm, Allstate, Farmers, Hartford, Encompass, Travelers, Republic and USAA. USAA is open to members of the military but their civilian children can buy home insurance from USAA as long as their parents are signed up. The Cadillac or "niche" carriers cover higher-end homes, are more expensive, but more comprehensive. These are companies like Chubb, AIG/Chartiss, Fireman's Fund and Ace Private Risk Services, which opened in Texas in April 2009. For example, if your home burns and takes two years to re-build, says Ace's Tom Gibson, most basic carriers will only cover a percentage of living expenses. Ace covers 100 percent even if it takes two years. Ace also has a program that credits back to you part of your deductible if you don't file a claim after three years.

The Bottom Line

Is there anything wrong with buying home insurance from a no-frills company -- cheap insurance? Not at all, says Rebecca Hirsch with San Antonio-based USAA. USAA clients get insurance quotes directly from the company on the Internet, she says, but consumers should cover their needs. She offers some things to consider:
  • Does your company offer coverage based on current replacement costs? Insure for full value at 100 percent replacement cost. Over the years, material things depreciate in value and can become worthless. You always want replacement value, or what the item would cost you if you had to buy it today.
  • Does the company take into account depreciation on personal property coverage?
  • Does your basic homeowners policy cover your fine art and jewelry? What are the limits? Is there a deductible?
  • Is your home in a flood zone? If so, you need flood insurance. Basic policies cover back-up water, such as clogged toilets and drains.
  • Does your company offer discounts for fire and burglar alarms?
In most cases, insurers will offer discounts for holding all your coverage: the house, the cars, the second homes.

Do Your Homework

Insurance companies are state, not federally, regulated, so you can check with your state insurance commissioner to see if a company has any complaints on file. Also check to see if the company is licensed. Buying home insurance from a company not licensed by your state is not recommended. To be licensed, they are required to have enough reserves to keep them solvent and pay claims in case of a widespread disaster. The American Association for Justice also tracks complaints against insurers and can help you select a company.

Once you find it, you can decide on the frills: endorsements that will cover or "schedule" fine jewelry, art, collectibles and antiques without a deductible. Buy this if you own more than $4,500 in jewelry, says Gibson. Most companies offer 150 percent replacement cost of scheduled items over $1,000.

Never underestimate what you have, says Gibson; moving up from $300,000 to $500,000 in personal liability on an umbrella policy can cost as little as $15 a month extra. An umbrella policy covers all the gaps in your insurance world -- if you have a car wreck and reach your auto policy limits, or if someone is injured while in your home. You need one.

If you have to pinch pennies, both Gibson and Hirsch agree that it is better to buy comprehensive coverage but choose a higher deductible.

"We all get busy and try to save money so we can buy Gucci shoes," says Gibson. "Then we have an accident, someone claims bodily injury, and everything we've worked for can be wiped out -- poof. Home insurance is our protection from the litigious society out there."

For more on home insurance and related topics see these AOL Real Estate guides:

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