Market Overview
Master of your house, or master of disaster?
If you want to make God laugh, tell Him about your plans. – Woody Allen
But whatever you do, don’t ask God what’s so funny. You probably won’t find as much humor in it, especially if you just bought a home. There’s a legal term, “Act of God,” for a disaster outside of human control and for which no human can be held responsible. That is, there’s nobody you can sue for damages. If one of these Acts of God strikes your new home, you might be facing down a 30-year note on a smoking ash heap or small duck pond.
Fires and floods happen. So do earthquakes, tornadoes, and let’s not tempt fate by even pondering what else. If you can’t stop them, can’t mitigate the damage they cause, and can’t make someone else pay to clean up the mess and fix your property, what can you do?
You can get property insurance, of course, but that’s often an incomplete answer. If you’re like most people, you have the bear minimum coverage your lender required of you when you took out the mortgage. But does it cover everything it needs to?
Minimalist approach
The average American homeowner’s policy covers $250,000 in damages and costs $1,383 per year, according to Bankrate. But it’s a big country and that figure varies immensely by location. Bankrate, a popular personal finance site, parses data from Quadrant Information Services to show that property insurance is one of those few commodities which cost more in the middle of the U.S. than along the coasts. Oklahomans pay $3,519 per year while Hawaiians pay $376 – an order of magnitude less. At the city level, it costs $2,291 per year to insure a home in tornado-prone Fort Worth but, shockingly, only $867 in earthquake-prone San Jose.
By the way, it’s important to note that your credit score is likely to be an input to your insurance premium amount. If you have poor credit, you could be paying almost triple what someone with excellent credit is paying for homeowner’s insurance.
The insurer’s credit rating is also a factor. Insurance is a competitive game, and companies generally compete on price. This race to the bottom can seriously weaken any company’s balance sheet. When the company you’re hiring to offload your home loss risk becomes risky itself, it then has to pay more to secure reserves to pay off claims. If it’s just one company, fine, good riddance to bad management. But in Florida the problem appears to be endemic, meaning that you can’t just switch to another insurer for a better deal. The result is that Floridians’ property insurance premiums are skyrocketing.
What you get for the money though is pretty standard. Every homeowner’s insurance policy covers losses due to fire, storms, theft, vandalism and legal liability. According to Bankrate, the most common home insurance coverage types include:
- Damage to the dwelling and other structures on the property: the home, detached garage, sheds, fences, playsets, and so on;
- Personal property: clothing, furniture and electronics;
- Personal liability: your own medical expenses as well as others’ injuries and property damage; and
- Loss of use: rent on a temporary living space until the home can be occupied again.
But the only thing that’s 100% covered up to the limit is the dwelling. The insurance company will probably pay out only 10% to 20% of the damage to your garage. You’ll also only see restitution of between 50% and 75% of your personal property, and it might not apply to cash or collectibles.
And just because this is what’s considered standard coverage doesn’t mean it’s precisely what’s written in your policy. It’s always best to check. The standards are often set by algorithm, and they’re every bit as fallible as the humans who code them. The Denver Post ran an unsettling article about how many homeowners found that, even though they were covered for such a contingency, they found themselves seriously out-of-pocket for damages caused by December 2021’s Marshall fire. Twin Cities residents faced similarly poor outcomes as a result of wind and hail events, according to ABC News’s Minneapolis-St. Paul affiliate.
The gap
Policy Genius, an insurance comparison site, lists 13 exclusions that are probably not covered by your current policy. Those include:
- Flooding
- Earthquakes, landslides, and other ground movement
- Termites, rats, and other infestations
- Mold
- Aggressive or dangerous dogs
- Poor maintenance or neglect
- Power surges or outages
- Home-based businesses
- Local building ordinance or law requiring you to bring your home up to code
- Intentional damage caused by you or another resident family member
- Nuclear hazards
- War
- Government action
If any of those last three listed actions occur, insurance is probably the least of your worries. Vermin and mold are things you can take action against – but the expense will likely fall to you.
It’s those top two, though, that are causing quite a firestorm of public policy debate in states as far apart as Florida and California; ironically, firestorms themselves are usually covered.
The more things stay the same …
Regardless of how much money you’ve managed to save for retirement, the equity in your house is still likely to be your largest asset. And just as you’ve mitigated risk by diversifying your securities portfolio by sector and asset class, you should consider how to best mitigate risk at home as well.
Do you have adequate coverage for storms and wildfires? Are you protected against floods or earthquakes at all? Are there less expensive plans out there which offer the same benefits?
Consider posing these questions to a financial professional who understands the ins and outs of property insurance.
