Purchasing Homeowner's Insurance- Strategies & Pitfalls


People who have read Mark Kohler’s Lawyers are Liars know that our philosophy with respect to asset protection is the “multiple barrier approaches” to put as many barriers as you can between you and someone who would sue you.  For owners of real estate, one of primary asset protection barriers is your homeowner’s insurance policy.
No insurance policy will cover all risks under any circumstance, and so it is important for owners of real estate to request, understand and procure the right policy for their situation.   Unfortunately, getting the right policy tailored your situation may not as easy as just calling your insurance agent and getting whatever they recommend, but requires a careful understanding and analysis of risks that can be protected by insurance, but most importantly making sure your policy actually covers those risks.  Your insurance agent should assist you in deciding on appropriate coverage, but remember that you, not the agent, knows this property the best and so it is your job to communicate the risks and perils on the property to the agent.   Some guidelines that can help maximize coverage include the following:
Tip 1. Make sure you are Dealing with a Licensed Insurance Company or Agent.Both Insurance Companies and Agents are generally licensed by the state and their information can be found online at the insurance department for the state.   Most state insurance departments have resources online to assist you in purchasing the right insurance and make sure that the person or company you are dealing with specializes in that specific area of insurance.
Tip 2. Understand What Type of Risks and Coverage You Need.Every property is different and may entail different risks.   The type of insurance will also depend on whether the property is used as a personal residence, long term versus short term rental, or a condo.    In general, homeowner’s insurance is designed to protect against risks that are outside the control of the owner, such as rain, wind, fire, vandalism, pipe bursting, falling objects, theft caused by breakage of glass, etc.   It generally does not cover risks that are within the control of the owner or occupier, such as flooding caused by drain stoppages, mold, toxic materials, pests, damage or injury resulting from deferred maintenance, intentional criminal acts, etc.  Flood and earthquakes generally require a separate policy. A typical homeowner’s policy will generally classify coverage for (1) Dwellings or other structures, (2) Damage to Personal Property, and (3) Liability coverage.   Knowing what you are specifically looking for in the form of coverage BEFORE you shop for insurance will help ensure that the actual coverage you buy matches your expectation.  An insurance agent will typically gather some specifics about your property and (if your lucky) also have a conversation with you regarding appropriate coverage, and based on that alone will make a recommendation of coverage most likely generated from a computer. The insurance agent will rarely have seen the property nor have any idea of any unique risks existing on the property and so it is your responsibility to discuss any unique risks on the property.
For example, for coverage for “Dwellings,” you want to know, from as reliable a source as possible, the estimated cost to repair or replace the structure with like kind and materials in the location where the property is located.  Construction costs vary depending on the location and the actual costs are often higher than what most people think.  Make sure you understand terms used by your insurance company such as the difference between “Actual Cash Value” versus “Replacement Cost” or “Guaranteed Replacement Cost,” with the understanding that insurance companies may define these differently.  For Personal Property, you want to make sure that important items of personal property are covered, how much they are actually worth, and create an inventory or snapshot of your personal property.
Most people are unaware that homeowner’s policies also provide coverage for personal (not business) liabilities that occur outside of the home.  For Liability Coverage, especially for rentals, you need to be very precise as to what your expectations in terms of what are the most horrible things that could cause significant injuries on the property what the appropriate amount of coverage would be.    Create a list of all the risks and perils that are important for the property (e.g. pools, dogs, trees, neighbors???) so that you can address these with the insurance agent.   Also, understand or ask how the deductible amount or other discounts such as alarms or other safety features will impact the premiums.   Consider what the differences in premiums would be if you increased the coverage especially if you have higher net worth as the premium increase for added coverage may not be as much as you think.   Look online for tips from state insurance departments websites such as insurance.ca.gov, or consumer-oriented websites like www.insuranceconsumers.com   for issues and topics that can help you understand what risks and perils you should be aware.
For condos or other common interest developments, there is often a master HOA policy from the homeowner’s association which generally covers the common walls, areas, and roof.  There may be separate policies for earthquake and flood.  Obtain copies of these policies and consider contacting the insurance agent to inquire about any gaps in coverage. The master HOA policy typically does not cover your interior condo unit and so a separate HO-6 is recommended to cover risks occurring from the “walls in.”  Since condo units often have shared walls, make sure you understand how risks occurring in these shared walls, in particular, water damage will be covered as this type of damage is often tricky to determine who should be responsible in the event of a loss.
For landlords (whether long term or short term), there are different policies depending on the use of the property and so make sure you get the proper policy for your specific use of the property. If you change the use of the property, for example, a personal residence to a long term rental, or into a short term rental, you’ll need to get a different policy to cover the different risks involved with the different use of the property.
Tip 3. Keep Detailed Notes of Your Communications with Insurance Representatives and Confirm, Confirm, Confirm. Although the nature of the relationship between the insurance agent and insured could vary depending on laws of the state and whether they are working for the insurance company or an insurance “broker,” you want to be very clear with your insurance representative as to what coverage is important to you, and any specific requests or expectations of coverage should be made or confirmed in writing to the insurance representative.  Ask and confirm with the agent in writing any specific exclusions from the policy.  In other words, if the agent makes a representation of coverage to you that is important, send a confirmation of that representation in writing (e.g. email, fax, etc.) so that a record exists confirming your expectations.  Better yet, ask the agent for a copy of the policy beforehand.  Most agents won’t volunteer this but any agent that has been doing this for any amount of time should have this handy.   Keep copies of everything, including advertisements and marketing as that information could be relevant in a coverage dispute.   If you’re not sure about the type or amount of coverage you need, ask the insurance agent for their opinion and confirm this opinion in writing.  An insurance agent who makes a representation to you concerning coverage could be bound by that representation even if it doesn’t appear in the policy so it is important to document all communications with the agent to hold them accountable for what they say.
Tip 4. Read Your Policy. I’m not talking about the 1-2 page “Declarations Page” that is only designed to show proof of coverage, but 20-30 page insurance “Binder” or “Policy” that contains the details of the actual coverage and exclusions.  No one really enjoys reading insurance policies and don’t be surprised or embarrassed if you don’t understand what you are reading.  It is a well known fact that insurance companies intentionally make their policy language difficult so as to create ambiguities as to their coverage responsibility.    Nevertheless, don’t let the first time you read the policy to be when you need to file claim.   Get ahead of it beforehand which will give you the perfect opportunity to ask questions and to clarify coverage with the insurance agent before a claim arises (See #2 above).   Be assured that if a claim is ever made, the adjusters and defense attorneys will be combing through the policy language with a fine toothed comb to try and evade responsibility.   If you do ask questions about the policy language, don’t be surprised if the insurance agent initially doesn’t understand what the policy says either as that is quite often the case, but make sure you get an answer to your questions in writing.
Tip 5. Coverage for an LLC.For those of you who own rental property in an LLC, check with your insurance agent as to what they would require to add the LLC as an additional insured.  Some companies will simply add the LLC as an additional insured in addition to the owners.  If your insurance agent tries to sell you a different policy such as a commercial policy, consider getting a second opinion, and again, do not rely merely on the verbal assurances of your agent, but confirm it in writing.   If you have a mortgage, be aware that some lenders may periodically ask for proof of coverage, and so there are possible due on sale implications for adding an LLC as additional insured.
Getting the right insurance coverage should be one of your front line defenses in your overall asset protection strategy.  Doing your homework beforehand, exercising proper due diligence during the process, and making sure there is a paper trail of your dealings with the insurance company will help ensure that there will be coverage in the event of a loss.