“The only constant is change.”—Heraclitus, Greek philosopher

Life changes and so should your policy to reflect those changes.  Therefore, one of the first steps toward having adequate insurance is to regularly review and update your homeowner’s policy by asking the following questions.

Do I have enough insurance to:

• Rebuild my home?
• Replace all of my possessions?
• Protect my assets against third party liability claims?

Let’s review each of these questions and their significance to the average homeowner.

Do I Have Enough Insurance To Rebuild My Home?

Choosing the Level of Coverage

Whether you have adequate insurance to rebuild your home will be determined by which type of coverage you choose.  There are three levels of coverage that determine the amount of money to be paid to cover the cost of the loss or damage to your property. They are:

• Actual Cash Value Policy:  This type of policy pays to repair damages or replace your building or your possessions—minus a deduction for depreciation. Actual Cash Value policies are often offered at a lower price, but they are a poor choice because construction expenses continually rise, and the Actual Cash Value of your property will be lower than its replacement cost, requiring you to pay the difference, which could be a substantial amount.
• Replacement Cost Policy:  This coverage ensures that your home is repaired or rebuilt at the actual cost to replace it. It is important to note that the repairs or rebuilding costs covered are only up to the sum that your policy specifies. For example, if your policy limit is $200,000, but at today’s construction prices it may cost $300,000 to rebuild your building—the maximum payout would be $200,000.

In addition, there is another feature of Replacement Cost policies that apply in such cases. You can only collect the face value of the policy if you rebuild your home. So, in the above example, the insurance company will pay up to $200,000 to rebuild it—but you must rebuild it to collect the $200,000. However, at today’s construction prices it costs $300,000 to rebuild it. Now, you have two options:

• Decide to rebuild; collect the $200,000 and pay the $100,000 difference yourself
• Decide not to rebuild the building, or at least not to its original size and purpose, and accept a claim settlement based on the Actual Cost Value of the original building. In most cases, this would be far less than the amount of the insurance you carry. In addition, you are still required to pay for debris removal and site clearing out of your settlement money.
• Guaranteed Replacement Cost Policy: The Guaranteed Replacement Cost provision offers the highest level of protection as it pays whatever it costs to rebuild your home—as it was before the loss or damage—even if it exceeds the total sum of the policy limit. Therefore, this policy gives you the very best protection against increases in construction costs.

Okay, what else should I know about insurance rebuilding costs?

Enforcement of By-laws

Enforcement of By-laws coverage comes into play any time a building suffers a loss or is damaged. The municipal building authority requires repairs to conform to current building codes. This may necessitate a complete upgrading of the electrical, plumbing, heating systems, or other structural components. Therefore, the older the building the more important this coverage becomes.

Real Estate Value or Insurance-to-Value

Real estate value or insurance-to-value—what’s the difference?  How much is my house really worth?  Okay, let’s clear up a little confusion here. It is important to note that for insurance purposes, the value of a property is not based on its real estate value. Rather, the value of a property is based on the estimated cost to restore or rebuild the property, referred to as Insurance-to-Value.  In other words, real estate values are based upon a home’s potential sale price, which may increase or decrease, while at the same time reconstruction costs may remain the same.  Or the reverse may be true, reconstruction costs go up, but the real estate value (potential selling price), may not increase.

So, in view of the fact that construction costs are constantly changing, it is important both to the insurance company and the policyholder that the level of insurance coverage is balanced against the actual costs of reconstruction.

How Often Does It Happen that Someone Doesn’t Have Enough Insurance?

Way too often.  The July, 2009 issue of Canadian Underwriter reports on the issue of Insurance-to-Value, and noted that according to some experts:  “. . . about 80% of residential homes in Canada are undervalued by 27%—a figure that hasn’t changed since 1995. . . . That does not necessarily include building contents, which many argue are also woefully undervalued.

This imbalance in the rebuilding cost coverage came to light after the 2003 Kelowna forest fires.  It turned out that almost every home was underinsured with most by about 50% of their actual replacement values.

The gap between estimated values and actual reconstruction costs was further widened by the red hot construction market in BC, which pushed up reconstruction costs even further. (As noted earlier, although real estate values declined in 2008, reconstruction costs did not follow suit.  For example, due to the increase in oil prices in 2008, the price of asphalt shingles went up some 30%.)

Finally, another reason why many homeowner’s have inadequate coverage is that they do not always inform their brokers when they make upgrades to their homes or property.  Therefore, the policyholder’s level of coverage does not reflect the upgrades.

Whatever the reason for being underinsured, the result can be disastrous in the event of a substantial loss.  In our earlier example, inadequate insurance meant that the homeowner had to pay $100,000 of his own money to rebuild his home.  That’s not unlike a person getting a $100,000 inheritance, which they then leave laying around the house in cash—unprotected.

So, although adequate coverage, such as provided by a Guaranteed Replacement Cost policy may cost more initially, it always saves big-time when you need to file a claim.  Talk to your broker and ask him/her:  “Do I have enough insurance to rebuild my home?”

Do I Have Enough Insurance To Replace All My Possessions?

Homeowner’s Insurance Policy

Briefly a homeowner’s insurance policy is usually comprised of the following components:

• Property coverage that protects your home and your possessions if they are damaged or destroyed by certain causes, or stolen
• Liability coverage that will pay if you cause another person to be injured or another person’s property to be damaged or destroyed
• Medical payments coverage pays for medical treatment when others are injured in an accident in your home or under certain situations when it occurs away from your home—whether or not you are determined to be at fault
• Additional living expenses coverage will pay accommodation expenses, as well as some related living expenses when your home has been damaged by causes covered under your policy and you cannot live in your home temporarily

Bundling these types of coverage into your homeowner policy works out to be less costly than if you were to buy these types of coverage separately.

Personal Property

It is under the property coverage that your possessions are protected.  The level of coverage for your possessions varies between policies, however, most policies provide contents coverage for approximately 50 – 70% of the amount of insurance you have on the structure of your home.  So if you have $300,000 worth of coverage on the structure of your home, you would be covered for $150,000 to $210,000 worth of the contents of your home, depending on the specific policy.

Your homeowner’s policy also provides more limited coverage for personal property if it is stolen or damaged away from home, such as when you are on vacation. Some policies will limit coverage to a $1,000 or 10% of the total coverage on your personal property when your loss occurs away from your home.

In other cases, coverage under your homeowner’s policy may be limited to very small amounts particularly for personal property that is susceptible to loss, such as cash, securities, jewellery, manuscripts and stamp or coin collections. Typically, coverage may be limited to $1,500 for all jewellery stolen in a single theft, or a $500 limit for securities, receivables, travel tickets, and stamp collections.  Or course, additional coverage can be purchased, and you should ask your insurance broker about itemizing these items separately for coverage.  Additional examples of items that require specific mention in your policy could include valuables such as garden tractors, bicycles, computer software, fine arts, musical instruments, antiques, photographic equipment, video or sound systems, oriental rugs, silverware, and like items.

How Much Coverage Should I Have?

The best way to determine whether your coverage is adequate is to conduct a home inventory of your possessions. This should be done whenever there is a significant change in your home situation, such as:

• Moving to a different home
• Major purchases have been made, such as kitchen appliances or artwork
• Children move out, or back into the home
• Changed marital or partnership status

A home inventory should detail everything you own and the estimated cost to replace these items if they were to be stolen or destroyed by a disaster. The inventory should include everything except autos, animals and items that are insured under other policies. To simplify the process use our provided Home Inventory form.  It is a good idea to keep receipts of major purchases, as well as their make, model, serial number, or other identifying marks.

Taking pictures or using a video camera to visually record your belongings is another excellent way to protect these personal assets.  Burn a CD/DVD of the pictures and put this, along with receipts for the more expensive items in a fire-proof safe, or somewhere outside of your home.

Not only will an inventory help you determine the level of coverage you need, it also helps ensure a quicker and fair settlement for your claim.  After a loss, it can be difficult to recall the details of things that are now damaged or missing.

Once you have completed the inventory, ask yourself these questions:

• How much is my personal property worth?  Estimate the value of your personal property and its replacement cost, including applicable taxes!
• How much are you willing to pay out of your own pocket for small losses?

Do I Have Enough Insurance To Protect My Assets From Third Party Liability Claims?

Personal Liability Coverage

Under the liability section of your homeowner’s policy your insurance company provides protection against third party claims if another person is injured or if another person’s property is damaged allegedly due to your fault, though unintentional. Liability coverage in a homeowner’s policy is not limited to accidents that occur at your home. It provides protection for you and your family wherever an accident may occur worldwide. For example, your insurance will protect you if:

• Your child accidentally injures a playmate at school
• You hit a golf ball and injure someone
• You injure someone while skiing
• Your dog bites a neighbour

This type of coverage automatically protects you for losses arising from your ownership or non-business use of a trailer (except when it is attached to a motor vehicle), small boats of limited horsepower, golf carts on a golf course, self-propelled lawn mowers, snow blowers and garden tractors used mainly on your property, and motorized wheelchairs.

To illustrate how personal liability coverage works, imagine that your dog frightens a friend who slips on the icy steps to your house and badly breaks his leg. Your friend had been employed as a letter carrier and now will never be able to work in that capacity again.  He files a suit against you to cover his medical costs and to recover his loss of income due to the fact he is no longer able to work as a letter carrier.

The court decides that you are at fault for this accident, though unintentional (it was after all your dog, your steps and on your property).  The court assesses the loss of income to be $500,000, plus $100,000 in medical costs, and another $50,000 to cover your friend ’s legal costs.  Here is where your Personal Liability coverage comes into play.  The insurance company will pay the claim, including your legal costs—up to the amount of coverage in your homeowner’s policy.  Your insurer will also defend you against any suit for compensation related to your insurance coverage, even if the suit is groundless, false, or fraudulent.

Your personal liability coverage can also include coverage for “voluntary payment for damage to property” and “voluntary medical payments.”  This coverage is important coverage for those situations where you may not be legally responsible for accidentally injuring someone or damaging someone else’s property, but you may nonetheless feel morally obligated to pay for damages.  Such coverage makes that possible, without paying out of your own pocket.

There are some exceptions to the above, however.  The liability coverage will not protect you if you are sued as a result of something you did in your job or something you did intentionally to harm someone else. And, it will not pay for liability arising out of the use of an auto, or most motorized land vehicles including mopeds.  (Liability coverage for use of such vehicles must be purchased separately.)  In addition, this coverage does not cover “punitive” damages assessed by a court as punishment for your actions.

How Much Liability Insurance Do I Need?

Most primary insurance policies (home, auto, watercraft, etc.) provide a minimum of $1,000,000 worth of liability coverage against personal injury claims, but higher amounts can be purchased.

Will $1,000,000 coverage be sufficient?  It depends in part on how much you have to lose if you’re sued.  If you have considerable assets that could be seized by the court to pay off such a judgment, (your house, cars, RRSPs, or a business you own), you should seriously consider the level of liability coverage that you currently have.  It is important to note that a large judgment against you can cost you not only all the assets you possess at present, but also possible future earnings as well.

There are other factors that could influence the level of coverage that you need.  For example:

• Do you serve alcohol to guests in your home?
• Do you participate in a sport or other activity where you might injure others?
• Are you financially responsible for young, inexperienced drivers?
• Is there a swimming pool or trampoline on your property?

How often do claims of $1,000,000 and more arise?  They occur with an increasing frequency.  It is not uncommon for claims to exceed $1 million, and in cases of major trauma where a person suffers from long-term disability, a claim can easily rise to $3 – $5 million dollars.

Note:   Personal liability coverage under your homeowner’s insurance policy does not cover activities related to your business, whether it is an in-home or out-of-home business. You will need Business Insurance to cover any possible losses.

Therefore, it’s important to speak with your insurance broker to find out what the cost of typical claims payouts are in your province or region and your needs.  The cost of increasing your level of coverage is relatively inexpensive, as can be seen in the case of auto insurance.

Also ask your insurance broker about the value of obtaining an umbrella liability policy, which can give you significantly greater protection at even lower rates than increasing your personal liability coverage under your primary policies, such as your home, auto, and watercraft insurance policies.

Never forget that your insurance broker is your partner in ensuring that you have adequate coverage.  Talk to us today about your personal insurance needs. We’re here to help.